Aside from being subject to United States federal laws and regulations on the matter of executive remuneration, Puerto Rico has a number of local laws and regulations that affect executive compensation. Although executive compensation arrangements are usually contractually agreed to between the parties, and therefore tend to be more diverse than standard employment agreements, there are particularities in our jurisdiction, especially in the areas of employment law and taxation, which must be taken into consideration.

In this chapter, we will discuss some of the most important issues that impact the compensation structures of executives in Puerto Rico.


In Puerto Rico, the tax rules for executive compensation require the interplay of Puerto Rico and US Federal laws, such as the Puerto Rico Internal Revenue Code of 2011, as amended (the PR Code), the US Internal Revenue Code of 1986, as amended (the US Code) and the Employee Retirement Income Security Act of 1974, as amended (ERISA). Executive compensation provisions in the PR Code are comparable to those under the US Code. However, they are not identical.

Under the PR Code, the tax provisions related to executive compensation are limited to a couple of sections, which have not been significantly amended since their approval. Furthermore, only a few regulations have been issued by the Puerto Rico Treasury Department (the PRTD) under these sections; thus, regulations issued under the previous Puerto Rico Internal Revenue Code of 1994, as amended, are still in effect as long as the provisions in the PR Code remain unchanged. We hereby provide a summary of those provisions.

i Income tax for employees

Compensation for personal services rendered in Puerto Rico is gross income subject to Puerto Rico income tax. Compensation for personal services include wages, commissions, bonuses, vacation or sick pay, among others. Such compensation is subject to income tax withholding based on the withholding tables published by the Secretary of the PRTD every year.2

Compensation will be subject to withholding even if paid by means other than cash, including stocks, property or bonds. The fair market value of the property received as payment will be considered as wages subject to withholding. In cases where the services are paid with corporate stock, the fair market value of the shares at the date of transfer will be considered compensation. If at the time of the transfer the shares are substantially restricted, such that no fair market value may be attributed to said shares, the employee will receive wages for an amount equal to the fair market value of the stocks at the time the restrictions end (even if such event occurs in a future calendar year after the employee renders the services).

Wages are also subject to Puerto Rico disability and unemployment tax.

Pursuant to Section 1031.01(a)(1) of the PR Code, compensation for personal services is part of the taxpayer's gross income. Generally, income from services rendered in Puerto Rico constitutes income from sources within Puerto Rico, whereas income from services rendered outside Puerto Rico constitutes income from sources outside Puerto Rico. By exception, services rendered in Puerto Rico by a non-resident individual who is temporarily in Puerto Rico for a period or periods not exceeding 90 days in total during the taxable year and whose compensation does not exceed US$3,000 total for services rendered as an employee or under a contract with a non-resident individual, or a foreign corporation or partnership not engaged in trade or business in Puerto Rico, is not considered Puerto Rico source income.

Individuals are subject to regular Puerto Rico income tax rates from 7 per cent up to a maximum of 33 per cent. In addition, individuals with net income subject to alternative minimum tax equal to or more than US$150,000 are subject to alternative minimum tax rates between 10 per cent and 24 per cent. Currently, there is a tax reform (House Bill No. 1544/Senate Bill No. 909) under the consideration of the Puerto Rico Legislative Assembly that lowers individual regular income tax rates to a maximum of 31 per cent and changes the current alternative minimum tax rules.

Severance payments

Act No. 4 of 26 January 2017, as amended, known as the Labour Transformation and Flexibility Act, amended Section 1031.01 of the PR Code to exclude severance payments from the definition of gross income.3 Therefore, severance pay received by a former employee, up to the amount such employee could have received under the severance formula provided by Act No. 80 of 31 May 1976, as amended, is tax exempt.4 It is still unclear how the PRTD treats severance payments for purposes of determining an individual's net income subject to alternative minimum tax in the Puerto Rico income tax return.

Severance payments are not subject to Puerto Rico income tax withholding, as provided by Section 1062.01 of the PR Code. Note, however, that severance payments are subject to social security tax and Medicare tax (commonly referred to as FICA payroll taxes), as provided by US Federal law.5

Employees' trusts

If certain requirements are met, trusts set up by employers that are part of a stock bonus, pension or profit-sharing plan are subject to a beneficial tax treatment. Plans that meet all requirements established in Section 1081.01 of the PR Code are deemed 'qualified', which has income tax benefits to both the employer and the employees.

To be qualified, certain tests must be met to guarantee adequate coverage to rank and file employees and to avoid discrimination in favour of highly compensated employees. For these purposes, a 'highly compensated employee' refers to an employee in Puerto Rico who is described in the PR Code Section 1081.01(d)(3)(E)(iii), including: (1) an individual holding more than 5 per cent of the voting or total value of all classes of stock of a corporation that is the participating employer; (2) an individual holding more than 5 per cent of the capital or interest in profits of the employer, in case of an entity that is not a corporation; or (3) an employee that for the previous taxable year earned compensation in excess of US$150,000. For purposes of determining whether an employee is holding more than 5 per cent of the stock, capital or profits, the rules of controlled groups under PR Code Section 1010.04, related entities under PR Code Section 1010.05 and affiliated service groups under PR Code Section 1081.01(a)(14)(B) shall be taken into consideration.

When a pension, stock bonus or profit-sharing plan is qualified under Section 1081.01 of the PR Code, the fund established to provide such benefits is exempt from Puerto Rico income tax. In addition, if the plan is tax exempt for Puerto Rico income tax purposes and all the participants in such plan are Puerto Rico residents, the trust is also treated as exempt under the US Code, as provided by Section 1022(i)(1) of ERISA. As a result, income earned by the trust in the United States is not subject to US taxation. A plan may exclude from coverage employees who are non-resident aliens and whose income is not deemed Puerto Rico source income and still benefit from the preferential Puerto Rico income tax treatment.

Employees are taxed in the year in which they receive a distribution from the trust. In general, employees' pre-tax contributions to such plans are excluded from their gross income in the taxable year in which the contributions are made. Thus, such employee contributions are not subject to Puerto Rico income tax at such time.

Contributions made by an employer to a qualified plan may be deducted against its business income on its Puerto Rico income tax return, subject to certain limits provided in Section 1033.09 of the PR Code. These limits vary depending on whether the employer is making contributions to a pension plan, stock bonus or profit-sharing plan. In the case of contributions to a qualified retirement plan in excess of the amount deductible, the employer is subject to a 10 per cent penalty tax (although this contribution may be carried forward or deducted in future taxable years, subject to the applicable limits).

Act No. 106 of 23 August 2017 amended Section 1081.01 of the PR Code with respect to the tax treatment of total distributions from a qualified plan made after 31 December 2017. In such case, lump-sum distributions paid to an employee within one taxable year due to separation of service or plan termination are generally taxed as ordinary income subject to the regular individual income tax rates.6 However, lump-sum distributions subject to Puerto Rico income tax withholding at source (and if the amount withheld is deposited with the PRTD), will be taxed at a 20 per cent tax rate (instead of the regular individual income tax rates). The 20 per cent tax rate could be reduced to 10 per cent only in certain cases. If within 60 days upon receiving a lump-sum distribution from a retirement plan the employee elects to roll it over to another qualified retirement plan, no tax consequences will be triggered for the employee at that time by reason of this distribution.

Employee stock options

Pursuant to Section 1040.08 of the PR Code, if certain conditions are met with respect to employee stock options, then:

a no income is recognised when the employee exercises the option, nor at the time the stock is transferred to the employee;

b no deduction may be claimed by the employer corporation (or its parent or subsidiary) as a business expense with respect to the transferred stock; and

c only the amount paid pursuant to the option is the amount received by the corporation for the transferred stock.

The rules listed above apply if during the period commencing when the option is granted and ending three months before the date the option is exercised, the individual is an employee or director of the corporation granting the option (or the parent or subsidiary of the corporation).

In other stock option cases, the portion related to the increase in value from the time the option is granted to when it is exercised will be deemed wages, if the transfer is not substantially restricted. Any discount granted by the employer between the stock option price and the share's fair market value will also be deemed wages. In this scenario, the employee receives wages when he or she exercises the option based on the excess between the stock's fair market value at the time the option is exercised and the price paid by the employee for the stock.

ii Social taxes for employees

FICA payroll taxes apply in Puerto Rico in the same manner as in the United States.

iii Tax deductibility for employers

Section 1033.01(a)(1) of the PR Code allows employers to claim a deduction on its Puerto Rico income tax return as an industry or business expense, a reasonable amount paid or incurred during the taxable year for wages or compensation for personal services rendered. The Secretary of the PRTD is authorised to determine the reasonableness of the compensation and may disallow or limit the deduction if found unreasonable.

For purposes of deduction, salaries are deemed implicitly paid when they are credited to the account of, or are separated for the benefit of an employee, such that he or she may withdraw and collect them at any time, even if he or she does not take possession of the funds.

iv Other special rules

Premium payments made by an employer for group or collective life insurance policies, covering the lives of its employees, are exempt from Puerto Rico income taxes for an amount of up to US$50,000 in coverage. Premiums in excess of the maximum US$50,000 coverage allowed are taxable to the employee in the taxable year in which the premiums are paid.7

Premiums paid as part of a life insurance policy covering the life of an employee or officer, or any other person with financial interests in the taxpayer's business, cannot be deducted when the taxpayer is the beneficiary of the policy.

In addition, employer contributions to a health or accident plan for the benefit of its employees are tax-exempt for Puerto Rico income tax purposes.


In 2012, the Puerto Rico government approved two acts as part of its efforts to attract foreign investors to Puerto Rico: Act No. 20 of 17 January 2012, as amended (Act 20) and Act 22 of 17 January 2012, as amended (Act 22). Many executives have shown interest in these Acts due to the attractive tax incentives package both acts offer. In summary, Act 22 grants a Puerto Rico income tax exemption on dividends and interest from all sources, and on capital gains derived from the appreciation of securities after commencement of Puerto Rico residency (certain requirements apply). Entities with Act 20 tax grants are subject to a fixed 4 per cent Puerto Rico income tax rate, 100 per cent Puerto Rico income tax exemption on dividends and partial exemption on real and personal property tax and municipal gross receipts tax.

Although these Acts have no specific provisions related to executive compensation, on 15 October 2015, the PRTD issued Administrative Determination No. 15-22 regarding salary imputation rules to shareholders or partners who are also employees of an entity with an Act 20 tax grant (the Officer-Owner). Pursuant to Section 1040.09 of the PR Code, the Secretary of the PRTD may impute compensation income to certain taxpayers when adequate to prevent tax evasion or to clearly reflect the income of a business. In cases where the Officer-Owner has an annual salary that is less than US$350,000 for services rendered to the Act 20 entity in which the Officer-Owner has a proprietary interest at the end of the taxable year, the Secretary may assess the reasonableness of that salary and impute additional income up to US$350,000, if appropriate. Income imputation depends on the facts and circumstances in each case and the Secretary of the PRTD may consider the economic status of the Act 20 entity, the Officer-Owner's job responsibilities, and salaries earned by executives in similar positions.


As Puerto Rico is subject to US federal law, in order to qualify as an executive, an employee must meet the requirements of the Fair Labour Standards Act. That is, the employee must earn a minimum salary of US$455 per week, or US$23,660 per year. The employee's compensation must not be subject to reduction because of variations on the quality or quantity of work performed. In addition, to qualify as an executive, all of the following requirements must be met:

a the employee's primary duty must relate to managing the business or one of its recognised departments or subdivisions;

b the employee must customarily and regularly direct the work of at least two full-time employees (or their equivalent in part-time employees); and

c the employee must have the authority to hire or fire employees, or the employee's recommendations as to hiring, firing, promotion or demotion must carry particular weight.

If an employee qualifies as an executive, as in most US jurisdictions, in Puerto Rico, the terms and conditions of compensation are typically governed by contractual agreement between the employer and the employee, rather than being statutorily established, as in the case of rank-and-file employees. Parties may negotiate a broad variety of compensation and benefits, such as, for example, stock options, incentive plans, tax equalisation, other deferred compensation and bonuses.

i Non-competition and non-solicitation agreements

At an executive level, covenants not to compete are not unusual. They are enforceable in Puerto Rico, under general freedom of contract principles, as long as they comply with certain requirements.

Non-competition agreements may not be against public policy. According to case law established by the Puerto Rico Supreme Court, for a covenant not to compete to be valid in this jurisdiction it must be made in writing, in exchange for adequate consideration, and must not impose an undue burden on the employee. The non-competition clause must be tailored to the employer's legitimate need to protect its business in terms of duration, geographical limitation and clients affected.8

The clause must be limited to the geographical area, clients, and type of service strictly necessary to protect the employer's interests. In addition, a non-competition agreement must not exceed 12 months, although longer periods have been found valid for shareholders and consultants.9 The more parity that exists between the parties negotiating the agreement, the more likely it is that its terms will be upheld. As to the requirement that adequate consideration be provided, if the non-competition clause is part of the original employment agreement, no independent consideration is required. However, if the non-competition clause is required after the individual has become employed, independent consideration must be provided. What constitutes 'adequate' consideration varies by industry, position, and by the employee's overall compensation package.

Under general freedom of contract principles, provisions for non-solicitation of employees may be enforceable. These provisions are generally included in non-competition agreements, separation agreements and settlement agreements. However, the Puerto Rico Constitution and case law of the Puerto Rico Supreme Court provide for the right of every employee to choose and resign freely from his or her employment. Thus, in the absence of a valid agreement to the contrary, or an employment contract for a fixed period of time, any employee is free to resign and work for any other employer, including a competitor.

Similarly, under general freedom of contract principles, non-solicitation of customer provisions may be valid. These provisions are generally included in non-competition agreements, separation agreements and settlement agreements.

ii Termination of executive employees

Contractual agreements for executive employees typically include clauses that set forth the terms and conditions governing their separation from employment. Many agreements include a severance benefit based on the employee's total compensation.

It must be noted that Puerto Rico is presently a 'for-cause' jurisdiction, meaning that if a court concludes that an employee was terminated without just cause, he or she is entitled to statutory severance. Act No. 80, as amended, establishes a seniority-based formula to calculate statutory severance, which is currently capped at a maximum of nine months' salary for all employees hired after 26 January 2017.10 Employees hired before 26 January 2017 may use the prior, more favourable formula, which does not include a monetary cap.11 Although claims under Act No. 80 cannot be prospectively waived at the beginning of an employment relationship, they can be addressed and settled in the context of a termination agreement.

'Just cause' under Act No. 80 has been defined as:

a that the employee commits a pattern of improper or disorderly conduct;

b that the employee commits a pattern of deficient, inefficient, unsatisfactory, poor, tardy or negligent performance;

c repeated violation of the reasonable rules and policies established by the employer for the operation of the business, so long as those rules and policies have been timely provided to the employee in writing;

d total, temporary or partial closing of the employer's operations;

e technological changes to the organisation, reorganisation or restructuring, as well as changes related to the style, design, or nature of the product that is produced or handled by the business, or the services rendered to the public; and

f reductions in force made necessary due to a decrease in volume of production, sales or earnings, whether anticipated or prevailing at the time of the termination; as well as such those made with the purpose of increasing the competitiveness or productivity of the business.12

Of course, this definition of just cause is not intended to be taxative, and the Puerto Rico Supreme Court has clarified that the definition of 'just cause' extends to any reason related to the good and normal operation of the business, and not to the whims of the employer. Act No. 80 also contemplates constructive discharge. In this scenario, the employee must establish that he or she had no other reasonable alternative but to resign from his or her position due to arbitrary and capricious conduct by the employer designed to force the resignation.

The elimination of Act No. 80 is currently a topic being actively discussed in the context of the negotiations between the government of the Commonwealth of Puerto Rico and the Fiscal Control Board established by the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). The Fiscal Oversight Board has strongly advocated for doing away with Act No. 80 and making Puerto Rico an 'at-will' jurisdiction, arguing that will incentivise hiring and, consequently, stimulate the economy. This position has been met with strong resistance from local congress, which has now voted against repealing the statute twice.

iii Applicability of Puerto Rico employment laws to executive employees

In addition to being covered by Act No. 80, discussed above, executive employees in Puerto Rico receive a statutorily established Christmas bonus of a maximum of US$600.13 The employer is free to establish, through company policy, bonuses over that amount. Likewise, bonuses exceeding that amount may be contractually negotiated. Any bonus paid by the employer will be credited towards the statutory amount required.

Executives in Puerto Rico are also statutorily entitled to maternity leave and legally established breaks for breastfeeding or the expressing of breast milk.14 Under Puerto Rico law, any woman who gives birth or adopts a child under the age of five is entitled to eight weeks of paid leave, with employment secured. Furthermore, breastfeeding mothers are entitled to two 30-minute breaks to breastfeed their child or express breast milk.

Likewise, executive employees are covered by Puerto Rico's Short-Term Non-Occupational Disability statute. This statute provides nominal monetary compensation of US$133 per week for non-occupational short-term disability for a period of 26 weeks, and employment reservation of one year.15 Long-term disability benefits are only available by company policy or contractual agreement.

Unlike hourly employees, executive employees in Puerto Rico are not statutorily entitled to vacation and sick leave. Vacation and sick leave benefits for executives may be established by company policy, or in the employment agreement. Once these benefits have been recognised by the employer, they must be honoured.16

In addition to the above, executive employees are also protected from discrimination and retaliation in the workplace under local law, in the same manner as non-exempt personnel. It is worthwhile to note that, while federal employment discrimination statutes exclude the possibility of individual liability for supervisors for discriminatory actions or workplace harassment, under Puerto Rico law, direct action against supervisors is expressly permitted. Accordingly, executive employees may be held personally liable for intentional discrimination, harassment or retaliation.

Further, on 8 March 2017, Puerto Rico enacted legislation that specifically prohibits employers from enquiring about an employment candidate's salary history, including salary, benefits, perquisites and any other form or remuneration, or combination thereof.17 The law entered into force immediately after its enactment, though employers were granted a one-year grace period to enter into full compliance with its provisions. Presently, employers are expected to be fully compliant.


Any aspects of executive remuneration in Puerto Rico pertaining to Securities Law are governed by US federal law. Therefore, regulation of these matters is identical to that of the United States.


Disclosure of executive remuneration for Puerto Rico public companies is regulated by US federal law. As to privately held corporations, under Puerto Rico law, disclosure is limited to the filing of an annual report with the Puerto Rico Department of State, which must include a balance sheet. In the case of corporations with an annual business volume in excess of US$3 million, the annual report must include an audited balance sheet.18 Any disclosure to regulatory entities would be dependent on a particular corporation's operations and the laws and regulations that apply to the same.

Under Puerto Rico law, there is no obligation to disclose the remuneration of corporate directors or executives.


As with matters pertaining to Securities Law or Corporate Disclosure, corporate governance of Puerto Rico public corporations is subject to US federal law. At a local level, Puerto Rico has not adopted a corporate governance code applicable to privately held corporations. Accordingly, it is up to each company to establish such corporate governance codes or by-laws as it deems appropriate for its operation.


As is the case in the United States, certain industries in Puerto Rico, such as the finance industry, are subject to special federal regulation in the area of executive remuneration. Compliance with regulatory entities would be dependent on a particular corporation's operations and the laws and regulations that apply to the same.


Matters relating to executive remuneration in Puerto Rico are certain to evolve as the Fiscal Control Board continues to enact measures under PROMESA to reshape the financial and, by consequence, employment landscape of Puerto Rico. Broad changes are anticipated both to the local tax code and employment legislation. In the employment context, the tendency seems to be towards a general liberalisation of the employer–employee relationship, thereby allowing the parties to contractually agree to such terms as they see fit. However, given the resistance of the government of the Commonwealth of Puerto Rico to enact some of the proposed changes, the outcome remains to be seen.


1 Edwin J Seda-Fernández and Mariel Y Haack are shareholders of the labour and employment department of Adsuar Muñiz Goyco Seda & Pérez-Ochoa, PSC (AMG). Mariangely González-Tobaja is an associate of AMG's corporate and tax department.

2 The last withholding tables published by the PRTD are for wages paid after 31 December 2016, which are still in effect.

3 29 Laws of Puerto Rico Annotated (LPRA) 121, et seq.

4 29 LPRA 185 et seq.

5 See, US v. Quality Stores, Inc., 134 S. Ct. 1395, 188 L. Ed. 2d 413 (25 March 2014).

6 Lump-sum distributions from qualified plans made prior to 1 January 2018 were taxed at a 20 per cent rate as a long-term capital gain.

7 See Section 1031.02(a)(2) of the PR Code.

8 See Arthur Young & Co. v. Vega III, 136 D.P.R. (1994).

9 See Reyes-Ramis v. Serra-Torres, 195 D.P.R. 828 (2016).

10 29 LPRA 185a, et seq.

11 29 LPRA 185a, as amended.

12 29 LPRA 185b, as amended.

13 Act No. 148 of 30 June 1969, 29 LPRA 501et seq.

14 Act No. 3 of 13 May 1947, 29 LPRA 467 et seq, and Act No. 427 of 16 December 2000, 29 LPRA 478 et seq.

15 Act No. 139 of 26 June 1968, 11 LPRA 201 et seq.

16 See Beauchamp v. Holsum Bakers of P.R., 116 D.P.R. 522 (1985).

17 Act No. 16 of 8 March 2017, 29 LPRA 251, et seq.

18 Puerto Rico General Corporations Act of 2009.