President Donald Trump recently signed into law the bill commonly known as the One Big Beautiful Bill Act (OBBBA). On July 4, 2025, the OBBBA made permanent many of the provisions of the Tax Cuts and Jobs Act of 2017 (TCJA) and included numerous amendments to the US Internal Revenue Code of 1986, as amended (Code).
Below, we describe some of the OBBBA provisions and how they may affect Puerto Rico stakeholders.
Net CFC tested income
General
Currently, US shareholders of a controlled foreign corporation (CFC) are generally required to report the Global Intangible Low-Taxed Income (GILTI) derived by a CFC each year. This inclusion is calculated, in part, based on the CFC’s tested income (minus a ten-percent deemed return on tangible assets of the CFC).
For corporate US shareholders, GILTI is subject to a 21-percent tax rate. However, a 50-percent deduction is applied (GILTI Deduction), with the result that the effective tax on GILTI is 10.5 percent.
In addition, subject to certain limitations, corporate US shareholders may claim 80 percent of the foreign income tax imposed on GILTI as a foreign tax credit (GILTI FTC); however, this means that 20 percent of the foreign income tax paid on GILTI is not creditable (Residual FT).
Also, in determining GILTI for foreign tax credit purposes, certain limitations apply that may reduce the GILTI FTC, such as a rule that requires the US shareholder to allocate certain expenses to GILTI.
The OBBBA, which renames GILTI to “net CFC tested income” (NCFCTI), changes the above rules for taxable years beginning after December 31, 2025, as follows:
- The GILTI Deduction (now the NCFCTI Deduction) is reduced from 50 to 40 percent (resulting in an effective US corporate income tax rate of 12.6 percent)
- Increases the GILTI FTC (now NCFCTI FTC) from 80 to 90 percent
- The exclusion of the 10-percent deemed return on tangible assets to determine NCFCTI is repealed, and
- Certain expenses are not required to be allocated to NCFCTI for foreign tax credit purposes.
CFCs operating in Puerto Rico
The new NCFCTI provisions are likely to impact US shareholders of CFCs operating in Puerto Rico under a tax decree issued under Puerto Rico’s tax incentives laws.
To illustrate, a CFC that is covered by a decree issued under Act 60-2019 (Act 60) or a predecessor act – that pays in Puerto Rico a fixed income tax rate of 4 percent – may be able to claim in the US a NCFCTI FTC of 3.6 percent (4-percent Puerto Rico tax rate x 90-percent NCFCTI FTC) under the OBBBA, instead of the current 3.2 percent (4-percent Puerto Rico tax rate x 80-percent GILTI FTC), against a US tax liability of 12.6 percent, instead of the current 10.5 percent.
Therefore, the effective tax rate for the CFC would be 13 percent (12.6 plus the 0.4-percent Residual FT) under the OBBBA, instead of 11.3 percent (10.5 plus the 0.8-percent Residual FT) under the current rules, representing a tax increase of approximately 1.7 percent for taxable years beginning after December 31, 2025.
The actual effective tax rate on the NCFCTI of CFCs operating in Puerto Rico will depend on other factors, such as the repeal of the ten-percent deemed return on tangible assets (which will have the effect of increasing a CFC’s NCFCTI) and the elimination of expenses that are required to be allocated to NCFCTI for foreign tax credit purposes (which could increase the NCFCTI FTC of a US shareholder).
Downward attribution
General
Before the enactment of the TCJA, the attribution of stock ownership from a foreign person to a US person for purposes of determining whether a US person qualified as a US shareholder and whether a foreign corporation constituted a CFC was not permitted (Downward Attribution Prohibition).
The TCJA repealed the Downward Attribution Prohibition; therefore, the ownership in foreign corporations held by foreign persons could be attributed to a US corporation with the result that the foreign corporation could be treated as a CFC solely on account of this repeal (Permitted Downward Attribution).
The OBBBA reinstated the Downward Attribution Prohibition but with a limited exception (under new section 951B) that applies the Permitted Downward Attribution to treat a foreign corporation as a CFC for certain US shareholders.
Puerto Rico stakeholders
With the reinstatement of the Downward Attribution Prohibition, it is possible that certain CFCs that are operating in Puerto Rico may no longer be considered CFCs effective for taxable years beginning after December 31, 2025. However, a careful analysis to determine the application of these rules (and potentially the application of the PFIC regime) is encouraged, particularly with respect to individuals who are US shareholders and that have not been bona fide residents of Puerto Rico during the entire period of time of ownership in the foreign corporation.
Opportunity zones
General
The qualified opportunity zones program was introduced by the TCJA to attract private investment in “qualified opportunity funds” (QOF) operating in “qualified opportunity zones (QOZ). A QOZ is a population census tract that is a low-income community that is designated by the state as a QOZ.
The number of population census tracts in a state that may be designated as QOZs may not exceed 25 percent of the number of low-income communities in the state (General Rule). However, each population census tract in Puerto Rico that is a low-income community is designated as a QOZ (Puerto Rico Special Rule). Accordingly, 98 percent of PR’s geographical area is comprised of areas that have been designated as a QOZ.
Changes affecting Puerto Rico
Among other changes, the OBBBA repeals the Puerto Rico Special Rule for tax years beginning after December 31, 2026. As a result, Puerto Rico QOZs will be limited to 25 percent of the number of low-income communities, the same limitation that applies to all US states. This means that within the 90-day period starting on July 1, 2026, the Governor of Puerto Rico will need to designate the QOZs for the 10-year period beginning on January 1, 2027, and future Governors will need to follow similar designation procedures for subsequent 10-year intervals.
In terms of the impact of the changes introduced by the OBBBA for local QOZs operating in Puerto Rico under the QOF tax incentives provisions of Act 60 or Act 21-2019, it is relevant to note that these incentives will continue in effect for these QOFs after the expiration of the 10-year designation period if the entity would otherwise qualify as a QOF, if such designation were still in effect.
Therefore, QOFs that comply with the QOF requirements will continue to benefit from the Puerto Rico tax incentives covered by a decree issued to such QOFs that is effective on or before December 31, 2025, even if the QOF covered under such decree is no longer located in a QOZ. For taxable years beginning after December 31, 2026, new QOFs will have to be located in a QOZ designated by the Governor of Puerto Rico.
Contacts
Learn more about the net CFC tested income, downward attribution, opportunity zones, and other US and Puerto Rico tax matters by contacting:
Manuel López-Zambrana
Bibiana A. Cruz
Edwin O. Figueroa-Álvarez
Pablo R. Gil Díaz