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New Beneficial Ownership Information Report for Puerto Rico Entities

by Caridad Muñiz-Padilla, Esq. and Arnaldo Laboy-Castro

Commencing on January 1st, 2024, corporations and limited liability companies (“LLCs”) organized in any State of the United States (“US”), as well as foreign corporations and LLCs authorized to do business in the US, must file a beneficial ownership information (“BOI”) report with the Financial Crimes Enforcement Network, a bureau of the US Department of the Treasury (“FinCen”), as required by the Corporate Transparency Act. It should be noted that Puerto Rico (“PR”) is considered a State of the US for these purposes.  Thus, most PR organized corporations and LLCs, as well as non-PR organized entities authorized to do business in PR, must comply with this reporting requirement.

The reporting company must provide information about itself, such as its legal name, any trade name, address, jurisdiction of formation or registration, and taxpayer identification number. It must also provide information of its “beneficial owners”, such as their full legal name, date of birth, residential address, and an identifying number from an acceptable identification document, including without limitation a non-expired passport or driver’s license.  A “beneficial owner” is an individual who, directly or indirectly, either (i) exercises substantial control over a reporting company, or (ii) owns or controls at least 25% of the ownership interests of a reporting company.

The due date for filing this BOI report varies depending on the date of formation or registration of the reporting company, as specified below:

– A reporting company created or registered before January 1st, 2024, will have from January 1st, 2024 through January 1st, 2025 to file its initial report.

– A reporting company created or registered on or after January 1st, 2024, will have 30 days after its organization or registration to file its initial report.

– If there is any change to the required information, the reporting company must file an updated report no later than 30 days after the date of change.

– If there is any inaccuracy in the required information, the reporting company must correct it no later than 30 days after it became aware of the inaccuracy or had reason to know of it.

The BOI report must be filed electronically through FinCen’s website. Non-compliance with this reporting requirement could result in the imposition of civil penalties of $500 per day (up to $10,000) or criminal penalties of up to two years in prison.  Please note that there are 23 types of entities that are exempt from this new reporting requirement.  

FinCen is proposing an extension of 90 days to the 30-day reporting period rule for newly formed entities only during the first year of implementation (i.e., January 1st, 2024 through December 31st, 2024). This extension would not apply to a reporting company created or registered before January 1st, 2024. After January 1st, 2025, all reporting companies must file their BOI report within the respective 30-day periods.

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Puerto Rico: Law & Practice and Trends & Developments

We are delighted to be a contributing firm to the 2023 Employment Guide with Chambers Global Practice Guides.  Our commentary on the Employment sector in Puerto Rico provides professional insight on local law and regulations, legal risks for employers doing business in Puerto Rico, best practices, cross-jurisdictional issues, and more.  If you’d like to read our chapter for more commentary on the legal issues surrounding employment in Puerto Rico, please click the link:

Puerto Rico: Law & Practice and Trends & Developments

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Labor and Employment Update: United States Citizenship and Immigration Services
Issues Revised Employment Eligibility Verification Form I-9, Ends COVID-19 Flexibilities

Since 1986, the Immigration Reform and Control Act (“IRCA”) requires all employers to complete an Employment Eligibility Verification Form I-9 for all new hires to physically verify an employee’s identity and authorization to accept employment, within the first three (3) days of employment, and to retain the form for three (3) years after the date of employment, or one (1) year after the date of termination of employment, whichever occurs later.

On August 1, 2023, the United States Citizenship and Immigration Services (“USCIS”) published a revised version of Form I-9. After October 31, 2023, all employers must use the latest version of Form I-9 to verify the identity and employment eligibility of all new hires, and/or for the reverification of expiring employment authorization of current employees (if applicable). After October 31, 2023, previous versions of Form I-9 will not be accepted, and failure to use the revised Form I-9 may result in penalties. A revised Spanish Form I-9 dated August 1, 2023 is available for use in Puerto Rico only. All employers should make sure to use the latest version of Form I-9, available at https://www.uscis.gov/i-9.

In addition, beginning on August 1, 2023, employers may remotely examine employees’ Form I-9 documents, provided they are enrolled in the E-Verify program.

Changes to the latest version of Form I-9 include:

• Reduced Sections 1 and 2 to a single sheet.

• Moved the Section 1 Preparer/Translator Certification area to a separate Supplement A that employers can use when necessary. This supplement provides three areas for current and future preparers and translators to complete as needed. Employers may attach additional supplements as needed.

• Moved Section 3 Reverification and Rehire to a standalone Supplement B that employers can use as needed for rehire or reverification. This supplement provides four areas for current and subsequent reverifications. Employers may attach additional supplements as needed.

• Removed use of “alien authorized to work” in Section 1 and replaced it with “noncitizen authorized to work” and clarified the difference between “noncitizen national” and “noncitizen authorized to work.”

• Ensured the form can be filled out on tablets and mobile devices by downloading onto the device and opening in the free Adobe Acrobat Reader app.

• Removed certain features to ensure the form can be downloaded easily. This also removes the requirement to enter N/A in certain fields.

• Improved guidance to the Lists of Acceptable Documents to include some acceptable receipts, guidance, and links to information on automatic extensions of employment authorization documentation.

• Added a checkbox for E-Verify employers to indicate when they have remotely examined Form I-9 documents.

On a separate note, the United States Immigration and Customs Enforcement (“ICE”) announced that, effective July 31, 2023, COVID-19 related flexibilities for the remote inspection of employee documents would end. These flexibilities were originally announced in March 2020 and updated in March 2021. Employers must now complete in person physical document inspections for employees whose documents were inspected remotely during the temporary flexibility period by August 30, 2023. This announcement gives employers additional time to complete in-person physical inspection of identity and employment authorization documents and annotate the Form I-9 for this population. As discussed above, employers enrolled in the E-Verify program may prospectively use remote examination for I-9 documents as of August 1, 2023.

Please contact Mariel Y. Haack, Esq., at (787) 281-1951, mhaack@amgprlaw.com, or Edwin J. Seda- Fernández, Esq., (787) 281-1822, seda@amgprlaw.com, if you have any further questions regarding the revised Form I-9 or the required in-person document inspections for employees whose documents were inspected remotely during the COVID-19 pandemic.

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Q&A: Disregarded Entities for Puerto Rico Income Tax Purposes

The concept of a disregarded entity was unknown for Puerto Rico income tax purposes until last year when it was introduced to the Puerto Rico Internal Revenue Code of 2011, as amended (the “PR Code”) by Act No. 52 of June 30, 2022.  By contrast, for United States income tax purposes, the disregarded entity tax treatment has been available since the late 1990s. 

The questions and answers below discuss the main topics related to disregarded entities for Puerto Rico income tax purposes:     

What is a disregarded entity?

A disregarded entity is an entity that is “ignored” as a separate entity from its owner for Puerto Rico income tax purposes.

Is a disregarded entity required to file a Puerto Rico income tax return?

No, a disregarded entity is not required to file a Puerto Rico income tax return.  Instead, the owner reports the entity’s income, expenses, gains, and losses on its own Puerto Rico income tax return.

Are all entities eligible to be treated as a disregarded entity for Puerto Rico income tax purposes?

No, only those Puerto Rico organized and non-Puerto Rico organized limited liability companies (LLCs) that have one member (i.e., owner) may elect to be classified as a disregarded entity for Puerto Rico income tax purposes; provided that for these purposes, a married couple under the community property regime is considered one owner. 

Which Puerto Rico organized LLCs are eligible to be classified as disregarded entities for Puerto Rico income tax purposes?

For Puerto Rico organized LLCs, the sole member must be a Puerto Rico resident individual or a married couple in which both are Puerto Rico residents.

What happens if a Puerto Rico organized LLC fails to timely elect to be classified as a disregarded entity for Puerto Rico income tax purposes?

It will be treated as a corporation for Puerto Rico income tax purposes, which is the default classification in the case of a Puerto Rico organized LLC, unless it timely elects to be classified as a pass-through entity (i.e., “Entidad Conducto”). 

Which non-Puerto Rico organized LLCs are eligible to be classified as a disregarded entity for Puerto Rico income tax purposes?

Those non-Puerto Rico organized LLCs that have a single member and are treated -by election or by operation of law- as a disregarded entity for income tax purposes in the United States, or their respective foreign country.  In these cases, the member does not have to be an individual, nor does it have to be a resident of Puerto Rico.  For these purposes, a married couple under the community property regime is considered one owner.

What happens if a non-Puerto Rico organized LLC that is classified -by election or by operation of law- as a disregarded entity in the United States, or in its respective foreign country, fails to timely elect to be classified as a disregarded entity for Puerto Rico income tax purposes?

Such entity will be classified as a pass-through entity (i.e., “Entidad Conducto”) for Puerto Rico income tax purposes, and it cannot elect to be treated as a corporation for Puerto Rico income tax purposes.

The classification as a disregarded entity for Puerto Rico income tax purposes is available for which taxable years?

In the case of a Puerto Rico organized LLC, the election is available for the taxable year 2022 and years thereafter.  For non-Puerto Rico organized LLCs, the disregarded entity classification is available for taxable year 2023 and years thereafter.

Is the classification as a disregarded entity for Puerto Rico income tax purposes mandatory for all eligible LLCs?

No, it is optional. The LLCs can elect to be classified as a pass-through entity (i.e., “Entidad Conducto”), which are generally subject to the Puerto Rico partnership income taxation rules, or as a corporation, as applicable. 

How does an eligible entity choose to be classified as a disregarded entity for Puerto Rico income tax purposes?

The election is made by filing Form AS 6045 entitled Partnership, Limited Liability Company or Corporation Classification Election with the Puerto Rico Treasury Department, along with the Puerto Rico income tax return.

When is the election to be taxed as a disregarded entity due?

The election is due on or before the due date for the owner to file its Puerto Rico income tax return for the taxable year in which the election will be effective, including extensions.

Can an eligible entity change its classification once an election to be classified as a disregarded entity for Puerto Rico income tax purposes is made?

Generally, yes, but the entity and its owners must consider the income tax implications and the conversion costs that may apply by reason of the change in classification as well as any limits or conditions that may apply.

Is a disregarded entity required to comply with the filing and payment responsibilities related to other taxes (i.e., not income taxes)?

Yes, a disregarded entity is solely disregarded for Puerto Rico income tax purposes.  The entity is required to comply with the filing and payment responsibilities related to other taxes (i.e., not income taxes), including but not limited to employment taxes, sales and use taxes, property taxes, municipal license taxes, among others.

What are the advantages of disregarded entity status?

  • No separate income tax return must be filed for the LLC; and tax compliance costs may be lower.
  • Lower income tax rates (avoid the effect of double taxation vis-à-vis being taxed as a corporation).

If disregarded entity classification is elected in Puerto Rico, does the entity have to make a similar election for United States income tax purposes?

No. The applicable requirements and rules for United States income tax purposes are different and separate from the Puerto Rico election.  Furthermore, electing disregarding entity for United States income tax purposes can have serious negative United States tax implications, particularly United States estate taxes and FICA/FUTA taxes, thus careful consideration should be given to such an election as there are very few instances where such a United States income tax election would be advisable.

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AMG’s Mariel Y. Haack to Participate in Puerto Rico HotelierCon 2023

On May 11, 2023, at 4:30pm, Mariel Y. Haack, Shareholder of AMG’s Labor and Employment Department, will participate as a speaker at the 2023 Puerto Rico HotelierCon, sponsored by the Puerto Rico Tourism Company.  Mariel will discuss how to approach mental health in the workplace from a legal perspective.  

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New PR Tax Reporting Requirement for Foreign Financial Accounts

It’s no surprise that Puerto Rico residents may have a financial account outside of Puerto Rico and the United States. But did you know that simply having a bank account in a foreign country, such as Spain and the Dominican Republic, might trigger reporting requirements both in the United States, and most recently in Puerto Rico?

Puerto Rico resident individuals that have a financial interest in financial accounts held outside of Puerto Rico (or the United States) with a balance over $10,000 during the previous taxable year must report such foreign financial accounts in their Puerto Rico income tax returns, commencing with the return due on April 17, 2023.  A taxpayer complies with this requirement by completing and filing Schedule CFF for each foreign financial account with a maximum value exceeding $10,000, along with his or her tax return.

It should be noted that this new Schedule CFF is similar to FinCEN Form 114 (formerly known as Report of Foreign Bank and Financial Accounts – FBAR) required to be filed by United States persons (including Puerto Rico residents) under the Bank Secrecy Act.

Financial accounts include:
– bank accounts
– investment accounts
– crypto asset accounts
– certain insurance policies
– future or options contract accounts

An individual is considered as having a financial interest in an account when:
– the individual is the owner;
– the owner is a third party acting on behalf of the individual;
– the owner is an entity in which the individual directly or indirectly owns at least 50% of all their value or voting power;
– the owner is a grantor trust for the individual’s benefit; or
– the individual has signature authority over the foreign financial account.

Failure to report foreign financial accounts will be subject to a $10,000 penalty and is classified as a misdemeanor.

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THE REPEAL AND UNCERTAIN FATE OF LAW NO. 41-2022

Since the inception of Law No. 41-2022, we alerted our clients and readers of the obstacles and challenges that lay ahead with the implementation of this legislation.  The Fiscal Oversight & Management Board for Puerto Rico (“the Board”) made no secret of its opposition to House Bill 1244-2022, which eventually became Law No. 41-2022, and advised the government of Puerto Rico not to repeal Law No. 4-2017, also known as the Labor Transformation and Flexibility Act.  The Board also vowed to take legal action to stop any legislation that would negatively impact the labor market flexibility that Puerto Rico needs, or any action that would interfere with PROMESA’s purposes.

Thus, on July 30, 2022, a few days after the effective date of the law, the Board provided the government of Puerto Rico with an economic impact analysis of Law No. 41-2022, and asked the government to suspend voluntarily such law no later than August 4, 2022.  Failure to act on the part of the government would result in legal action to nullify Law No. 41-2022.  The government, however, ignored the Board’s warning and decided to go full speed ahead with the implementation of the law.

The Board made good on its promise.  On September 1, 2022, it filed a complaint in federal court with two (2) counts to repeal Law No. 41-2022.  On September 29, 2022, the government answered and challenged the jurisdiction of the Court.  On the same day, the Board moved for summary judgment.  Accordingly, on March 3, 2023, after full consideration of the parties’ arguments and positions, the Court denied the government’s motion, holding that it may exercise jurisdiction, and granted in part and denied in part the Board’s summary judgment motion. 

Granting in part the Board’s summary judgment motion was sufficient for the Court to find that such entity was entitled as a matter of law to the relief sought.  Consequently, the Court held that Law No. 41-2022 was null ab initioThis means that the law and all actions taken to implement it are null and void from the beginning.  In other words, Law No. 41-2022 never had any legal effect.

The decision of the Court validates and gives new life to Law No. 4-2017.  However, the effects on employers of this new development could still be significant.  In the past few months the government of Puerto Rico took the stand that all employers in our jurisdiction had to comply with the provisions and amendments of Law No. 41-2022.  Thus, many employers modified personnel handbooks, offered employment under the new rules for probationary periods, calculated hours and paid Christmas bonuses according to the new guidelines of the Puerto Rico Department of Labor, and accrued vacation for part-time employees, to mention just a few.  Others are perhaps litigating or have settled cases under the changes brought by Law No. 41-2022.  Now the question turns out to be what to do next.  Changing rules again for the existing workforce could have unforeseeable effects, and could result in staff turnover and difficulties in attracting good candidates.        

This Court’s decision is not final yet.  According to some government spokespersons, including the Secretary of Labor and Human Resources of Puerto Rico, they are analyzing the legal grounds that support the decision and will determine if the best course of action is to appeal.  However, given this swift action and decisive language used by the Court, in addition to the good track record of the Board in PROMESA cases, it is likely that the decision will be upheld.  Moreover, the least that is needed at this moment is further confusion and instability from a government appeal.  At AMG we will follow closely all development related to Law No. 41-2022 and keep you updated.  For your ready reference, we are attaching our newsletter of January 27, 2017, which contains a summary of Law No. 4-2017.