Real Estate 2022 Comparisons

The main sources of real estate law in Puerto Rico are:

• the Real Estate Property Registry Act of the Commonwealth of Puerto Rico, Act 210, dated 8 December 2015, as amended;
• the Puerto Rico Civil Code, Act 55, dated 1 January 2020, as amended; and
• the Puerto Rico Notarial Act, Act 75, dated 2 July 1987, as amended.

The Puerto Rico Commercial Transactions Act, Act 208, dated 17 August 1995, as amended, most commonly known as the PR UCC, also provides some insight related to real estate in what pertains to fixtures.

The main trends in the real estate market in Puerto Rico over the past 12 months pertain to:

• commercial real estate financing addressed to perform improvements on properties;
• the increase in the amount of individuals who have relocated to Puerto Rico and acquired real estate given tax incentives for foreigners who export services from Puerto Rico; and
• CBDG funds made available to Puerto Rico by the US Department of Housing and Urban Development (mitigation, disaster recovery and electrical system enhancement funds).

The coronavirus pandemic initially impacted the real estate market in the sense that transactions were halted during the lockdown period. Puerto Rico follows the civil tradition concept of execution of public deeds before notary publics for the recordation of transfers, and other transactions, involving real estate. Accordingly, during lockdown no deeds of transfer were executed or filed for recordation. Thereafter, once measures were lightened, a series of amendments were proposed to the Puerto Rico Notarial Act, Act 75, dated 2 July 1987, as amended, in order to allow for “virtual” authorisations of public deeds or related documents. However, none of these proposed legislations were approved. Financial institutions did, however, digitalise many of their internal proceedings associated with mortgage loan underwriting processes, which allowed for a speedier underwriting process. After the summer/autumn of 2020, real estate transactions resumed their normal processes and velocities.

Some of the most significant real estate deals our firm worked on during 2021 were:

• representing Pueblo Inc and Campo Rico Warehouse and Distribution Center Inc in a USD79.5 million commercial real estate financing with Banco Popular de Puerto Rico;
• representing EHP San Juan Suites LLC, a Blackstone Group subsidiary, in the sale of the San Juan Embassy Suites Hotel and Casino for USD63 million;
• representing Banco Popular de Puerto Rico in a USD31.5 million commercial real estate financing with Centro Europa LLC;
• representing Orion Real Estate Group in the acquisition of 18 real estate properties leased to KFC, Taco Bell and Pizza Hut; and
• representing FirstBank Puerto Rico in a USD16.3 million commercial real estate financing with Paseo Portuario Owner PR, LLC and DAP Calle Brumbaugh Puerto Rico LLC.

We are not aware of real estate transactions in Puerto Rico involving these new technologies or currencies.

The most recent proposal for law reform relating to real estate in Puerto Rico pertains to a bill introduced in the House of Representatives that would allow attorneys who are notary publics to become real estate brokers without the need to take the applicable bar exam therefor. The approval of this bill will allow attorneys who are notary publics to exercise a dual function: they would market real estate and would also execute/authorise the applicable public deeds related to the underlying properties.

The bill does not address matters such as compensation (brokerage commissions) and standing ethical rules in Puerto Rico, which do not foment attorneys from generating compensation from different professions. The bill is currently in the early stages of the legislative process as it was proposed on 22 February.

In Puerto Rico, the following categories comprise property rights that can be transferred/acquired:

• straight ownership (fee simple);
• lease;
• surface rights;
• administrative concessions;
• usufructs;
• preferential acquisition rights (ie, option to purchase, right of first refusal and redemption rights); and
• mortgage.

The most important laws applicable to transfer of real estate in Puerto Rico are the Puerto Rico Real Estate Property Registry Act (Act 210, dated 8 December 2015, as amended); and the Puerto Rico Civil Code (Act 55, dated 1 June 2020, as amended).

Other special laws may also be applicable to special types of properties, for instance apartments, which will also be subject to dispositions from the Puerto Rico Condominiums Act (Act 129, dated 16 August 2020, as amended); or hotels or manufacturing plants (for which certain tax incentives from the Puerto Rico Code of Incentives may be applicable (Act 60, dated 1 July 2019, as amended)).

In Puerto Rico, the lawful and most proper method of transferring real estate is by means of executing a public deed of transfer and recording the same in the Puerto Rico Registry of the Property. Real estate can also be transferred by private agreement (non-deed form) but such a document will not have access to the Registry of the Property and as such, the new owner’s title will not be enforceable against third parties (erga omnes).

Title insurance is certainly common in our jurisdiction, with the main title insurance companies being present on the island (Fidelity National Title, First American, Chicago, etc). The pandemic had its initial toll on the real estate transfer processes in the sense that the lockdown impeded notary publics from meeting with parties to execute public deeds. However, once pandemic measures were lightened, processes returned to normal. Filings in the Registry of the Property are mainly done electronically and the online platform was never shut down during lockdown. No new procedures were implemented to effectuate real estate transfers during the pandemic.

The typical due diligence process in real estate involves obtaining the following certifications related to the property, the transferor and the transferee:

• a title search report (abstracts);
• property tax debt and values certificates;
• a survey or plot plan, as applicable;
• good standing certificates (if applicable to the parties involved);
• bankruptcy certificates;
• UCC Search (if the transfer entails personal property as well); and
• federal tax lien certificates.

Other aspects to diligence are existing permits and licences, as well as prior title insurance policies. Except for the limitation on the type of services that could be provided during the initial lockdown, the pandemic did not impact the need for obtaining these certificates and the same continues to be standard procedure in due diligence processes.

Typical representations and warranties are: title; liens and encumbrances; compliance with laws; presence of hazardous substances; no hidden defects; no squatters; and payment of property taxes and other assessments due on the property.

The Puerto Rico Civil Code provides the seller is liable for warranty of title, but such warranty and liability are waivable by agreement of the parties' absent fraud. Buyer remedies against sellers for misrepresentations are typically damages and/or specific performance (subject to terms and conditions negotiated). If the right is recorded in the Registry of the Property (ie, option to purchase and/or right of first refusal), the buyer also has remedies against the new owner of the property in order to assert its rights. Typical security for enforcement of those remedies are title policies and/or deposits held in escrow, pending confirmation of contingencies. Other than title insurance covering a warranty of title and escrow closing mechanisms, representation and warranty insurance is not often used in our jurisdiction.

Contracts (warranties, representations and liabilities), taxes, incentives, financing, leasing and notarial (formalities); and the extent of real property rights affecting a particular property (ie, restrictive covenants of edification and use).

The buyer could be responsible under CRCLA or any other applicable federal law that imposes strict liability. US Federal laws are applicable in Puerto Rico, unless specifically excluded by Congress or deemed locally inapplicable pursuant to the Federal Relations Act. The buyer could also be responsible under Puerto Rico laws and regulations, if the transaction includes acquiring underground storage tanks (USTs), because, in general terms, the applicable regulation imposes strict liability on owners and operators of USTs.

The buyer can ascertain permitted uses by commissioning a zoning report. It is possible to enter into such an agreement subject to existing zoning and/or specifically permitted variances.

The government can effectuate takings/condemnations by judicial process, which entails due process and payment of just compensation.

Transfer taxes in connection with transactions that are made pursuant to a public deed in Puerto Rico are generally estimated at USD5.65 per thousand dollars of value and are allocated among internal revenue stamps, legal aid stamps, filing and recording vouchers. The seller and buyer can split these costs by agreement, but usually the seller covers the costs associated with the original deed (internal revenue stamps and legal aid stamps) and the buyer covers the costs associated with the first certified copy of the deed and its recordation in the Registry of the Property (internal revenue stamps, legal aid stamps, filing and recording vouchers).

There is also a statutory fee payable to the notary public who executes the deed of transfer, which is usually 0.5% of the value of the transfer (up to USD5 million; negotiable among the parties for any surplus). This fee is usually paid by the party who selects the notary. Transactions that are made by private agreement, and thus not recorded in the Registry of the Property, are not subject to the payment of these transfer taxes.

No legal restrictions for foreign investors, other than OFAC.

Commercial real estate is generally financed with mortgage secured term loans with a five- to seven-year maturity and balloon payments (usually refinanced at maturity). These loans are also typically secured with assignment of existing rents and equity pledges.

Mortgage; assignment of leases and rents; ownership equity pledges; and blanket personal property (UCC).

There are no restrictions.

The recordation of a mortgage in Puerto Rico entails the payment of approximately USD5.85 per thousand dollars of value. This includes internal revenue stamps, legal aid stamps, filing and recording vouchers. Furthermore, there is a statutory fee payable to the notary public who executes the Deed of Constitution of Mortgage, which is usually 0.50% of the value of the mortgage (up to USD5 million; negotiable among the parties for any surplus).

The entity must have legal title to the real estate to be mortgaged.

Notice provisions within the credit agreement, lapse of applicable cure periods and thereafter, filing judicial complaint seeking mortgage foreclosure. Priority of a mortgage lien will depend on the order the same was filed in the Registry of the Property. At the beginning of the pandemic, mortgage foreclosures were halted by the government but this is no longer in effect.

This is by agreement/consent of the existing creditor for the benefit of the new creditor. Creditors execute a subordination and intercreditor agreement. If the debt in question is secured by a mortgage, the subordination agreement is typically executed in public deed form and registered in the Registry of the Property.

Generally, federal environmental laws imposing strict liability, such as CERCLA, provide for a lenders’ liability exclusion. The Puerto Rico UST Regulation also provides a lender’s liability exclusion. However, these liability exclusions can be removed under certain circumstances, such as when a lender participates in management of the secured asset. Therefore, early in their relationship with borrowers, lenders must have a clear understanding of the requirements that these exclusions entail.

In most scenarios, if the security interest has been duly perfected, it will not be affected by the debtor’s insolvency. On the contrary, if the security interest in question was not perfected, then such a creditor will most likely become an unsecured creditor within the bankruptcy proceeding.

The key consequence was the entry of fallback languages providing for alternate rates, usually SOFR-based. With the approval of the Adjustable Interest Rate Act (the “LIBOR Act”) as part of the Consolidated Appropriations Act of 2022, signed into law on 15 March, lenders can also agree with their borrowers on fallback language not SOFR-based (such as the Bloomberg Short Term Bank Yield Index) without regulatory repercussions.

The Puerto Rico Land Use Plan is the general planning instrument developed to identify the land value in Puerto Rico. The Puerto Rico Planning Board is the administrative agency in charge of establishing the territorial zoning. The municipal territories with planning and permitting hierarchies delegated by the central government (Autonomous Municipalities) also establish their territorial ordering plans and zoning maps. There are also overlapping special planning districts. These special districts can generally respond to urban particularities or to conservation of resources (natural, agricultural, tourist, etc).

The Puerto Rico 2018 Building Code, which follows uses in the 2018 International Building Code. In addition, the Joint Regulation for the Evaluation and Issuance of Permits provides construction and development parameters and general permitting regulatory requirements.

The Puerto Rico Planning Board, The Permits Management Office and several Autonomous Municipalities. In general terms, the organic Act of the Puerto Rico Planning Board, the Act for the Reform of the Permitting Process and the Puerto Rico Municipal Code.

A myriad of special laws and planning instruments (eg, overlapping planning districts established by special laws) also apply to designation and use of individual parcels. In general terms, Siting Approvals are required for uses that are not permitted by the zoning, as well as for projects with regional or supra-regional impact.

Prior to any development or new project, an Environmental Impacts Review process is necessary. The complexity of the analysis and the timing for approval depends on the significance of the potential environmental impacts. If the zoning allows the particular development, and no variances are required, a Siting Approval is not generally necessary. However, some projects must go through this process regardless of zoning (because of their impacts or characteristics). Endorsements and comments from municipalities and administrative agencies with jurisdiction over the project must generally be obtained prior to applying for a construction permit.

In general terms, third parties with interest can participate and object (neighbours or people whose rights may be affected). 

The determinations of the administrative agencies may be subject to judicial review.

It is possible to enter into agreements with local or governmental authorities; for example, mitigation plans, conservation easements, electricity supply or interconnection to the electricity grid.

The administrative agencies in charge of planning and zoning, as well as evaluating and issuing permits, are in charge of enforcing the restrictions. These agencies can issue fines and penalties, as well as cease and desist or demolition orders. Agencies and municipalities can also go to court to enforce their laws and regulations in case of violations and non-compliance.

Puerto Rico offers a wide array of entities that can serve the special purpose of holding title to real estate assets, such as corporations, limited liability companies or partnerships. Corporations and limited liability companies are the most used.

The main feature investors seek is for the liability of equity holders to be limited to their stake/capital investment in the entity.

There is no minimum.

Governance requirements for LLCs and corporations are those set forth in the Puerto Rico Corporations Act, which is modelled to the Delaware Corporations Act. 

Annual filing fees are nominal in nature (approximately USD150 per year). Accounting expenses can also come into play when preparing financial statements and annual reports that need to be filed for corporations.

Lease, surface rights and usufruct agreements.

Net leases, gross leases and percentage leases. Parties can also agree to a combination of any of these.

Subject to consumer laws, leases are mainly freely negotiable. During the pandemic, the government halted eviction proceedings for some time (no longer in effect). There were no government-mandated moratoriums for commercial rents (although they were highly encouraged publicly by the government). Many commercial landlords did grant rent moratoriums, which mainly consist of postponing all or part of monthly rents to the end of the lease, or creating payment plans for the lockdown months' rents.

Typical lengths of a commercial lease will vary on the type of lease (retail, office space, etc) and the nature of the tenant (anchor or mom-and-pop shop). They can go from a one-year lease to a five-, ten- or 20-year lease, or even higher depending on the circumstances.

Maintenance is usually allocated among landlord and tenant, with the prior being liable for structural repairs and exterior portions, and the tenant being liable for day-to-day maintenance and full responsibility for personal property within the demised premises.

Rental payments in commercial leases are most commonly made monthly. The pandemic caused the inclusion on new leases or amendments to leases of more detailed force majeure or the like scenarios, providing tenants with the possibility of rent abatements or good faith negotiations for payment plans after abatement terms.

This depends on what is agreed in the lease; annual increases by percentage are common.

Parties determine and agree on rent increase kickers, such as just lapse of time (ie, 5% increase per year) or by sales (base rent to be increased if gross sales reach x% increase).

Puerto Rico does not have a VAT regime, but has a sales and use tax (“SUT”) regime. The rental payment for the lease of real property for commercial purposes may be exempt from the payment of SUT if the lessee proves to the lessor that it complies with the requirement of maintaining a fiscal terminal pursuant to the Puerto Rico Internal Revenue Code of 2011, as amended (“PR Tax Code”), in those cases in which it is required to have such terminal. The rental payment for the lease of real property paid by the lessee to the lessor on the principal residence of the lessee or student lodge is also exempt from SUT.

All costs associated to obtainment of the tenant’s permits and operational licences. Should the tenant decide to record the lease, and the same is recordable pursuant to applicable law, the tenant will pay the applicable stamp, vouchers and notarial fees related thereto. Also, the tenant may also be required to pay a security deposit or a bond to secure performance.

CAM, or common area maintenance charges, are typically put in place to cover these expenses based on each tenant’s share of liability.

CAM, or common area maintenance charges, are typically put in place to cover these expenses based on each tenant’s share of liability.

The tenant usually pays for insurance covering property damage, business interruption, general liability and other liabilities associated with matters within the demised premises. The tenant also contributes to the landlord’s cost of the hazard insurance insuring property damage on common areas. Some business interruption insurance has been recovered for office closures during the pandemic.

The landlord can impose a set of rules and regulations for its real estate being leased. In addition, tenants must comply with all applicable laws (licences, permits, type of business operations, noises, environmental, consumer, etc). Furthermore, if the property is part of a horizontal property regime, the tenant must comply with the regulations approved by the HOA.

Tenants are usually permitted to repair normal wear and tear; however, edifications or alternations structural in nature will in most cases require landlord consent and the title thereto will revert to the landlord at the end of the lease. Compensation, therefore, can be negotiated.

Except for leases with government entities, and limitations on use or edification that may imposed by restrictive covenants over the property, there are no specific regulations/laws that apply to particular leases. Tenants under government contracts need to comply with legislation and provide certain representations under the contract (eg, fiscal liabilities and no-conflict certification, among others).

The US Bankruptcy Code, applicable in Puerto Rico, provides that leases are executory contracts that trustees, on behalf of insolvent tenants, need to decide whether to accept or reject. Accepted leases will continue to be paid as per their terms and rejected leases will be subject to court determinations for the landlord as an unsecured creditor. 

Landlord liens are not recognised under Puerto Rico law (lien over personal property of the tenant as security for landlord). As such, the most common security is a personal or entity guaranty from the tenant’s principal. Other types of known securities are payment bonds or safety deposits.

In general terms, tenants must vacate demised premises after the end of the agreed-upon term. However, the tenant may continue to pay monthly rent, and should the landlord agree, the lease can continue month to month. Should the landlord not want this to happen, the landlord should notify the tenant prior to the expiration of the term that it does not wish to continue the lease month to month, and shall remind the tenant of the expiration date and the agreed condition on which the tenant shall leave the premises after vacating it. Should the tenant fail to vacate, the landlord shall seek judicial eviction.

Unless specifically prohibited in the lease, the tenant may assign its interest or sublease part or all of the demised space. If specifically permitted under the lease, typically the landlord will require prior consent and approval of the assignee or subtenant and will most likely require the original tenant to remain liable. There is, however, one exception that is typically included in leases and it is when the tenant is assigning its interests in the lease to a related entity.

Default under the terms and conditions of the lease (ie, payment default or insurance compliance).

Lease agreements do not have registration requirements, but these are available to the parties. Lease agreements may be recorded in the Registry of the Property by mutual agreement among the parties, or by tenant request if the lease term is for six or more years. In order to record the lease, the same does need to be in deed form.

Memorandums of lease are not recordable in Puerto Rico. Recordation costs for leases are estimated at USD5.50 per thousand dollars of value and include internal revenue stamps, filing and recordation vouchers. Stamps are paid based on the total value of the rent payable under the lease, including extensions. The recording voucher is calculated based on the total rent payable during the base term of the lease (capped at 15 years). There is also a statutory fee payable to the notary public who executes the deed, which is usually 0.5% of the value of the deed (up to USD5 million; negotiable for any surplus).

Following an uncured event of default, a landlord may terminate a lease and seek eviction. Depending on the court and the backlog of cases, these proceedings, although summary in nature, can last approximately from three to nine months in best-case scenarios.

The government may terminate a lease as part of the condemnation proceedings of a real estate property. Depending on the contents of the lease, the tenant may or may not have a say or stake on the just compensation the real estate owner receives from the government.

The three main structures used in Puerto Rico to price construction projects are:

• lump-sum;
• cost-plus; and
• guaranteed maximum price.

Under Puerto Rico applicable laws and regulations, mainly Law No 164 of 16 December 2009, as amended, and Law No 173 of 12 August 1988, as amended, a project’s design can only be performed by duly Puerto Rico licensed professionals and/or professional services entities (professional services corporations, limited liability companies and/or limited liability partnerships where all of its shareholders, members and/or partners are duly Puerto Rico licensed professionals as well).

Generally, contractors do not need to be licensed or registered to conduct general construction work; however, under applicable laws and regulations of the Puerto Rico Department of Consumer Affairs (“DACO”, by its Spanish acronym), residential development contractors need to be registered at DACO’s Contractor’s Registry.

Most sophisticated design and construction relationships in Puerto Rico are carried out using American Institute of Architects (AIA) forms. As such, these types of agreements shall contain typical indemnification and hold-harmless provisions, as well as requirement of special payment and performance bonds and liability and property insurance.

The parties may agree, as is typical in Puerto Rico, to contractors and designers being subject to delay-penalty deductions from their fees for failure to perform their services in accordance with their corresponding services’ agreements.

Most owners will require payment and performance bonds from a third-party surety company for the project’s designers, contractors and main subcontractors. Said bonds are generally required to cover claims for latent defects or arising from the fraud or wilful misconduct of any of the above-referenced parties; and to remain in effect in accordance with Puerto Rico’s statute of repose for hidden latent defects, that is, for ten years from the date when the project was completed (from the date the corresponding use or occupancy permit was issued). Parent guarantees may also be required.

There are no mechanical liens in Puerto Rico. A contractor, however, may seek judicial remedies and, as part of said action, request and obtain an attachment over the property and record the same in the Registry of the Property.

In accordance with Articles 1374 and 1375 of the Puerto Rico Civil Code, Law No 55 of 1 June 2020, as amended, the owner of a project may be responsible to the contractor’s employees, subcontractors, suppliers and/or materialmen (“Contractor’s Service Providers”), when such amounts have been invoiced by the contractor to the owner; and have not been satisfied by owner to contractor.

As such, any of the Contractor’s Service Providers may file a lawsuit before any local or federal court and request an attachment (embargo) against the owner’s real property(ies) and have the same filed for recordation in the corresponding section(s) of the Registry of Property of Puerto Rico. The attachment’s rank, however, will depend on the filing (ie, does not have priority over other recorded liens).   

Depending on the project’s main characteristics, in general, a project shall be considered in substantial completion and available for use when the corresponding permits agency has issued a “Unique Permit” (a use and occupancy permit). In order for the permits agency to issue said Unique Permit, several other local agencies must certify that the project has been substantially completed, including, but not limited to, certificates from the Puerto Rico Health Department and the Puerto Rico Fire Department’s Fire Prevention Division.

Puerto Rico does not have a VAT regime, but has a sales and use tax (“SUT”) regime. The sale or purchase of corporate real estate is not subject to SUT.

As transfer taxes are based on valuation of properties in the public deeds where they are transferred, the only method available would be to valuate them using accepted accounting principles but without entering into donations or gifts.

Real estate in Puerto Rico is subject to real property taxes, which are payable to the Municipal Revenue Collection Center (“CRIM” by its Spanish acronym), mostly for the benefit of municipalities. Real property taxes are assessed based on fiscal year 1957-1958 property values. No real property reassessment has been made since fiscal year 1957-1958 and construction taking place after that year has been assessed on the basis of what the value of the property would have been in the fiscal year 1957-1958. This tax is assessed by CRIM agents and no return needs to be filed by the taxpayer.

Taxable property is generally assessed in the name of the person owning it on the assessment date, but property of persons domiciled outside Puerto Rico and having no representation or office in Puerto Rico (ie, non-residents) is assessed in the name of the person or entity in Puerto Rico who is in possession of the property. The imposition of this tax is not limited to persons engaged in trade or business in Puerto Rico (“ETB-PR”). An exemption on the first USD15,000 of assessed 1958 valuation in owner-occupied residences is available, but this exemption is not applicable to business premises. The total property tax rate varies based on the municipality in which the property is located, but ranges between 8.03% and 12.33% for the fiscal year 2022-2023. Taxpayers may be covered by tax exemptions, which are generally based on their type of business or location of the property. A tax exemption grant or concession may be required to claim a tax exemption.

Natural or juridical persons who (1) are ETB-PR, and (2) on 1 January owned personal property used in that trade or business, even though it may be leased to another person, or is held in a fiduciary capacity, would also be subject to a personal property tax. The personal property tax is self-assessed and an annual personal property tax return must be filed with the CRIM. Every person required to file a personal property tax return must compute the tax on the basis of the book value of personal property by 1 January of each fiscal year for which the tax is computed. In the case of inventory, personal property taxes are assessed based on the book value of the average monthly inventory for the calendar year prior to the 1 January assessment date.

The municipalities of Puerto Rico have the authority to impose a municipal licence tax, which is a tax on the gross volume of business derived by any person engaged for profit in the rendering of any service, in the sale of any goods, in any financial business or any other industry within a municipality of Puerto Rico. If the owner of the property is ETB-PR, it will have the obligation to be registered in the municipality in which it conducts business and have an office, warehouse or other place of business for municipal licence tax purposes. The municipal licence tax is imposed on the gross income of the person attributable to the operations within a municipality. The municipal licence tax rate varies per municipality, but the most common rates are 0.50% in the case of non-financial businesses and 1.5% in the case of financial businesses. Leasing of real property may be considered a business subject to the municipal licence tax.

In general, foreign investors that receive gross income from Puerto Rico sources that is fixed or determinable annual or periodical income (“FDAP”) are subject to Puerto Rico income tax withholding at source. The general applicable tax rate is 29% in the case of foreign entities not ETB-PR and non-resident aliens, and 20% in the case of non-resident US citizens.

The income from rental of real property located in Puerto Rico is considered income from Puerto Rico sources. Thus, rental payments to foreign entities not ETB-PR or non-resident individuals would be subject to the income tax withholding at the tax rates discussed above. Such tax would need to be collected and remitted to the Puerto Rico Department of Treasury by the lessee. An election to have the income from real property (including gains on the sale or exchange of such property) taxed as effectively connected income is available. The filing of a Puerto Rico income tax return would be required in that case.

If the lessor is a foreign entity ETB-PR, it will be taxed on its net income effectively connected with its Puerto Rico trade or business, and the rental payments to that lessor will not be subject to income tax withholding at source.

The taxation of gains from the disposition of real property will depend on whether the foreign investor is ETB-PR or not, and whether the owner holds the property as a capital asset or not. If the seller is a foreign entity not ETB-PR or a non-resident individual, the “purchase price” will be subject to income tax withholding at a 25% rate in the case of foreign entities not ETB-PR and non-resident aliens, and 15% in the case of non-resident US citizens. For this purpose, the term “purchase price” means the aggregate payments that the purchaser is required to make, reduced by:

• the purchase price of the property, as reflected in the original purchase deed or private document of the seller;
• the notary fees, internal revenue stamps and Property Registry fees corresponding to the cancellation of mortgages paid by the seller;
• the commissions paid by the seller to the real estate broker with respect to the purchase and sale of the real estate; and
• the increase in value of the property over which the seller has prepaid the special tax pursuant to section 1014A of the Puerto Rico Internal Revenue Code of 1994, as amended. 

The tax applicable to foreign corporations not ETB-PR and non-resident aliens is 29% on the net capital gains. Non-resident US citizens are eligible for the 15% capital gain tax rate if the property is held as a capital asset for more than one year. Otherwise, they would be subject to the ordinary tax rates of up to 33%. The tax withheld may be credited against the tax due.

If the seller is a foreign entity ETB-PR or a resident individual, no income tax withholding would apply. Such a seller would be taxed on its net gain at the capital gain tax rates if it has held the property as a capital asset for more than one year, or at the ordinary tax rates if it does not hold the property as a capital asset or has held it for one year or less.

Certain types of leases and the sale of certain real property may be exempted under special laws. A tax exemption grant or concession may be required to claim such tax exemptions.

The property owner that is ETB-PR and holds the property for business purposes can get deductions for depreciation, mortgage interest, taxes and other ordinary and necessary expenses related to the operation of the property.