The New Era of Flow-Through Taxation in Puerto Rico: Opportunities and Challenges for Choice of Entity Strategies

Author:Felipe Rodríguez Lafontaine
Position:Certified Public Accountant
Pages:50-76
 
FREE EXCERPT
THE NEW ERA OF FLOW-THROUGH TAXATION IN PUERTO RICO:
OPPORTUNITIES AND CHALLENGES FOR CHOICE OF ENTITY
STRATEGI ES
FELIPE RODRÍGUEZ LAFONTAINE*
I. Introduction ......................................................................................................................... 50
II. Discussion ............................................................................................................................ 53
A. Entities Available for Doing Business in Puerto Rico .................................... 53
B. Summary of Changes Introduced by the 2011 PR Code Regarding Flow
Through Taxation. ............................................................................................................ 55
C. Difference between Flow-Through Taxation and Entity Level Taxation 56
III. Analysis ............................................................................................................................... 58
A. Description of the General Changes in the Entities Allowed to Request
Flow-Through Taxation for Puerto Rico Tax Purposes ...................................... 58
1. Special Partnership Elections ................................................................................... 58
2. Corporation of Individuals or an N Corporation Status ................................. 59
B. Description of Chapter 7 (“Partnerships and Partners”) of Subtitle A
(“Income Taxes”) of the 2011 PR Code. .................................................................... 61
1. Roadmap of the Provisions of Chapter 7 ............................................................. 61
2. Elections “to Be or Not to Be a Flow-Through Entity” ........................... 65
a. Existing Entities ........................................................................................... 65
b. New Entities................................................................................................... 66
c. Forced Conversions? Considerations for Partnerships and LLCs
Converting to “Pass-Through Entities” ........................................................... 66
d. Election to Continue Being Taxed Under the Provisions of the
1994 PR Code ............................................................................................................ 67
3. Guidance Issued by the Puerto Rico Department of the Treasury:
Administrative Determination 12-04 ................................................................... 68
a. Statutory Conversions ............................................................................... 68
b. Election to Remain as Corporation Under 2011 PR Code ............ 69
c. Voluntary Conversion ................................................................................ 69
* Certified Public Accountant; Tax Senior working for Deloitte Tax LLP in San Juan, Puerto
Rico and J.D. University of Puerto Rico Law School, May 2012.
50
U.P.R. Business Law Journal
Vol. 4
d. LLCs One-Year Grace Period ................................................................... 70
e. Conversion of Special Partnerships (SE) and Corporations of
Individuals (CI) ......................................................................................................... 70
e. LLCs F Reorganization Election ...................................................................... 70
f. New Filing Due Dates - Partnerships ....................................................... 70
g. New Filing Due Dates - LLCs ................................................................... 71
h. New Filing Requirements - Estimated Income Tax for
Partnerships and LLCs ........................................................................................... 72
i. New Income Sourcing Rules for Partners and Members .................. 73
IV. Conclusion .......................................................................................................................... 74
The distressingly complex and confusing nature of the
provisions of subchapter K present a formidable
obstacle to the comprehension of these provisions
without the expenditure of a disproportionate amount
of time and effort even by one who is sophisticated in
tax matters with many years of experience in the tax
field . . . . Surely, a statute has not achieved "simplicity"
when its complex provisions may confidently be dealt
with by at most only a comparatively small number of
specialists who have been initiated into its mysteries.
1
Over and over again co urts have said that there is
nothing sinister in so arranging one's affairs as to keep
taxes as low as possible. Everybody does so, rich or
poor; and all do right, fo r nobody owes any public duty
to pay more than the law demands: taxes are enforced
exactions, not voluntary contributions. To demand
more in the name of morals is mere cant.
2
I. INTRODUCTION
The origins of this story can be traced as far back as to the promises
made during the campaign efforts leading to the 2008 general elections in
Puerto Rico. However, it was not until February 4th, 2010, a significant date,
in which a tax reform commission was appointed by the Governor of Puerto
Rico and was quickly charged with the task of examining different
alternatives to expeditously reform the Island’s tax system.
3
Almost a year
1
Foxman v. C.I.R., 41 T.C. 535, 551 n.9 (1964).
2
Comm’r. v. Newman, 159 F.2d 848, 850-51 (2d Cir. 1947) (Judge Learned Hand dissenting ).
3
Yanira Hernández Cabiya, Configurado el com ité que redacta rá la reforma contributiva, EL
NUEVO DÍA, Feb. 4, 2010, http://www.elnuevodia.com/Xstatic/endi/template/imprimir.aspx?

To continue reading

REQUEST YOUR TRIAL