Doing Business in Puerto Rico Blog: Business Coaching, News & Developments

EIGHT STEPS TO COMPLETE BEFORE OPENING UP FOR BUSINESS

If you are planning to open a business in Puerto Rico here are  eight  steps that you must follow to be in compliance.

1. Decide and create the type of legal structure  (corporation, proprietorship, limited liability corporation, partnership).
2. Register the company with the Puerto Rico Department of State. The Department issues an identification number and a certificate.
3. Apply for an employer identification number (EIN) with the  U.S. Internal Revenue Service.
   
4. Obtain occupancy permit from ARPE (requires several endorsements). This is assuming you are moving to an office building. Construction is more complicated. It requires the developer to obtain a  land use permit followed by a building permit.
5. Apply for a municipal business license (patente municipal). This is channeled through the appropriate county or municipality.Businesses are generally taxed up to .5% of the yearly gross receipts. Financial businesses pay more.
6. File with the Registry of Merchants and Business, the Commercial Development Administration and the Treasury Department (Hacienda). The law requires all persons or entities doing business in Puerto Rico (or are planning to do so) to register their activity with the Secretary of the Treasury. The registry will be the official record of a business in the Department. Merchants must fill form SC 2914 known as the Application for Merchant's Registration Certificate and Exemption Certificate.
7. If you will have employees, request unemployment and disability account numbers from the local Department of Labor (Departamento del Trabajo y Recursos Humanos).
8. Obtain a workers' compensation insurance policy for your employees with the State Insurance Fund Corporation (Corporacion del Fondo del Seguro del Estado (CFSE).

PAYROLL TAXES IN PUERTO RICO

In the U.S.A.  there is generalized misunderstanding  that the people of Puerto Rico  do not pay taxes. The fact is that we probably pay more than those in the States except that the money goes to the local Revenue Department. It has to do something with the fact that we do not have a vote or effective representation in either the House or Congress; no representation, no taxation. Another interesting fact is that businesses that open shop in the Island often enjoy more tax breaks than local businessmen.

Still all  businesses in Puerto Rico  have to pay Federal Unemployment Tax (FUTA) and Social Security (FICA). FUTA is imposed on businesses who employ one or more individuals for a portion of a day in each of 20 weeks in the current or preceding calendar year, or who pay in the aggregate $1,500 or  more of wages in a calendar quarter of the current or preceding calendar year.  For FICA the tax rate is 7.65% for each employee (of which 1.45% is  for Medicare) up to a maximum base ($76,200 for social security in 2000).  Self employed individuals pay to the federal government 15.3% tax rate (including 2.9% for Medicare).

POSITIONING PUERTO RICO FOR GROWTH

The Government of Puerto Rico has published its Economic Development and Government Transformation Plan for Puerto Rico. The plan outlines the Governor’s proposal and agenda to reestablish Puerto Rico ’s once vigorous  economic development. It builds upon the vision shared by many sectors who:

Want a Puerto Rico that fosters a highly developed, diversified economy that is integrated into the global economy, that looks after its natural resources, promotes social solidarity and nourishes a culture of equality and inclusion that encourages free and democratic participation of citizens in decisions crucial to their political future.

The government acknowledges that it must transform itself from and obstacle to a facilitator of growth. It must also support and steer the private sector into assuming an increasingly important role in the development of the Island’s economy; eventually becoming the principal engine of economic activity. Part of this effort involves getting  people interested in working and  less dependent on economic handouts. The Sudy identified the following pressing needs:

• Insert the Island into the ‘knowledge economy' with special emphasis on research and development in the biosciences, advanced technology, and computing sectors.

• Diversify the economy, so as not to depend on limited industrial sectors, and strive for greater competitiveness in a diversity of sectors.

• Encourage growth and capital of local enterprise, with emphasis on exportation.

• Dramatically improve the quality of the public system of education.

• Invest in a first-class infrastructure, including telecommunications, domestic transportation, maritime and airborne accessibility, sewers, and energy systems.

• Reduce the cost of energy and our dependence on petroleum.

• Diversify and improve tourism.

• Promote work to increase our low labor participation rate.

• Speed up bureaucratic procedures, reduce the complexity of government and upgrade the quality of its services.

The Plan outlines an action plan in Six Key areas:

• INFRASTRUCTURE: Advance a world-class infrastructure, while encouraging private investment with innovative financial models and an agile, effective evaluation processes.

•  HIGH TECH: Accelerate Puerto Rico’s insertion into the knowledge economy, creating a center of excellence in Biotechnology, Engineering, and Computing.

• LOCAL BUSINESS: Promote local enterprise while 'Supporting our Own'  by providing innovative alternatives for financing and access to domestic and foreign markets.

•  TOURISM: Transform the tourism industry into a vehicle for Puerto Rico’s economic development.

•  ENERGY: Diversify energy-generating sources to reduce dependence on petroleum by half.

•  BUREOCRACY: Transform our Government, without the need for layoffs or privatization, to a) offer first-class services to all citizens in a sensible, effective and agile manner, and b) contribute to Puerto Rico’s socioeconomic development.

You can access a  copy of the Plan by pressing hereDownload PDETGEnglishVersion_Nov906_FINAL.pdf

BUSINESS IN PUERTO RICO SHOWCASED IN NEW YORK

The Puerto Rico Chamber of Commerce will be  sponsoring the  First Summit: Doing Business in Puerto Rico.  It will  be held at the Waldorf Astoria, NYC, March 27, 2006. The conference will feature key business and government leaders who will showcase the benefits of doing business in Puerto Rico and how other U.S. businesses are currently benefiting from their investment  in the Island. The Conference is endorsed by a number of private and public entities including the United States Hispanic Chamber of Commerce.

LEGISLATORS HAVE IT BACKWARDS ONE MORE TIME

The Governor and the Legislature are working opposite ways as if each did not exist. While the Executive  acknowledges a run of the mill, insensitive and ineffective  public work force, the legislators touts it it as the finest of its kind.  One branch tries to reduce bureaucracy and payroll; the other raises salaries, benefits and blocks early retirement programs. Is all of this more of the same legislative stupidity or near-election dirty politics?

A few months ago our Governor Anibal Acevedo released an “Economic Development and Government Transformation Plan” (October 2006). In it, Mr. Acevedo conceded that the government was too big (200,000 + workers) and public services were deficient. He shared the private sector’s concern that the lack of sensitivity, effectiveness and quality of services were blocking Puerto Rico’s economic development. As part of the Plan, the Governor committed to restructure, streamline and retrain the public force.

Practically all sectors of our economy agree that our government needs to transform into something leaner and better. The sore exceptions are unions in public service and legislators.  Representing the bottom of the barrel of public service, it’s no surprise that legislators have a different vision. 

Yesterday, several senators filed a bill to reward public employees with automatic salary raises; this in response to public criticism against them for approving  a law awarding themselves automatic raises. Instead of repealing their automatic salary scheme, some legislators decided it was better  to extend automatic salary raises to everyone (an in the process use the bill to publicly praise and acknowledge the commitment, dedication and quality of the pubic service). That would certainly look good in the eyes of 200,000 public employees come election time.  This latest bill is one of many under consideration to provide additional benefits to public workers.

I am for improving benefits and salary of public workers but,  give the mediocre state of our public services, the issue under consideration right now should be how and when to transform the public workforce. When this is under way and results start to show, THEN we can talk about more wages and benefits.

Difference Between Federal and Local Sexual Harassment Laws

I was asked recently what was the main difference between the federal and Puerto Rico law on sexual harassment. I would say that the key difference is that under Puerto Rico law, sexual harassment by supervisors implies absolute responsibility of the employer, whereas responsibility under federal law is based on agency considerations. Also, the Puerto Rico statute provides for a wider range of remedies, including criminal penalties, double the amount of all compensatory damages, including back and/or front pay and mental pain and suffering, plus reinstatement and attorney's fees. 

LEGISLATORS' SOCIAL AGENDA KEEP THEM BUSY

It was a very busy day for our legislators.  Seven bills were for the following purposes:

• P C3258- Girls Scout Cookies- to make them exempt from IVU.
• R S711- To congratulate  a high school.
• R S715-  To express gratitude to the employees of a pharmaceutical company for their participation in a Christmas related activity sponsored by the Senate.
• R S712-  To express sympathy for the loss of a businessman.
• R S713-  To express gratitude to the President of a bank for his participation on a Christmas related activity sponsored by the Senate.
• R S714- To express gratitude to the President of a manufacturing co and its employees for their participation in a Christmas related activity sponsored by the Senate.

On the plus side, the Senate approved- by a slim margin- the one-chamber bill which seeks to eliminate one of the two houses.  The bill  will now come to the consideration of the House of representative.

MORE ON PUERTO RICO'S 2006 LABOR LAWS

Continuing my review of last year’s legislation I deem appropriate to mention two additional legal provisions. One is an amendment to Regulation #13  and the other pertains to Puerto Rico’s ‘Closing Law’.

CLOSING LAW

·    Act # 24 – 1/23/2006,  favorably amends PR’s closing law  to increase from seven (7) to fifteen (15) the number of employees a retailer may have in its weekly payroll  to remain exempt from the opening and closing provisions of said law.  Puerto Rico’s  ‘Closing law’ requires a retail operation to remain closed during certain days including Sundays -except between the hours of  11:00 a.m. to 5:00 p.m.  There are exceptions depending on the type of store involved, the nature of the goods  sold  and the number of employees.

WAGE & HOUR

·    Regulation 13-   2/17/2006, was amended in 2005 but its changes became effective on February 17, 2006. This Fifth revision basically increases to $455.00 the minimum salary  for an employee to be considered exempt under the  categories of Administrator, Executive and Professional. It also modifies the language of the regulation, making  it similar to its federal counterpart. 

REITS WANTED IN PUERTO RICO

The Government has touted its new law- No. 289 of December 26, 2006- promoting the creation of local REITS as an important tool to foster local capital markets and  increase economic activity in Puerto Rico.

REITs are a corporations or business trusts– generally trading in stock exchanges-that pools investors’ capital in all types of real estate investments such as office buildings, hotels, industrial facilities and apartments. Since REITS trade as shares, investors can participate in real estate investments without tying up enormous amounts of cash.

The law eliminates regulatory  barriers for REITS and lowers tax rates for dividends.  Seventy Five percent or more of their assets and gross income must be derived from local property.

KEY EMPLOYMENT LAWS ENACTED DURING 2006

Here are five of the most notable employment laws enacted in Puerto Rico during 2006.  They apply to private companies and employers:

WORKERS COMPENSATION

# 284 12/22/2006: Amends Puerto Rico's Workers Compensation Law, No. 45  of April 18, 1935, to include under the definition of employee those that work for their employers from their homes.

SEXUAL HARASSMENT

# 252 11/30/2006:  Amended the Island's sexual harassment statute.  It broadened the definition of sexual harassment to include acts committed via Internet and  all electronic means including email.  See my 12/23/06 entry.

WORKPLACE VIOLENCE

# 217 09/29/2006: Requires all employers in Puerto Rico to adopt an internal process ("Protocol")  to deal with domestic violence  in the workplace. See my 12/05/06 entry.

BREASTFEEDING

# 239 11/06/2006: Amends Act 427 that regulates the period to breastfeed or to express breast milk to increase the period to one hour (which can be  further subdivided in two 30- minute or three 20- minute periods). Private employers that fall under the definition of Small Business, as defined by the Small Business Administration (SBA), need only provide half an hour per  shift. The definition of what constitutes a small business, varies from industry to industry (generally based on number of employees or average annual receipts ) so, employers need to do some homework with the SBA or consult their attorney. I do not understand why did the legislature chose such a needlessly complicated definition as opposed to  providing a cut-off number based on  payroll, for example. Regardless, I suspect the majority of private employers in Puerto Rico will fall under the SBA  exemption.

PRIVACY

# 207  09/27/2006: To restrict private employers from using the Social Security number as a means of identifying  employees.