Spring 2003-07 Interest income from hotel loans exempted from tax

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Number 51
Spring 2003

Interest income from hotel loans exempted from tax

As an additional incentive for the construction of tourism facilities, Act Number 62 of January 4, 2003, has exempted from the payment of income tax all loan interest received from the development of tourism projects.

Background

In 1993 (Act No. 75 of September 7) the Puerto Rico Legislative Assembly authorized the establishment of the Tourism Development Fund as a subsidiary of the Government Development Bank. The principal purpose of this new entity was to finance tourism projects that would result in the creation of jobs and, in general, provide a boost to the island economy. However successful the operation proved to be (as of June 30, 2001, 3,046 new hotel rooms had been built, creating 5,461 direct jobs), in 2001 the need for participation by private lenders was considered necessary. This was due first, to the limited capital resources available to the Fund, and second, to reduce the government's financial exposure.

Tax-free guaranties

As a result, Act No. 143 of October 4, 2001, exempted from taxation the income derived from guaranty and letter of credit charges paid to financial institutions that participate and share the pecuniary risk with the Fund. Also exempted from taxation was all income stemming from guaranties and letters of credit directly issued by financial institutions to enhance financing for the development of tourism undertakings.

For some reason, interest payments resulting from direct loans for the same purposes were excluded. This situation has been corrected by Act No. 62.

Tax-free loans

Act No. 62 explains that the letter of credit exemption turned out to be an insufficient incentive, as the expected growth in the development of new hotels and condo hotels did not materialize. Recognizing the significance of participation by the private sector, the legislature decided to extend the tax exemption to direct interim and permanent loans for the construction of hotels and condo hotels.

Therefore, also exempt from taxation are now interest income, charges and other yield received by financial institutions with respect to:

F interim and permanent loans for the development, construction, rehabilitation or improvement of hotels and other businesses deemed to be exempt pursuant to the Tourism Development Act (Act No. 78 of December 10, 1993);

F interim and permanent financing for the development, construction or rehabilitation of inns ("paradores") that participate in the Inn Program of Act 78.

Specifications

In the case of the inns, but not with respect to hotels or condo hotels, the proceeds of the loans may be used to refinance existing debt.

Loans must be granted directly to the exempt business, and not through stockholders or other intermediaries, in order for the interest to qualify for exemption.

The tax exemption incentive is afforded on top of any additional benefit as may be available under other laws.

4 Note:

The exemption is available to loans granted on or after October 10, 1993. n


© 2003 Goldman Antonetti