By: Mariana Muniz and Juan Carlos Feliciano

For tax year 2018, employers in Puerto Rico will be required to report certain severance payments, as discussed further below, as “exempt wages” on Withholding Statement Form 499R-2/W-2PR (the Puerto Rico equivalent of the US W-2 Form – PR Form W-2),¹ as opposed to Form 480.6D.

Under Section 4.3 of Act 4-2017, known as the Labor Transformation and Flexibility Act, which amends Section 1 of Act No. 80 of May 30, 1976 (Act No. 80), known as the Unjust Dismissal Act, severance payments as well as any equivalent voluntary payment made by the employer to employees on account of their dismissal, are excluded from the definition of gross income and as such are not subject to Puerto Rico income tax, whether such payment is made at the time of their dismissal or later, or whether it is made by reason of a settlement agreement or pursuant to a judgment or administrative order.

The amount of the severance payment excluded from the definition of gross income, and not subject to Puerto Rico income tax, is equal to the severance payment that would be payable pursuant to the provisions of Act No. 80. Severance payments that are made in excess of such amount are subject to Puerto Rico income tax.

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