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Fall 2004-01 Reduction in long-term capital gains tax

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Number 57
Fall 2004

Reduction in long-term capital gains tax

Puerto Rico has enacted Act No. 226 of August 22, 2004, that reduces by 50% the tax rates applicable to net long-term capital gains, for both individuals and corporations, for a period of one year. The reduction will be in effect from July 1, 2004, to June 30, 2005.

Reinvestment in Puerto Rico

The Act amends Section 1014(g) of the Puerto Rico Internal Revenue Code of 1994, which relates to the special tax that individuals, estates and trusts are subject to for net long-term capital gains.

During the stated period, any net long-term capital gain derived from the sale or exchange of capital assets, if reinvested in Puerto Rico, will be subject to the following special rates:

  • 10% of the amount of excess of net long-term capital gains over any net short-term capital loss;
  • 55 percent of the amount of excess of net long-term capital gains over any net short-term capital loss derived from property located in Puerto Rico; and
  • 3.5% of the amount of excess of net long-term capital gains over any net short-term capital loss derived from the sale of stock or participations of an eligible domestic corporation or partnership as defined in Section 1014(e)(2) of the Code.

"Reinvested in Puerto Rico"

The term "reinvested in Puerto Rico" is not defined by the Act. Neither does the Act establish how long said net gain from capital assets must remain invested on the island.

Corporations and partnerships

The Act amends as well Section 1121(c) of the Code for situations involving corporations or partnerships. The Act establishes that for any taxable year where the net long-term capital gain of any corporation or partnership exceeds the net short-term capital loss, there will be levied, collected and paid, in lieu of the tax imposed by Sections 1015 [normal tax on corporations and partnership], 1016 [surtax on regular corporations and partnerships], 1201(b)(1) [normal tax on domestic life insurance companies] and 1207(a) [normal tax on insurance companies other than life or mutual], a tax determined as follows, if the net long-term capital gain is derived from the sale or exchange of capital assets by a corporation or partnership between July 1, 2004 and June 30, 2005:

  • 6.25% of said excess, if the property is located in Puerto Rico in accordance to Section 1014(e) of the Code;
  • 3.5% in cases involving stock or participations of eligible corporations or partnerships, in accordance to the definition provided in Section 1014(e)(3) of the Code; or
  • 12.5% of said excess in any other situation not described in (A) and (B) mentioned above.

Retirement plans

Finally, the Act amends Section 1165(b) of the Code, which refers to the taxation of beneficiaries in the case of lump sum distributions from qualified trusts that form part of qualified retirement benefit plans, reducing the special tax rate from 20% to 10%.

This section, as amended, provides that any person, regardless of the capacity in which he or she is acting, who makes these lump sum distributions to any employee payable in a single taxable year due to said employee's separation from service, which are deemed as long-term capital gains, must deduct and withhold from said distribution an amount equal to 10% of the total sum thereof in excess of the amounts contributed by the employee to the plan, for which the person has been taxed. The reduction from 20% to 10% will only be applied to distributions that take place between July 1, 2004 and June 30, 2005.

Effective date

The Act became effective immediately after its enactment on August 22, 2004.

© 2004 Goldman Antonetti

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