NEW PUERTO RICO INTERNAL REVENUE CODE APPROVED

A new Puerto Rico Internal Revenue Code was signed into law as Act No. 1 of January 31, 2011 known as the “Puerto Rico Internal Revenue Code for a New Puerto Rico” (the “New Code”). The New Code amends and adds new provisions to former Section 1165 of the Puerto Rico Internal Revenue Code of 1994, as amended (the “1994 Code”), which governed the qualification of pension plans in Puerto Rico. Among the most significant changes brought by the New Code are the following:

1. New Annual Compensation Limitation

For taxable years commencing after January 1, 2012, a plan shall not be considered a qualified plan if the participant’s annual compensation that can be taken into account for purposes of determining the contributions and benefits under the plan and the application of the discrimination testa^–1g and the limitations on benefits and contributions exceeds $245,000. Notwithstanding the above, instead of the $245,000 limit, in the case of dual qualified plans, the limit established under Section 401(a)(17) of the Internal Revenue Code of 1986, as amended, (the “US IRC”) will apply.

2. Maximum Limitations on Annual Benefits and Annual Contributions

A new section was added governing limits on benefits and contributions, effective for taxable years commencing after January 1, 2012.

In the case of a defined benefit plan, the annual benefit, when expressed as a benefit payable annually in the form of a straight life annuity (with no ancillary benefits) under a plan to which employees do not contribute and does not accept rollover contributions, cannot exceed the lesser of: $195,000 or 100% of the average annual compensation for a period of no more than 3 consecutive years during which the compensation paid was the highest.

In the case of a defined contribution plan, the annual employer and employee contributions (excluding nllovers made from other qualified plans) cannot exceed the lesser of: $49,000 or 100% of the participant’s compensation during the calendar year or plan year, as selected by the employer.

3. Taxation of Total Distributions

Under the 1994 Code, only total distributions paid within a single taxable year due to separation from service qualified for the special tax of 20%. Under the New Code, total distributions made as a result of the plan’s termination will also qualify for the 20% special income tax.

With respect to the requirements that must be met in order to qualify for the special tax rate of 10% on lump-sum distributions, under the New Code the manner in which the 10% Puerto Rico investment requirement is calculated is now based on the average daily balance of the investment of the trust during the plan year in which the distribution is made and each of the preceding two years.

4. Rollover of Partial Distributions Allowed

Under the 1994 Code only rollover of lump-sum distributions were allowed. The provisions of the New Code allow for rollover of partial distributions due to separation from service from PR qualified plans to other PR qualified plans and PR IRAs.

5. New Withholding Requirement on Partial Distributions

A new provision was added requiring a 10% withholding on any distribution to a plan participant, other than a lump-sum distribution or loans to participants, such as partial distributions due to separation from service and in-service withdrawals.

6. Liability of Employer

Under the New Code the employer sponsoring the plan is jointly liable with the withholding or paying agent for the amounts not withheld and for which the plan participant failed to pay the corresponding income tax.

7. New Definition of Highly Compensated Employee

Under the 1994 Code, the top one third of the eligible employees were considered highly compensated employees (“HCE”). The New Code defines HCE as an (i) officer, (ii) shareholder who owns more than 5% of the voting shares or the total value of all classes of shares of the employer, (iii) an employee who for the prior taxable year had compensation in excess of $110,000, or (iv) the spouse or dependant of any HCE. In the case of a dual qualified plan, the compensation limit established under Section 414(q)(1)(B) of the US IRC will be applicable for purposes of the definition of HCE.

8. Imposition of Tax for Failure to make Corrections of Excess Contributions