Summer 2006-03 Prepayment tax imposed on capital gains

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Number 64
Summer 2006

Prepayment tax imposed on capital gains

Act No. 117 of July 4, 2006, introduced a special prepayment tax of 5% or 10% on the increase in value of capital assets.

The special tax is available for the period of July 1, 2006, to October 31, 2006.

Individuals, estates and trusts

Act 117 inserted a new § 1014A, under which individuals, estates and trusts may elect to prepay a the special tax without an actual sale of capital assets, and without regard to the period during which said taxpayer owned the assets.

Assets covered

The capital assets covered are the following:

stock or proprietary interest in domestic or foreign corporations or partnerships; and

real estate located in Puerto Rico.

Corporations & partnerships

In that same sense, Act 117 adopted § 1121A to provide to corporations and partnerships a special prepaid tax of 10% on the increase in value of capital assets. As in the case of individuals, the election to opt for this special tax must be made, and the tax paid, from July 1 to October 31, 2006.

However, the capital assets covered by this special prepayment tax of 10% available to corporations and partnerships apply only to real estate located in Puerto Rico.

Subsequent developments

Any increase in value of such capital assets generated after an election under §§ 1014A or 1121A will be subject to tax under the provisions of law in effect as of the date of the sale. On the other hand, any loss realized on a subsequent sale of the capital assets for which an election for the special prepayment tax was made will be adjusted according to the effective tax rate applicable at the time of the sale. Said loss will be adjusted by a fraction which will include as the numerator the applicable special prepayment tax (5% or 10% ) and the dominator the tax rate in effect on the date of the sale.

Election form

The election to benefit from the special tax must be made by filing a form and paying the tax at the internal revenue collector offices.

At press time the Puerto Rico Treasury Department had not promulgated any regulation or administrative pronouncement on either § 1014A or § 1121A; neither had it published the form needed for making the election and prepaying the tax.

© 2006 Goldman Antonetti & Cordova, LLC