On February 21, 2017, the Governor of Puerto Rico signed into law House Bill No. 5, known as the “Incentives Act for the Retention and Return of Medical Professionals” as Act No. 14 of 2017 (“Act 14-2017”). The purpose of Act 14- 2017 is to ensure that quality health services are available and accessible to all residents of the Island by offering an attractive tax incentives proposal for the medical professionals to stay in Puerto Rico or to move to the Island. Act 14- 2017 will be effective 60 days after its approval (i.e., April 22, 2017).
WHO CAN REQUEST THE TAX BENEFITS UNDER ACT 14-2017?
Only a Qualified Physician can benefit from the tax incentives offered under Act 14-2017. A Qualified Physician, as defined by Article 3(i) of the Act, is an individual who is admitted to the practice of medicine, podiatry or has any specialty in odontology and works in a full-time capacity. It also includes a medical resident studying in an accredited program in Puerto Rico.
In addition, the Qualified Physician must be engaged full-time (at least 100 hours per month) in providing Professional Medical Services in Puerto Rico during each tax year in which the benefits are claimed.
A non-resident Qualified Physician may request tax benefits under Act 14- 2017 and, if he/she receives a favorable determination from the Secretary of the Department of Economic Development and Commerce of Puerto Rico (the “Secretary”), the Qualified Physician will have a term of 120 days to transfer his/ her practice to Puerto Rico and become a Puerto Rico resident.
Under Act 14-2017, Qualified Physicians covered by the Tax Exemption Grant will benefit from the following:
- A 4% fixed income tax rate on Eligible Income (see below) generated from his/her Medical Business Services (as of January 1st, of the year in which the Decree is granted);
- 100% income tax exemption (including alternate basic tax) on up to $250,000 received from Eligible Dividends (see below) per taxable year.
- A Qualified Physician can make voluntary contributions (after-tax contributions) of up to 25% of his/her net income to individual retirement plans (Keogh) or up to 25% of his/her salary in case of corporate retirement plans.
Any Qualified Physician who has a Grant under Act 14-2017 shall enjoy the benefits for a period of 15 years, which can be renewed for an additional 15 years if it is demonstrated that said extension is in the economic benefit of Puerto Rico.
INCOME AND SERVICES COVERED UNDER ACT 14-2017
The incentives provided by the Grant cover the net income derived from the rendering of Professional Medical Services in Puerto Rico by a Qualified Physician, “Eligible Income”. The Professional Medical Services must be provided in:
(i) a public or private hospital; (ii) a federal or state agency; (iii) a private office dedicated to providing professional medical services; or, (iv) a duly accredited school of medicine.
In addition, the Grant covers “Eligible Dividends” which are issued by a professional service corporation or limited liability company which provides diagnosis and treatment in Puerto Rico. The Professional Medical Services entity can be domestic or foreign, but must be authorized to do business in Puerto Rico.
For a Qualified Physician to be considered eligible, he/she must meet the following requirements during the Grant’s term:
- The Physician must maintain his/her status as a Qualified Physician;
- Practice medicine, podiatry, or odontology specialty in a full-time basis;
- Be a resident of Puerto Rico;
- Comply with his/her tax responsibilities;
- Provide 180 hours of eligible community services; and,
- Comply with any other requirement imposed by the Tax Exemption Decree.
The Secretary will establish the specific procedures to issue annual certifications to validate the individual’s compliance with the Grant’s requirements.
As a condition for the concession of tax benefits, every Qualified Physician must provide on an annual basis 180 hours of community services without compensation. The eligible community services provided by Act 14-2017 are:
- Assist in the education programs in teaching hospitals and schools of medicine;
- Provide medical services in regions that the Puerto Rico College of Physicians and Surgeons (“CMPR”, by its Spanish acronym) in conjunction with the Puerto Rico Health Department (“DSPR”, by its Spanish acronym) determine that lack certain specialized medical services;
- Provide on-call services in hospitals selected by the CMPR and the DSPR;
- Provide seminars on prevention and other health related matters to the community or as part of continued education programs;
- Provide professional medical services to disadvantaged populations through certain non-profit entities identified by the CMPR, in conjunction with the DSPR.
In the alternative, a Qualified Physician may comply with the community service requirement by providing medical services as part of a service contract with the Health Plan of the Government of Puerto Rico. In this case, the work will not have to be offered free of charge and may be offered as an employee or independent contractor of the person or entity contracting with the Health Plan of the Government of Puerto Rico.
OBTAINING A TAX EXEMPTION DECREE
To enjoy the benefits under Act 14-2017, every Qualified Physician must request and obtain a tax exemption decree through the Office of Industrial Tax Exemption (“OITE”). The applicant must submit the application duly sworn before OITE with a filing fee of $1,000.00, within 2 years as of the effective date of Act 14-2017. The Grant will constitute a contract between the Puerto Rican Government and the Qualified Physician. Once issued, the Qualified Physician will submit annually a report certifying compliance with the Grant’s requirements.
CRITERIA FOR EVALUATING APPLICATIONS
In granting the exemption to a Qualified Physician, the Secretary shall determine whether it is in the best economic and social interests of Puerto Rico. The Secretary will take into consideration:
- The economic impact of the concession of the decree;
- The specialties or subspecialties that the medical applicant has or is in the process of obtaining;
- If there is a shortage of specialists or sub-specialties of this type in Puerto Rico; and,
- The geographical areas to which the physician provides or will provide services.
REVOCATION OF GRANT
A Grant may be revoked immediately and will be without effect if the Qualified Physician:
- Ceases to be a Puerto Rico resident individual;
- Ceases to be a Qualified Physician;
- Ceases to practice full-time in Puerto Rico;
- Does not meet the annual hours of community services;
- Does not comply with any other requirement established by law or regulation.
If a Grant is revoked, the individual shall be required to remit to the Department of the Treasury an amount equal to all unpaid income taxes on Eligible Income and Eligible Dividends for the previous 3 years or the duration of the Grant, whichever is less. Said payment shall be sent no later than 60 days after the effective date of the revocation.
However, if the Qualified Physician satisfactorily certifies that the noncompliance was due to his/her disability or illness or that of his/her spouse, children or parents, the Secretary shall proceed to revoke the decree, but the individual shall only have to remit to the Department of the Treasury a sum equivalent to all unpaid income contributions on Eligible Income and Eligible Dividends as of the taxable year of the revocation.
There are criminal penalties if any person willfully provides any false or fraudulent information in the procurement of the tax benefits under Act 14-2017.
In addition, the decree will be revoked and the Qualified Physician will be responsible for the payment of all taxes which were partially or totally exempted under the Act 14-2017. Similarly, the Qualified Physician will be deemed as having filed a false or fraudulent income tax return and, therefore, will be subject to the criminal sanctions of the Puerto Rico Internal Revenue Code of 2011, as amended.
The Secretary, the Secretary of the Treasury Department, and the Secretary of DSPR shall establish, through regulations, circular letters, or administrative determinations, the necessary guidelines for the interpretation and implementation of the provisions of this Act.
BDO is the subject matter expert in tax incentives and we can help you to navigate through the evolving Puerto Rico tax field and identify risks and opportunities suited for your particular circumstances. For further information contact a BDO professional.