On January 12, 2026, the Puerto Rico Legislature introduced House Bill 1014 and Senate Bill 912. These bills propose amendments to Sections 1010.01, 1021.01, 1021.02, 1021.06, 1022.07, 1031.02, 1033.18, 1078.02, 1081.01, 3030.03, 4030.05, 4030.17, and 6041.11 of the Puerto Rico Internal Revenue Code of 2011, as amended (“PRIRC”).  The primary objective of the proposed legislation is to reduce the tax burden on taxpayers in Puerto Rico and address other related fiscal matters.

Purpose

This proposed legislation represents the second phase of Puerto Rico’s tax reform and seeks to establish a fairer and simpler tax system by reducing the tax burden on individuals, particularly the working middle class.

What does this measure seek to accomplish?

Currently, income tax rates in Puerto Rico are significantly higher than U.S. federal rates, negatively impacting the competitiveness and perceived fairness of the tax system. The proposed legislation aims to narrow this gap by reducing effective income tax rates. Additionally, future phases are expected to focus on modernizing consumption taxes, corporate taxes, and municipal taxes to further enhance the efficiency and equity of the tax system.

The bill also seeks to reduce the individual tax burden by reviewing and adjusting personal exemptions, dependent exemptions, and exemptions for retirees to account for inflation, as these amounts have not been updated since 2011. In addition, the proposal aims to simplify the tax system by eliminating complex components such as gradual adjustment, the tax computation discount, and the alternative basic tax on income subject to preferential rates, thereby facilitating compliance and improving fiscal administration.

Among the most important measures proposed by this bill are the following:

• Reduction in Individual Income Tax Rates
  For tax years beginning after December 31, 2024, the individual income tax brackets would be as follows:

• Elimination of Gradual Adjustment: The gradual adjustment applicable to individuals with income exceeding $500,000 will be eliminated for tax years beginning after December 31, 2024.
• Removal of 8% and 5% discounts: The current 8% and 5% discounts on income tax will be eliminated for tax years beginning after December 31, 2024.
• Elimination of Preferential Rate Income for Alternate Basic Tax (“ABT”): Income subject to preferential tax rates will no longer be included to determine net income subject to ABT for tax years beginning after December 31, 2024.
• Optional Computation Method: Individuals and corporations eligible for the optional computation method may elect this method even if they have a balance due on their income tax return, provided the full balance due is paid no later than the filing deadline, including any filing extension.
• Increase in Exemptions: The exemption per dependent will increase to $5,000 for tax years beginning after December 31, 2024, and will be subject to inflation adjustments in subsequent years. The personal exemption will also be subject to inflation adjustments going forward.
• Termination of Full Excise Tax Exemption for Alternative Energy Vehicles: The full exemption from excise taxes on motor vehicles powered by alternative or hybrid energy will end effective July 1, 2026.
• Repeal of Sales and Use Tax Exemptions: Sections 4030.05 and 4030.17 of the PRIRC will be repealed, eliminating the sales and use tax exemptions for tangible personal property considered promotional material (“giveaways”) introduced into Puerto Rico and for solar electric equipment, respectively.

 Effective Date

All provisions will take effect immediately upon enactment, except for the termination of the excise tax exemption for alternative and hybrid energy vehicles and the repeal of the sales and use tax exemptions, which will apply to transactions occurring on or after July 1, 2026.

ATBA’s Comments

Given the scope and importance of the proposed amendments, timely approval of these bills is essential to provide the Puerto Rico Treasury Department with adequate time to implement the required administrative and system updates ahead of the 2026 tax filing season. Prompt enactment will facilitate a seamless transition and support proper compliance by both taxpayers and the government.

However, several Representatives and Senators have raised concerns about the elimination of sales and use tax exemptions for solar equipment, as well as the new application of excise taxes to vehicles powered by alternative or hybrid energy.  These matters will be closely monitored as the legislative process continues.

We will continue to provide updates on the status and progression of these bills.