New Disregarded Entities in Puerto Rico

In 2011 the Government of Puerto Rico adopted, as part of a tax reform, the Puerto Rico
Internal Revenue Code of 2011 (the “Code”). This new code introduced to Puerto Rico’s
tax system the concept of “Partnerships,” by mainly adopting in Puerto Rico the
Partnership provisions included in the United States’ Internal Revenue Code (“USIRC”),
with minor exceptions. However, the concept of “disregarded entities” was not, at that
time, incorporated into our tax system. Unlike partnerships, under the USIRC disregarded
entities are “ignored” for income tax purposes, and it is considered that its sole owner
directly performs the business activities of the entity. It is an income tax status reserved
only for non-corporate entities that provide limited liability to its sole owner and its goal is
to simplify the income tax compliance of the entity.

On October 7, 2021, the Governor of Puerto Rico signed Executive Order No. 2021-072
to create an advisory group to provide recommendations on how to simplify and improve
the tax system in Puerto Rico (the “Advisory Group”). In 2022 the Advisory Group issued
a preliminary report which detailed various tax reform initiatives on income taxes,
consumption taxes, tax incentives, municipal taxes, and tax evasion policies. One of the
income tax initiatives proposed by the public sector was to incorporate into Puerto Rico’s
tax system the concept of disregarded entities. Under this initiative, as detailed in the
Advisory Group’s preliminary report, the concept of “disregarded entities” would: