www. salawpr. com
Employee
Benefits
SCHUSTER AGUIL0 LLP
221 PONCE DE LEON AVENUE, 15 Floor
th
HATO REY, PUERTO RICO 00917-1815
TEL. (787) 765-4646/FAX (787) 765-4611
* These attorneys are also Certified Public Accountants
Employee Benefits Notes are published as a service to
1
our clients and friends. Information contained in the
Notes should not be viewed as legal advice and is not
a substitute for legal counsel. You should not act on
information contained herein without further, specific, legal
consultation.
To cancel your subscription to the Notes, please send an
e-mail with the subject "Un subscribe" to sacosta@suas. net
Notes1
November 7, 2007
Series 2
Schuster Aguil贸 LLP's (SA) Employee Benefits
Notes is intended as a tool to keep employers
abreast of the latest developments in the Employee
Benefits area, and to provide tips and useful
information for employers to maintain compliance
with this ever-changing area of employment law. It
is sponsored by SA's ERISA Litigation and
Employee Benefits Practice Group ("ELEBPG") .
The ELEBPG is engaged in design, revision and
qualification of employee benefits plans, as well as
in the litigation of ERISA claims before Puerto Rico
and federal courts. The ELEBPG applies its ERISA
litigation experience to benefit plan design, in order
to achieve, not only the required qualification
before the appropriate government agencies, but
also plan documents that will satisfy judicial
scrutiny when faced with court claims by
participants and beneficiaries. The ELEBPG also
provides consulting services as well as seminars on
selected employee benefits matters, such as ERISA
employee benefits plans, COBRA and HIPAA
issues.
PRACTICE GROUP MEMBERS :
Carlos J. Villafa帽e Real*
Chairperson,
Employment Benefits Practice Group
cvillafane@salawpr. com
Lour des C. Hern谩ndez-Venegas
Chairperson,
ERISA Litigation Practice Group
lhernandez@salawpr. com
Rafael E. Aguil贸-V茅lez
raguil贸@salawpr. com
Mariela Rexach-Rexach
mrexach@salawpr. com
Shiara L. Dilon茅-Fern谩ndez*
sdilone@salawpr. com
Ricardo Guzm谩n L贸pez de Victoria*
guzmanr@salawpr. com
New Capital Gain Rate
Applicable to Plan
Distributions under the PR
Code
O
n November 1, 2007, the
Senate of Puerto Rico
approved PC 3750, which
amends Section 1165 of the Puerto
Rico Internal Revenue Code of 1994,
as amended (the "PR Code") to
reduce to 10% the capital gains rate
applicable to lump sum distributions.
This measure was approved by the
House of Representatives on October
11, 2007. The bill was already
enrolled and it is the process of being
sent for the Governor's signature. It is
expected that it will be finally
approved and executed. If finally
approved by the Governor, the new
capital gains rates will apply
retroactively to distributions made
after January 30, 2006.
In general, under the PR Code, if
upon separation from service a Puerto
Rico resident participant receives his
entire benefits from a Puerto Rico tax
qualified retirement plan within a
single taxable year, the amounts
distributed over his after-tax
contributions or any amounts
previously taxed, if any, will be taxed
as a long-term capital gain. These
distributions are also subject to
withholdings at the source at the time
of distribution at the applicable
maximum capital gains rate. Prior to
the approval of PC 3750, the capital
gains rate was 20%, irrespective of the
location of the plan's trust.
Nonetheless, until December 31,
2007, a 12.5% income tax and
withholding rate would apply to
lump sum distributions from a plan
funded through a PR situs trust or
funded through a US situs trust
with a co-trustee in Puerto Rico
acting as a paying agent. There
was no age or investment
requirement to enjoy this special
rate. After January 1, 2008, the
12.5% income tax and withholding
rate would apply solely to lump
sum distributions paid from a PR
situs trust or a US situs trust with a
Puerto Rico co-trustee acting as
paying agent if at least 10% of the
plan's assets or participant's
account, as applicable, have been
invested in "Puerto Rico Property"
during the year of the distribution
and the prior two (2) years (no age
requirement).
As a result of PC 3750, the
applicable tax and withholding on
lump sum distributions will be as
follows:
00rom January 30, 2006 until
December 31, 2007, a 10%
income tax and withholding rate
will apply to lump sum
distributions from a plan funded
through a PR situs trust or
funded through a US situs trust
with a co-trustee in Puerto Rico
acting as a paying agent. There
is no age or investment
November 7, 2007, Series 2
Page 2
Employee Benefits Notes
requirement to enjoy this special rate.
00he general 20% income tax and
withholding rate will apply to lump
sum distributions paid out from a
US situs trust with no PR co-trustee
acting as paying agent.
00Effective January 1, 2008, the
general 20% income tax and
withholding rate will continue to
apply to any lump sum distribution
irrespective of the location of the
trust, unless such distribution
complies with the PR trustee/ PR
co-trustee-paying agent and certain
investment requirements discussed
below.
00rom January 1, 2008, a 10%
income tax and withholding rate will
solely apply to lump sum
distributions paid from a PR situs
trust or a US situs trust with a PR
co-trustee acting as paying agent if
at least 10% of the plan's assets or
participant's account, as applicable,
have been invested in "Puerto Rico
Property" during the year of the
distribution and the prior 2 years
(no age requirement).
As noted above, the big change
introduced by PC 3750 is to reduce the
special capital gains rate from 12.5%
to 10%, with a retroactive effect to
distributions made after January 30,
2006. The Bill is silent with respect to
the treatment of distributions already
made after such date at the 12.5%
withholding rate. Therefore, it is
expected that taxpayers will request a
refund for the 2.5% excess
withholding applied to such lump sum
distributions. Due to the political
implications of this Bill, it is expected
that it will be finally approved and
signed by the Governor regardless
of this retroactive effect issue.
Nonetheless, we will keep you
posted on upcoming newsletters on
any new developments.
This message is provided as a service to
our clients and friends. It is not intended
to provide legal or tax advice. SA
If you need assistance in this area, please
contact us.
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