On April 16, 2020, the Governor of Puerto Rico, Hon. Wanda Vazquez-Garced, signed into law Act No. 40-2020,  including important technical amendments to the retirement plan provisions of the Puerto Rico Internal Revenue Code of 2011 (the “PR Code”), among other special laws and provisions, as part of measures taken to manage the Covid-19 situation.

The following summarizes the most relevant provisions Act No. 40-2020 pertaining to retirement plans.

Withholding Tax Obligation on Retirement Plan Distributions (Other than Lump Sum Distributions)

Act 257-2018 inadvertently eliminated certain provisions of Section 1081.01(b) of the PR Code, which imposed a 10% withholding at source on certain distributions from retirement plans, other than lump sum distributions.  The Technical Amendments correct this omission by reinstating the deleted sections back into the PR Code.

The reinstated provisions require a 10% income tax withholding at source on the following distributions:

• Partial distributions after separation from service.
• Annuity and periodic payment distributions over the amount of $31,000 (for individuals 60 years or less) and $35,000 (for individuals age 60 or older).
• Outstanding loans deemed taxable distributions.

Outstanding loans shall be considered taxable distributions if the following requirements are not met:

• The loan should be payable in substantially equal payments at least quarterly; and
• The loan’s maturity date should not exceed a five-year term (except in the case of a loan to finance the principal residence of the participant, which may provide for a longer period as established under the plan).

In addition, the Technical Amendments reinstated the section of the PR Code providing that no taxes will be withheld on partial or total distributions upon separation from service that are rolled over to another PR qualified plan, PR IRA or annuity.

Income Tax and Withholding Exemption on Retirement Plan Distributions to Non-Puerto Rico Residents from Dual-Qualified Plans

Effective for taxable years 2019 and thereafter, a new section was added to the PR Code establishing that distributions of retirement income, as defined under 4 U.S.C. Section 114(a), made to non-Puerto Rico residents from dual-qualified plans will not be subject to taxation and income tax withholding in Puerto Rico, even if the US situs trust is distributing PR source income. This  is consistent with the provisions of the State Taxation of Pension Income Act of 1995 (commonly known as the Source Act) which provides that no state may impose any income tax on the retirement income of an individual who is not a resident of that state.

PR Treasury will issue additional guidance on the required documentation to be provided by the non-resident individual to be able to avail from the income tax exemption.