The Puerto Rican Federal Relations Act stipulates that the commonwealth is exempt from US internal revenue laws. The federal income tax is not levied on permanent residents of Puerto Rico, but federal Social Security and unemployment taxes are deducted from payrolls, and the commonwealth government collects an income tax. Corporations in Puerto Rico are also taxed, though some companies fell under Section 936 financing until it was repealed in 1996.
Section 936 of the Internal Revenue Code exempted certain corporations from paying taxes for periods ranging from 10 to 25 years, allowing subsidiaries of US corporations virtual exemption from US corporate income taxes. The exemption was passed in 1976 to encourage economic development on the island. At the time of repatriation of profits to the US stockholder, the Puerto Rican government imposed a "tollgate" of 5–10%. Section 936 was replaced with Section 30A in 1996, which reduced the amount of income companies could claim as non-taxable to 60% of wages and capital investment.
The government in 2001 also enacted a series of 27 laws to further economic development and foreign investment, primary among them Laws 145, 169, and 225. These provide incentives or tax credits that could in effect reduce corporate income tax to as low as 2%; a 10% income tax credit for companies that purchase locally produced goods for export, or to be used in local manufacturing for local consumption; and lower tax rates directed to businesses that establish hemispheric, global, or Latin American headquarters in Puerto Rico.
Property, excise, and franchise taxes are also levied by the government. Excise taxes on new and used cars are an important source of revenue for the government.