As a territory of the USA and due to its Spanish colonial past, Puerto Rico is a mixed legal jurisdiction where both civil law and common law coexist. The government of Puerto Rico is a republican form of government with independent executive, legislative and judicial branches. The laws of Puerto Rico derive from different sources depending on the subject in question but, broadly speaking, private law derives from Spanish civil law and is mostly codified, while public law derives from Anglo-American common law. Nonetheless, the US Constitution is the supreme law of the land, followed by applicable federal laws and federal agency rules.

Further down the legal hierarchy lies the Constitution of the Commonwealth of Puerto Rico, followed by its state statutory laws and local regulatory rules. The Constitution of the Commonwealth of Puerto Rico is the supreme law of the territory, establishing the structure of the government, defining the rights and duties of its citizens, and serving as the foundation for the legal system. The USA retains control of foreign affairs, defence and immigration and, generally speaking, US laws apply in Puerto Rico unless Puerto Rico is specifically excluded.

In general terms, the government of the Commonwealth of Puerto Rico exercises virtually the same control over its internal affairs as do the 50 US states. As a result of the fiscal and economic crisis that has affected Puerto Rico’s public finances since 2007, the US Congress enacted the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA), which established a financial oversight and management board with broad powers over the government’s budgeting and finances.

Puerto Rico’s Judicial Structure

Puerto Rico has a dual legal system, with federal and local components. While the local federal courts handle federal matters, Puerto Rico also has its own local courts that address issues of purely local concern, such as family law, probate and certain criminal matters under local statutes.

Puerto Rican state courts have jurisdiction over questions of Puerto Rican state and federal law, except for certain subjects that are under exclusive federal jurisdiction, such as bankruptcy law, federal antitrust, admiralty, customs and federal criminal law. Federal courts have jurisdiction over questions of federal law and only limited jurisdiction over questions of Puerto Rican local law. The Puerto Rican local court system follows the same hierarchical structure as the federal courts, with a Supreme Court as the highest court, a Court of Appeals as an intermediary court and the trial courts (also known as the District Court at the federal level and as the Court of First Instance at the local level).

With respect to federal courts, Puerto Rico falls under the jurisdiction of the US Court of Appeals for the First Circuit and has its own US District Court, known as the US District Court for the District of Puerto Rico. This federal District Court is a trial-level court with general federal jurisdiction. There are generally two ways to gain access to the federal District Courts when there is concurrent jurisdiction:

• the first is diversity jurisdiction, which involves disputes between citizens of different states, or between US citizens and foreign citizens, where the amount in controversy exceeds a certain threshold set by law; and
• the second primary basis involves a federal question – ie, presenting an issue arising under the Constitution, federal statutes or treaties of the USA.

Sources of Puerto Rico Law

Applicable law derives from statutory laws, regulatory rules and regulations and common law. The sources of law in Puerto Rico are diverse, reflecting its history, constitutional status and unique relationship with the USA.

Puerto Rico is an unincorporated territory of the USA, so federal laws enacted by the US Congress are applicable. Federal laws cover a wide range of matters, including taxation, immigration and other areas that impact Puerto Rico’s legal framework.

The Puerto Rican Civil Code, modelled on the Spanish Civil Code, governs various aspects of private law, including contracts, property, family law and torts. It serves as a foundational legal text for many civil law matters in Puerto Rico.

Similar to the mainland USA, precedents from other jurisdictions have only persuasive or informational effect and are not binding, but for purposes of certain local statutes (such as the Puerto Rican General Corporations Act, which is modelled on the Delaware General Corporations Law), local courts look to Delaware court opinions as persuasive precedent. Rules enacted by federal and state regulatory agencies – such as the US Securities and Exchange Commission (SEC), the Federal Trade Commission (FTC), the Puerto Rican Department of Economic Development and Commerce (Departamento de Desarrollo Económico y Comercio, or DDEC) and the Office of the Commissioner of Financial Institutions of Puerto Rico (Oficina del Comisionado de Instituciones Financieras, or OCIF) – provide additional sources of law and regulatory frameworks that are relevant to investors.

The US Congress, as the legislative branch of the federal government, and the Puerto Rican Legislative Assembly, its local counterpart, are responsible for enacting statutes, and may delegate rule-making power to executive or independent agencies of the federal and Puerto Rican government to enact and enforce regulatory rules, such as the SEC, FTC, DDEC and OCIF. These regulatory agencies not only implement and enforce new rules but also interpret existing laws within their subject matter expertise. International treaties signed by the USA present further sources of law.

Puerto Rican law does not generally restrict foreign ownership specifically, nor impose special restrictions on foreign companies operating in Puerto Rico, but foreign companies must be authorised to do business in Puerto Rico. However, the Committee on Foreign Investment in the United States (CFIUS – see 7. Foreign Investment/National Security) can review certain foreign investment transactions to determine if they impact US national security. Review by the CFIUS remains mostly voluntary, as mandatory filing is limited to certain types of transactions, such as those that deal with critical technologies or infrastructure, or that collect and/or maintain sensitive personal data. Investors from certain foreign states are exempt from complying with some aspects of the CFIUS mandatory filing regime.

As described in 4.3 Disclosure and Reporting Obligations, the Bureau of Economic Analysis (BEA) of the US Department of Commerce has a mandatory survey (BE-13, Survey of New Foreign Direct Investment in the United States) that collects data from US companies. A US company is required to report if it is:

• acquired or established by a foreign person or entity, resulting in the creation of a foreign direct investment relationship; or
• an existing US affiliate of a foreign parent and establishes a new US legal entity, expands its US operations or acquires a US business enterprise.

Historically, the Puerto Rican government has promoted investment in Puerto Rico through a mix of financial and tax incentives, aimed at promoting the establishment of new businesses and promoting job creation. However, fiscal and economic challenges arising from the prolonged recession from 2007 to 2017, as well as fragile infrastructure and unstable public utilities, have created a complex economic landscape in recent years for investments in Puerto Rico.

The island has faced challenges such as natural disasters, a significant public debt burden and the ongoing recovery from the aftermath of Hurricane Maria in 2017. However, significant developments and emerging trends are shedding light on the current state of Puerto Rico’s economy, which finally appears to be turning a corner after almost two decades of contraction, challenges and setbacks.

One trend worth noting is the continued effort to diversify Puerto Rico’s economy. Traditionally dependent on sectors like manufacturing and pharmaceuticals, there has been a push to attract investment in emerging industries. Efforts to position Puerto Rico as a hub for technology, renewable energy and tourism have gained momentum, and investors and businesses are now exploring opportunities in these sectors, drawn by tax incentives and the potential for growth.

In the aftermath of Hurricane Maria, both the public and private sectors have focused on rebuilding and fortifying the island’s infrastructure, particularly its electric power system. Investments in resilient infrastructure, including energy, transportation and telecommunications, have become key components of Puerto Rico’s economic development strategy. These initiatives aim to enhance the island’s ability to withstand future natural disasters while fostering economic growth. Puerto Rico’s economy has gradually been recovering since 2018, aided in part by the large amount of federal disaster relief and recovery assistance funds injected into the Puerto Rican economy following Hurricane María and other recent natural disasters.

The tourism sector is a vital component of Puerto Rico’s economy, and recent trends suggest a renewed focus on expanding and enhancing this industry. Efforts to promote the island as a premier tourist destination, coupled with investments in hospitality infrastructure, aim to boost visitor numbers and drive economic activity.

Although the Puerto Rican economy is still subject to external shocks, and US federal fiscal policy continues to have a material impact on Puerto Rico’s economic outlook, Puerto Rico continues to show signs of a decoupling from the US mainland. While challenges persist, there are encouraging signs of economic diversification, infrastructure development and strategic initiatives to attract investment. The path forward involves a delicate balance of addressing fiscal challenges, leveraging economic incentives and fostering industries with growth potential. As Puerto Rico navigates this economic trajectory, continuous monitoring of these trends will be crucial for policymakers, investors and businesses seeking to participate in and contribute to Puerto Rico’s economic resurgence.

Most Puerto Rican companies are privately held entities, with only a handful of local companies having shares listed on a national stock exchange, primarily consisting of bank holding companies.

The structures for transactions in Puerto Rico can vary depending on the nature of the transaction, the parties involved, and the legal and regulatory requirements, as follows.

• Asset purchase agreement: in an asset purchase transaction, the buyer acquires specific assets of a business rather than the entire business itself. This can include tangible assets such as inventory and equipment, as well as intangible assets like intellectual property. Asset purchase agreements outline the terms and conditions of the transaction.
• Stock purchase agreement: in a stock purchase transaction, the buyer acquires the ownership interest (stock) of a company. This means the buyer assumes ownership of the entire business, including its assets and liabilities. Stock purchase agreements specify the terms and conditions of the sale of stock.
• Mergers: mergers involve the combination of two companies into a single entity through a statutorily provided mechanism. These transactions can be structured in various ways, and consideration can be provided in either stock or cash.
• Joint ventures: joint ventures involve collaboration between two or more entities for a specific business purpose. The parties contribute resources, share risks and rewards, and often establish a separate legal entity for the joint venture. Joint venture agreements outline the terms of the collaboration.
• Licensing agreements: licensing agreements allow one party to use the intellectual property (such as trade marks, patents or copyrights) of another party for a specified period and under certain conditions. These agreements can involve the payment of royalties or licensing fees.
• Franchise agreements: franchise agreements grant the right to operate a business using the brand, trade marks and business model of the franchisor. Franchisees typically pay fees or royalties to the franchisor in exchange for the right to use their established business format.
• Real estate transactions: real estate transactions in Puerto Rico can take various forms, including sales, leases and development agreements. The structure of the transaction will depend on the parties involved and the specific terms negotiated for the transfer or use of real property.
• Public-private partnerships (PPPs): PPPs involve collaboration between public and private entities to develop and operate public infrastructure projects or services. These partnerships are often governed by comprehensive agreements that outline the roles, responsibilities and revenue-sharing arrangements between the public and private sectors.

It is important to note, however, that the Puerto Rican General Corporations Act (which is modelled on the Delaware General Corporation Law), requires shareholder approval for extraordinary matters such as mergers and the sale of all or substantially all assets. Given Puerto Rico’s treatment as a foreign jurisdiction under the federal Internal Revenue Code, when it comes to structuring local M&A transactions, special consideration is typically given to structuring transactions in a way that avoids triggering federal tax liability.

Special laws that apply to specific industries, such as insurance, mortgage banking and banks, impose additional requirements that impact the structuring of M&A transactions in Puerto Rico.

As detailed in 6. Antitrust/Competition, M&A transactions in Puerto Rico are subject to US and local antitrust and competition laws. In addition, transactions involving the issuance of securities in Puerto Rico will be subject to the regulatory framework enacted and enforced by the SEC, as well as the Puerto Rican Uniform Securities Act, which is enforced by OCIF.

Legal Entities

Most Puerto Rican entities are incorporated as corporations or organised as limited liability companies (LLCs). The choice of entity type is typically determined by differences in tax treatment, liability limitations and structural flexibility, among other considerations.

Corporate Governance

Corporate governance matters in Puerto Rico are largely governed by federal law and the Puerto Rican General Corporations Act. This Act is modelled on the Delaware General Corporation Law, and court opinions issued by Delaware courts in connection with the interpretation of the Delaware General Corporation Law are considered persuasive precedents for the purposes of interpreting the analogous provisions of the Puerto Rican General Corporations Act.

Like Delaware, Puerto Rican law imposes fiduciary duties of loyalty and care upon officers and directors of a corporation, as well as on controlling shareholders. Puerto Rican law also follows the shareholder primacy framework adopted by Delaware, in which the officers of the corporation must act in the best interests of the shareholders and the corporation. Corporations with shares of stock listed in a stock exchange and registered with the SEC must also comply with the applicable requirements of the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which provide a framework of rules and disclosure and other requirements, as detailed in 5. Capital Markets.

Controlling Shareholders

Under the Puerto Rican General Corporations Act, controlling shareholders owe a fiduciary duty (duty of loyalty) to the corporation and its shareholders in situations where they might have a conflict of interest with respect to a corporate matter. For certain types of entities, such as LLCs, members may agree to eliminate the fiduciary duties for officers, directors and controlling members.

Shareholder Litigation

The Puerto Rican General Corporations Act allows for shareholder litigation in the two following ways:

• shareholders can pursue a direct action against the corporation and its management for damages suffered as an individual shareholder; or
• shareholders can present a derivative action on behalf of the corporation and against its management if the directors or officers violate their fiduciary duties.

Federal beneficial ownership and insider disclosures applicable to publicly traded companies in the USA also apply to Puerto Rican publicly traded companies.

Beneficial Ownership Disclosures Under the Corporate Transparency Act

Under the beneficial ownership information disclosure rule adopted by the Financial Crimes Enforcement Network (FinCEN) of the US Department of the Treasury during 2022, which came into effect on 1 January 2024 (the “CTA Rule”), certain “reporting companies” will be required to file certain identifying information regarding the reporting company and its “company applicants” and “beneficial owners” with FinCEN. While the CTA Rule treats entities organised in Puerto Rico, as well as foreign entities authorised to do business in Puerto Rico, the same as their analogous counterparts in other US jurisdictions, exemptions available to certain large companies may not be available to Puerto Rican entities that would otherwise meet certain thresholds because they generally do not file US federal income taxes. Any available exemptions from the CTA Rule disclosure requirements must be evaluated on a case-by-case basis, as they rely on technical criteria.

Pre-Merger Filing Thresholds

Under the federal Pre-Merger Notification Programme established by the Hart-Scott-Rodino Act of 1976 (HSR), parties to certain transactions involving large mergers and acquisitions must submit pre-merger notification to the FTC and the US Department of Justice. Notification is required at certain filing thresholds, depending on transaction size and size-of-person tests; see 6. Antitrust/Competition for more details.

The BEA

The BEA of the US Department of Commerce monitors inbound FDI in the US (including Puerto Rico) by compiling statistics on the scale of foreign-owned business activities in the US. Companies are required to report inbound FDI transactions to the BEA within 45 days after formation or acquisition of a company if the transaction was executed by a foreign person or entity or by an existing US entity with 10% or more foreign ownership.

Structure and Sources of Financing

As Puerto Rico is a US territory, Puerto Rican entities and investors have access to and participate in the US capital markets.

The Puerto Rican government lost access to the capital markets in 2014, and has been under the supervision of a federally appointed financial oversight and management board for Puerto Rico following the enactment of the PROMESA in 2016. As of 2024, the debt of the central government of Puerto Rico and most of its municipalities has been restructured pursuant to PROMESA’s bankruptcy processes, signalling a potential return by the government of Puerto Rico to the capital markets in the near future.

Nevertheless, businesses in Puerto Rico, like those elsewhere in the USA and other regions, have access to a variety of financing options. The availability and attractiveness of these options can vary depending on the size of the business, the industry, creditworthiness and other factors. The primary sources of financing for businesses in Puerto Rico include, without limitation:

• traditional bank loans to fund various needs, such as working capital, equipment purchase or expansion;
• government agencies that offer financing programmes to promote economic development, including through low-interest loans, grants and guarantees to support specific industries or activities; and
• private equity and venture capital.

Qualified companies can participate in a government programme called the Puerto Rican Industrial, Tourism, Education, Medical and Environmental Pollution-Control Facilities Financing Authority (AFICA), which provides financing by issuing industrial revenue bonds for certain projects that promote the economic development of Puerto Rico.

Regulation

The US capital markets are regulated by the SEC, which is an independent US government agency empowered to enforce securities laws and to regulate public companies’ disclosure requirements, securities offerings and market activities. It also oversees security exchanges, brokers, dealers, investment advisers and mutual funds.

Puerto Rico’s capital markets are also regulated by OCIF, which is the independent Puerto Rican government entity responsible for administering the Puerto Rican Uniform Securities Act (PRUSA). OCIF is specifically responsible for enforcing securities laws and for licensing broker-dealers, investment advisers and other market participants.

Securities regulation in Puerto Rico is governed by both federal and Puerto Rican laws. At the state level, Puerto Rico has enacted the PRUSA. Securities are also regulated by a series of federal statutes, which in turn authorise a series of regulations promulgated by the SEC. The main federal statutes are the Securities Act of 1933 and the Securities Exchange Act of 1934.

Securities Act of 1933

The Securities Act of 1933 governs the initial issuance and registration of securities, including registration exemptions. It requires that investors receive full and fair disclosures, including financial and other significant information concerning securities being offered for public sale, and prohibits deceit, misrepresentations and other fraud in the sale of securities.

Securities Exchange Act of 1934

The Securities Exchange Act of 1934 governs the purchase and sale of securities, securities brokerage firms, securities exchanges and financial reporting. It created the SEC and gave it broad authority over all aspects of the securities industry, such as the power to register, regulate and oversee brokerage firms, transfer agents, clearing agencies and the securities self-regulatory organisations, like the New York Stock Exchange, the NASDAQ Stock Market and the Financial Industry Regulatory Authority.

The PRUSA

The PRUSA is modelled on the Model Uniform Securities Act and is administered by OCIF. Among other matters, the PRUSA regulates the offer and sale of securities (unless federal pre-emption applies), and provides the legal framework for the regulation of securities in Puerto Rico. It includes provisions related to registration requirements, anti-fraud measures and the licensing of securities professionals. The PRUSA makes it unlawful for any person to offer or sell any security unless it has been registered, is exempt from registering, or is classified as a federally covered security subject to the Securities Act of 1933.

As a general matter, private equity funds, venture capital funds and their investment advisers organised under the laws of Puerto Rico and/or authorised to do business in Puerto Rico are subject to the laws of the USA and all applicable rules and regulations promulgated by the SEC and the analogous local regulator in Puerto Rico, OCIF. See also 1.2 Regulatory Framework for FDI.

As Puerto Rico is a territory of the USA, all federal laws on antitrust and competition apply. Therefore, reference should be made to the relevant portions of the HSR, the Clayton Act and the Sherman Act. As a matter of state law, Puerto Rico has a merger control regime.

Act 77-1964, also known as the Puerto Rican Anti-Monopoly Law, governs competition law in Puerto Rico (“Act 77”). In a broad and brief analysis, the Puerto Rican Attorney General (referred to officially as the Secretary of Justice) and by their delegation the assistant Secretary of Justice in charge of monopolistic affairs may, at the request of an acquiring party, give their opinion on the legality of any acquisition of assets or share capital before the accomplishment thereof. The application for an opinion will be filed in writing at the Office of Monopolistic Affairs of the Puerto Rican Department of Justice. The application must disclose every material fact of the intended transaction. At any time, the applicant may be requested to furnish additional information and documents concerning its production and sales or any other necessary documents to determine its economic impact. All information submitted as part of this process will be strictly confidential unless it is required for any judicial action on the part of the state against the applicant.

In no case will an opinion be given on an acquisition that responds to a plan already in operation or that is inconsistent with any other provision of this Act. An opinion that the proposed acquisition is lawful may state – as necessary to keep the immunity referred to below – such conditions as will reasonably tend to safeguard the effectiveness of this Act and prevent the abuse of the immunity to be granted. Every application filed per this Act and on which the Secretary of Justice is to render an opinion will be referred to the state Economic Development Administrator and the state Secretary of Economic Development and Commerce, who will advise the Secretary of Justice in that respect.

A favourable opinion on an acquisition carries immunity against any action on the part of the state for violation of this section. However, the state reserves the right to file any criminal, civil or administrative proceeding when a violation of the conditions of the opinion is committed, or when, post-acquisition, the execution of the acquisition plan or the ensuing activities deviate from the facts presented to the Office of Monopolistic Affairs during the process to obtain the opinion on the acquisition.

Unfavourable opinions, conversely, function solely as administrative guidance for the parties involved, as stipulated in their terms. These opinions hold no legal weight in judicial proceedings and cannot be used to establish statutory violations. Enforcement under this section rests solely with the state.

The Puerto Rican Department of Justice will determine the competitive impact of the investment as part of its review process. The process usually requires defining the market at issue, its geographic boundaries, the competitors within the market, and the market concentration of the parties to the transaction before and after the potential merger, by considering methods such as the Herfindahl-Harshman Index (HHI), the current economic factors and trends within the market that may affect competition, such as barriers of entry into the market, and their respective abilities before and after the merger to control prices and therefore limit competition.

The Puerto Rican Court of First Instance (state trial court) may prevent, prohibit, enjoin or punish violations of Act 77, and it will be the duty of the Secretary of Justice to institute proceedings for injunctions or any other proceeding to prevent, prohibit, enjoin or punish these violations, and to obtain such other or further relief as may be appropriate. When a party has been duly notified that an action has been filed against it, the court will proceed, as soon as possible, to the hearing and determination of the case; pending these proceedings and before final decree, the court may make such temporary restraining orders or prohibition as will be deemed just in the premises.

The Court of First Instance will have exclusive jurisdiction to entertain criminal proceedings for violation of this chapter. Disobedience of an order of the court to enforce the provisions of this chapter is punishable as contempt. A person found guilty of such violation may be punished by a fine not exceeding USD25,000 or imprisonment not exceeding one year, or both, at the court’s discretion.

Puerto Rican law does not impose general restrictions on foreign direct investments other than the restrictions on the banking, mortgage banking and insurance industries, which apply to both foreign and domestic investors. In addition, transactions that may require an HSR filing may not close until the relevant waiting period expires or terminates.

Puerto Rican law does not generally restrict foreign ownership nor impose special restrictions on foreign companies operating in Puerto Rico. However, foreign companies must be authorised to do business in Puerto Rico. As discussed in 1.2 Regulatory Framework for FDI, the CFIUS is authorised to review certain foreign investment transactions in order to determine the effect of the transactions on the national security of the USA, including Puerto Rico.

The CFIUS operates pursuant to Section 721 of the Defence Production Act of 1950 (as amended) (50 USC 4565) (Section 721) (the “Exon-Florio Amendment”), and the regulations promulgated by the Treasury Department (31 CFR Part 800, et seq), Executive Order 11858 (as amended) and Executive Order 14083, as well as pursuant to authority granted to it by the Foreign Investment Risk Review Modernisation Act of 2018 (FIRRMA).

Under the Exon-Florio Amendment, the President has broad authority to investigate and prohibit any merger, acquisition or takeover by or with foreign persons that could result in foreign control of persons engaged in interstate commerce, if the President determines that the merger, acquisition or takeover constitutes a threat to US national security. Congress has indicated that the term “national security” is to be interpreted broadly and that the application of the Exon-Florio Amendment should not be limited to any particular industry. The President delegated the authority to make investigations pursuant to the Exon-Florio Amendment to the CFIUS.

The CFIUS has jurisdiction to review “covered transactions”, which are transactions in which a foreign person gains “control” over a US business. “Control” is often interpreted as equity, but the CFIUS’ definition is far broader: “[t]he term control means the power, direct or indirect, whether or not exercised, through the ownership of a majority or a dominant minority of the total outstanding voting interest in an entity, board representation, proxy voting, a special share, contractual arrangements, formal or informal arrangements to act in concert, or other means, to determine, direct, or decide important matters affecting an entity.” Therefore, depending on the ownership structure or other operational control of the contractor, the CFIUS could view the operating agreement as conferring control, thereby subjecting the transaction to the jurisdiction of the CFIUS.

Currently, the CFIUS notification process is voluntary for most transactions (ie, transactions that do not involve “critical technology”). Parties choose to notify the CFIUS of their transactions because the President has broad authority to block transactions (or unwind them if they have already closed) if he determines that a transaction threatens US national security, although this is rare. In addition, if the parties do not voluntarily file their transaction, the CFIUS can ask the parties to file or self-initiate their own review before or after the closing. If the CFIUS clears a transaction, that clearance provides a safe harbour against future CFIUS action related to that transaction. The CFIUS framework provides a timetable for reviewing and clearing transactions, which can take up to 90 days to complete.

Under the FIRRMA, which was the first major CFIUS reform in a decade, parties are required to notify the CFIUS of certain transactions. Two Final Rules issued by the CFIUS implementing most of the provisions of the FIRRMA came into effect on 13 February 2020:

• one rule expands the CFIUS’ jurisdiction to review certain non-controlling foreign investments in US businesses involving critical technology, critical infrastructure and sensitive personal data (“TID businesses”) (the “US Business Rule”); and
• the other rule expands the CFIUS’ jurisdiction to review certain foreign investments in US real estate (the “Real Estate Rule”).

These rules will impact foreign investment – including foreign investments made indirectly via US investors – in the US energy, infrastructure, telecom/IT, financial services, technology, healthcare and pharmaceuticals, and real estate sectors.

Under the US Business Rule, non-controlling foreign investment in US businesses that produce, design, test, manufacture, fabricate or develop critical technology will be subject to the CFIUS voluntary filing jurisdiction if a foreign person also acquires information access, board nomination or decision-making rights as a result of the investment. The US Business Rule authorises the CFIUS to review covered investments in US businesses involved in a sensitive subset of critical infrastructure, defined as “covered investment critical infrastructure”. In particular, a covered investment will be subject to the CFIUS voluntary filing jurisdiction if the investment is in a US business that owns, operates, manufactures, supplies or services (each a critical infrastructure “function”) specific types of critical infrastructure.

In addition, CFIUS filings will be required for certain investments in TID businesses involving foreign government investors. The CFIUS requires a mandatory filing when a foreign person obtains a “substantial interest” in a US business and a foreign government in turn holds a “substantial interest” in the foreign person – ie, if a foreign person’s investment in a TID business gives that foreign person a 25% or greater direct or indirect voting interest in the TID business, and a foreign government, in turn, holds a 49% direct or indirect interest in the foreign person making the investment.

The criteria and analyses relating to the CFIUS approval process in Puerto Rico do not vary from those that apply more broadly in the USA. For more information, see 7.1 Applicable Regulator and Process Overview.

To the extent it identifies a risk with respect to a “covered transaction”, the CFIUS has the authority to negotiate and impose conditions, which generally vary based on the nature of the risk identified.

To the extent it identifies a national security risk with respect to a “covered transaction” that cannot otherwise be mitigated, the CFIUS may make a recommendation to the President of the USA with respect to a course of action relating to the transaction. The President has the authority to suspend or prohibit the transaction, including requiring divestment by the foreign entity if the transaction has already been consummated.

There are other federal and state regulatory reviews and/or requirements on FDI transactions that are industry-specific. An example of this is the required licensing and authorisation from the Federal Communications Commission for foreign investment in US companies within the telecommunications services sector. For the purposes of Puerto Rican law, the banking, mortgage banking and insurance industries are subject to special statutory regimes that may impact FDI transactions.

Entities organised under Puerto Rican laws (“Domestic Entities”) are subject to Puerto Rican income taxes on their worldwide income, subject to certain exemptions, exclusions and deductions.

For entities taxed as corporations (such as corporations or LLCs that do not elect to be treated as conduit entities), the applicable corporate income tax rate is 18.5% plus a progressive surtax that can go up to 19% for net taxable income subject to surtax in excess of USD275,000. Long-term capital gains, however, enjoy a preferential income tax rate of 20%.

Entities organised under the laws of a jurisdiction other than Puerto Rico (“Foreign Entities”) are subject to Puerto Rican income taxes only with respect to their income from Puerto Rican sources or effectively connected with a Puerto Rican trade or business. Foreign Entities engaged in business in Puerto Rico and taxed as corporations are subject to the same tax system as applies to Domestic Entities, plus a branch profit tax equal to 10%. The main difference is that the Puerto Rican income tax only applies to their net taxable income that is from Puerto Rican sources or effectively connected with the Puerto Rican trade or business. Foreign Entities not engaged in business in Puerto Rico are subject to a 29% tax, which must be withheld at source on the gross amount of any income from Puerto Rico sources (without deductions) by the payor.

As a general rule, any Domestic Entity or Foreign Entity, including corporations, can elect to be treated as a conduit entity for Puerto Rican income taxes, even if it only has one member or owner, or as a disregarded entity if it has only one member or owner. Conduit entities are not subject to Puerto Rican income taxes; the owners are instead responsible for the payment of the income taxes in their personal capacity on their distributable share of the conduit entity’s income and gains. A disregarded entity is ignored as a separate entity from its owner solely for the purpose of calculating Puerto Rico income taxes.

It is important to note that an LLC organised under the laws of a jurisdiction other than Puerto Rico (a “Non-Puerto Rican LLC”) that is treated as a partnership, disregarded entity or flow-through entity for US federal or foreign income tax purposes is treated by default as a conduit entity for Puerto Rican income tax purposes and cannot elect to be treated as a corporation. Non-Puerto Rican LLCs with a single member may, however, elect to be treated as disregarded entities for Puerto Rican income tax purposes.

Domestic Entities and Foreign Entities doing business in Puerto Rico are also subject to other local taxes, such as:

• a gross income tax payable to the municipalities where the business is conducted;
• municipal excise taxes on construction work;
• personal and real property taxes;
• transfer taxes; and
• payroll taxes, among others.

In addition, Puerto Rico imposes an excise tax on certain products imported or manufactured in Puerto Rico and certain business activities and transactions.

Finally, Puerto Rico has implemented a sale and use tax (SUT) system, which applies to the acquisition, use, consumption and importation of taxable items to Puerto Rico. The term “taxable items” generally includes tangible personal property, taxable services, admission rights, digital products and combined transactions. The SUT rate is 11.5%, with 10.5% payable to the Puerto Rican Treasury Department (the central government portion) and 1% payable to the corresponding municipality (the municipal portion). Generally, the taxpayer is the person that acquires or uses the taxable item, but if there is a merchant, that merchant is required to collect the SUT and remit it to the Puerto Rican Treasury Department.

It is important to note that if the Domestic Entity or Foreign Entity is covered by a tax exemption decree, the Puerto Rican income tax rate is generally reduced to 4%, and certain exemptions will apply in connection with other applicable taxes.

Dividends paid by a Domestic Entity to a non-Puerto Rican resident individual are subject to a 15% income withholding tax. If the dividend is paid to a Foreign Entity not engaged in trade or business in Puerto Rico, the withholding tax rate is 10%. Interest paid by a Domestic Entity to a US citizen not resident in Puerto Rico is considered non-Puerto Rican source income and, therefore, is not subject to Puerto Rican income taxes.

Interest paid to a non-Puerto Rican resident individual who is not a US citizen or Foreign Entity not engaged in trade or business in Puerto Rico is exempt from withholding tax if the recipient of the interest is not related to the Puerto Rican payor/borrower. If the Puerto Rican borrower is related (which generally includes direct, indirect or constructive control or common ownership, with control meaning more than 50%), a 29% Puerto Rican income withholding tax would apply.

Puerto Rico is an unincorporated territory of the USA and does not have full sovereignty or authority to enter into treaties with other countries. However, tax treaties entered into by the USA may be made applicable to Puerto Rico as an unincorporated territory of the USA, so each tax treaty must be reviewed to determine its applicability to Puerto Rico. As a general rule, US income tax treaties currently in place do not extend to Puerto Rico.

As a territory of the USA, there is no tax treaty between Puerto Rico and the USA. Instead, there is an implementation agreement known as the Tax Co-ordination Agreement between the USA and Puerto Rico of 1989, which is designed to facilitate mutual assistance on tax matters, avoid double taxation and prevent the avoidance and evasion of fiscal laws.

If the Domestic Entity or Foreign Entity is covered by a tax exemption decree, certain exemptions may apply to the payment of dividends and interest from income covered by the decree.

Puerto Rico promotes and encourages foreign investment through various tax incentives. The Puerto Rican Incentive Code provides tax incentives, tax credits and other benefits to certain businesses, including:

• manufacturing;
• tourism;
• green energy;
• film;
• private equity funds and other financial activities;
• agricultural; and
• certain export services and trade commerce activities, among others.

Analysing whether the activities may qualify for incentives is the first step when structuring an investment in Puerto Rico.

A foreign investment structure via an asset deal generally provides a better tax result for the investor/buyer because it allows for a step-up in the basis of the assets acquired, which in turn results in a higher depreciation/amortisation deduction going forward. The acquisition of the membership interest of an entity taxed as a conduit entity may provide the same tax result to the foreign investor/buyer, and generally results in a more tax-efficient structure for the seller.

Puerto Rico does not allow for the filing of consolidated returns. Notwithstanding this, taxpayers may enjoy the benefits of consolidation by investing through various flow-through/conduit entities wholly owned by a corporation/parent company. This way, flow-through gains and losses may be consolidated in the parent company’s corporate income tax return.

Capital gains from the sale by a non-Puerto Rican resident or Foreign Entity of shares in an entity taxed as a corporation are treated as non-Puerto Rican source income exempt from Puerto Rican income taxes, regardless of the assets held by the Puerto Rican corporation. The capital gain from the sale of an ownership interest in an entity taxed as a conduit interest, however, may be subject to Puerto Rican income taxes if the conduit entity was engaged in trade or business in Puerto Rico and the seller is a non-Puerto Rican resident individual that is not a US citizen, or a Foreign Entity not engaged in trade or business in Puerto Rico.

Capital gains from the sale of real property, on the other hand, constitute Puerto Rican source income and, therefore, a non-Puerto Rican resident or Foreign Entity will be subject to Puerto Rican income taxes on the gains. The buyer in the transaction that generates a Puerto Rican source capital gain (ie, real estate, conduit entity interest) is required to withhold the applicable Puerto Rican income tax and remit it to the Puerto Rican Treasury Department.

Investments in Domestic Entities that are taxed as conduit entities or in any other flow-through Puerto Rican business are generally made through a Domestic Entity taxed as a corporation. This investment vehicle serves as a “blocker” for the foreign investor as it eliminates the requirement of the foreign investor to file Puerto Rican income tax returns. The “blocker” will file Puerto Rican tax returns, pay the applicable Puerto Rican income taxes, and distribute its earnings and profits to the foreign investor, net of the applicable Puerto Rican income withholding tax.

On an exit, the foreign investor may sell the shares or ownership interest of the corporation or Domestic Entity and be exempt from Puerto Rican income taxes. The “blocker” may not necessarily result in a lower Puerto Rican income tax rate but simplifies the applicable Puerto Rican tax return compliance. If Puerto Rican operations are covered by a tax exemption decree, the “blocker” treatment is the preferred option because the “blocker” pays a fixed 4% Puerto Rican income tax rate and may distribute the earnings and profits without any Puerto Rican income taxes.

The Puerto Rican Internal Revenue Code of 2011 (as amended) (the “PR Code”) contains several rules designed to prevent tax avoidance or abuse. The Secretary of the Treasury has the authority to impute or reassign items of income and expenses to properly reflect the tax liability of the parties. In this regard, Puerto Rico follows the US federal transfer pricing rules. For example, deductions for payments to related Foreign Entities that are not engaged in trade or business in Puerto Rico are limited to 49%, unless a certification that a transfer pricing study prepared in line with US federal tax rules was obtained to confirm the amount of the payments. Interest paid to foreign-related entities not engaged in trade or business in Puerto Rico is also subject to a 29% withholding tax. Finally, the PR Code has specific rules designed to accelerate the tax on dividends by treating certain transactions with foreign affiliates as deemed dividends.

The PR Code also has several rules disallowing certain expenses deemed or presumed abusive, such as denying tax deductions for certain payments for which an informative return was not filed with the Puerto Rican Treasury Department. Beyond these specific rules, the Puerto Rican Treasury Department may also invoke judicially developed doctrines such as economic substance, substance-over-form and step transactions. These doctrines empower the Puerto Rican Treasury Department to disregard the form or steps of certain transactions in order to establish the appropriate tax treatment.

Puerto Rico is not an “employment at will” jurisdiction and the termination of employees is highly regulated. Puerto Rican law requires employers to have “just cause” for termination within the definition in Puerto Rico’s Wrongful Termination Act, Act No 80-1976 (“Act 80”). Terminations without “just cause” trigger the employer’s obligation to pay the terminated employee the discharge indemnity provided in the Act.

Puerto Rico’s labour and employment relations are governed by a mix of US federal and Puerto Rican laws and regulations. Areas covered by the applicable labour and employment legal regime include:

• wage and hour;
• the hiring and termination of employees;
• employment discrimination, retaliation and workplace harassment;
• leaves of absence;
• labour and union laws; and
• employee benefits.

Generally, labour relations in Puerto Rico are governed by the National Labor Relations Act. As in the USA, union membership in the Puerto Rican private sector has been declining significantly over the last 50 years. The percentage of private sector bargained employees currently stands at approximately 7%.

Foreign investors seeking to establish a presence in Puerto Rico may need to navigate US immigration laws. Visa categories could be relevant, such as the E-2 Treaty Investor Visa or the EB-5 Immigrant Investor Programme, depending on the nature and scale of the investment.

Under Puerto Rican law, non-exempt employees must be paid their wages in intervals that do not exceed 15 days. Non-exempt employees are guaranteed statutory benefits, such as:

• daily and weekly overtime;
• vacation and sick leave;
• employer paid maternity leave;
• premium pay for work performed during the statutory meal period; and
• premium pay for work performed during the seventh consecutive day of work.

Furthermore, employers are required to retain statutory employment insurances such as government-provided workers’ compensation and unemployment insurance and short-term non-occupational disability insurance. Benefits such as health insurance and pension plans (401(k)s, for example) are not required by local law but are commonly provided.

In an asset purchase scenario, buyers of an ongoing business regularly offer the seller’s employees comparable compensation and benefits to those previously offered by the seller. In this scenario, a significant reduction in compensation and benefits may be deemed a constructive dismissal under Act 80, which may trigger the employer’s obligation to pay the discharge indemnity provided in the Act if the termination was executed without “just cause”.

Act 80 provides that any person employed for an indefinite period of time and dismissed without “just cause” will be entitled to receive a wrongful discharge indemnity from their employer. The amount of such indemnification is determined by a formula provided by Act 80, which takes into consideration the employee’s seniority with the employer and their highest earnings..

Employees do not have a mandatory right to their employment when their employer is acquired. However, employees who experience an employment loss as the result of an asset or stock purchase, merger or any other transaction will be entitled to receive the abovementioned discharge indemnity if they are terminated without “just cause”.

Act 80’s definition of “just cause” includes terminations that result from:

• a full, temporary or partial closing of the operations of the employer or any of its establishments;
• technological changes or reorganisation, such as in the style, design or character of the product manufactured or handled, or changes in services rendered to the public;
• downsizing made necessary by a reduction in the foreseen or prevailing volume of production, sales or profits at the time of the discharge or for the purpose of increasing the establishment’s competitiveness or productivity;
• the employee’s engagement in a pattern of improper or disorderly conduct or poor performance; and
• the employee’s repeated violations of the employer’s reasonable rules, provided that a written copy thereof has been timely furnished to the employee.

Furthermore, offering a transferred employee a compensation and benefits package that is significantly lower than the one offered by the buyer may constitute a constructive dismissal under Act 80 and may trigger payment of the discharge indemnity provided therein.

As a US jurisdiction, Puerto Rico is generally subject to the same laws, rules and regulations regarding intellectual property that apply more broadly in the USA.

Puerto Rico has a double layer of intellectual property protection. As part of the USA, it is subject to federal laws on patents, copyrights and trade marks, among others. As a state-like jurisdiction within the USA, it has its own complementary regime of protection for trade marks, moral rights and trade secrets (but not patents, which are only regulated at the federal level). Local laws and regulations are modelled on, and similar to, the federal counterparts and can provide additional benefits.

Puerto Rico lacks a comprehensive data protection law or a government body responsible for supervising the collection, use and dissemination of personal data of individuals, except for what is provided under specific and limited statutes and regulations. In addition to FTC enforcement and the federal laws that govern the collection of personal information in certain sectors, the relevant Puerto Rican data protection laws and regulations include:

• Act No 185 of 27 August 2024 (known as the Children and Youth Cyber Privacy Protection Act);
• Act No 38 of 3 May 2016 (known as the Law to Prohibit Requesting Personal Information in Transactions with Credit or Debit Cards);
• Act No 234 of 19 December 2014 (known as the Law for the Disposal of Personal Information of Consumers);
• Act No 39 of 24 January 2012 (known as the Privacy Policy Notification Act);
• Act No 111 of 7 September 2005 (known as the Citizen Information on Data Banks Security Act);
• Act No 210 of 28 August 2003 (known as the Telemarketing Fraud Prevention Act);
• Regulation No 9158 promulgated by the Department of Consumer Affairs on 6 February 2020 (known as the Commercial Practices Regulation);
• Regulation No 8568 to Implement the Publication of the Privacy Policy in the Management of Personal and Private Data of Citizens, as compiled in Puerto Rico, promulgated by the Puerto Rican Department of Consumer Affairs on 27 February 2015;
• Regulation No 7479 promulgated by the Telecommunications Regulatory Board of Puerto Rico on 12 March 2012 (known as the Regulation on the Registry of Persons who do Not Want Advertisements Via Phone); and
• Regulation No 7376 promulgated by the Department of Consumer Affairs on 25 June 2007 (known as the Citizen Information on Data Banks’ Security Regulation).

Because of the nature of these laws and regulations, they may have extraterritorial scope. Penalties under these laws and regulations vary, but include civil penalties levied on a per-violation basis. Enforcement is still evolving and varies depending on the law or regulation at issue.