On November 16, 2020, the Puerto Rico Department of Labor and Human Resources ("PR DOL") issued Circular Letter No. 2020-05, discussing considerations for private sector employers when requesting an exemption from paying the Christmas Bonus to their employees where the employer received COVID-19-related economic assistance.
In Puerto Rico, Act No. 148 of June 30, 1969, as amended, better known as the Puerto Rico Christmas Bonus for the Employees of the Private Sector Act ("Act") establishes the payment of a bonus to certain private sector employees during this time of the year, as well as details the manner and terms of the payment. The Act includes, however, a provision that permits a private sector employer to request an exemption from paying all or part of the bonus. Specifically, an employer may be eligible to request the exemption if the payment of the bonus exceeds 15% of the employer's net profit earned from September 30th of the preceding year until September 30th of the year in which the bonus is paid. For the purposes of this Act, the regulation to administer the Act defines "net annual profits" as
. . . the total income less the costs of producing such income and the operating expenses of a business during the period covered by the statement of position and profit and loss, and by the internal financial statements when these are required. In order to determine the net profits, the amount of the carry-over of the net loss from previous years and the accounts receivable that have not been paid when the statements of balance are presented will be excluded. On the other hand, both extraordinary gains and losses will be included. For the purposes of Act No. 148 and this Regulation, net profit is that exclusively derived from the employer's operations in Puerto Rico.
In order to avail itself of this exemption, the employer must submit to the Secretary of Labor and Human Resources no later than November 30th of each year the required Request Form for Exemption accompanied by a general balance sheet and a profit and loss statement for the 12-month period from October 1st of the previous year to September 30th of the current year, duly certified by a certified public accountant, as evidence of said financial status.1
As a result of the economic hardships stemming from the COVID-19 pandemic, many businesses received economic assistance packages in all shapes and sizes, including but not limited to tax credits, debt cancellations, loans, monetary aid and subsidies, both from the local government as well as from the U.S. federal government. This, as advanced, has created uncertainty as to whether such assistance is to be considered as net profits and have had an impact on the exemption requested. The PR DOL's Circular Letter No. 2020-05 clarified that debt cancellations and amounts received for any subsidy or federal or state stimulus granted as a result of COVID-19, including reimbursable tax credits and other financial aid, will not be considered as income for the purposes of the Christmas Bonus Act. Likewise, employers may claim as a deduction from net income ordinary and necessary expenses incurred in the operation of the business, even when those were paid with funds received from assistance packages. Nonetheless, if government aid was used to alleviate any loss or extraordinary loss, it must be recorded in the financial statements that are presented to the PR DOL.
1 In those cases in which the fiscal year of the employer that requests the exemption provided in this Section does not end on September 30th of each year, the balance sheet and the profit and loss statement required may be that corresponding to the fiscal year of the business.
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