PUERTO RICO TAX INCENTIVES

Despite Puerto Rico's current economic crisis, now more than ever, Puerto Rico has become a very attractive place to move to, do business and invest in real estate.

As a U.S. territory, Puerto Rico shares a common currency and citizenship with the mainland. Puerto Ricans can travel to and from the US without a passport and are bound and protected by federal law. However, Puerto Rico enjoys fiscal autonomy and can create its own tax laws. Puerto Rican individuals and businesses are not subject to US federal taxes.

The Government of Puerto Rico is taking great strides to persuade individuals and business to move to Puerto Rico by approving extraordinary tax benefits for those who qualify.

The Government of Puerto Rico approved legislation on January 17, 2012 to promote the economic development of Puerto Rico through tax incentives:

Act 20 / Export Services Act to promote the exportation of services

Act 22 / Individual Investors Act to promote the relocation of individual investors to Puerto Rico

ACT 20 EXPORT SERVICES ACT

The Export Services Act applies exclusively to businesses, not to individuals. It applies to any entity that is or will be engaged in an eligible business in Puerto Rico and has or will open offices. These include call centers, professional services, advisory or consulting services, research and development, electronic data processing services, medical or hospital services and many more. The business must qualify as either a service for exportation for non-resident individuals or foreign entities that have no nexus with Puerto Rico,  or as a promoter service rendered to non-resident individuals and/or foreign entities related to the establishment of a new business in Puerto Rico (as defined by Act 20).

ACT 20 Tax Exemption Incentives

To enjoy the tax incentives granted under the Export Services Act the services provider must request and obtain a tax exemption decree. If granted, the decree will have a term of 20 years renewable for an additional 10 years (conditions apply). Tax incentives for Act 20 are:

  • A flat 4% income tax rate on export services income, which may be reduced to 3% when more than 90% of the eligible business’s gross income is derived from export services and such services are considered strategic services, according to the criteria established in the Export Services Act.
  • 100% tax-exempt distributions from earnings and profits derived from the Export Services Income.
  • 100% exemption from property taxes during the first five years of operations in the case of eligible services. After said 5-year period, a 90% exemption will apply during the term remaining under the Tax Exemption Decree.

ACT 20 Employment Requirement

New businesses applying for Act 20 must comply with a minimum of five (5) full-time employees (FTE) for the period of the grant, for which the company should be in compliance before the end of the 6th month after starting its operation.

ACT 22 INDIVIDUAL INVESTORS ACT

The Individual Investors Act seeks to attract new residents to Puerto Rico with tax incentives providing a total exemption from Puerto Rico income taxes on all passive income realized or accrued after such individuals have become bonafide/domiciled residents of Puerto Rico.

A presumption of residence requires the physical presence of the individual in Puerto Rico for a minimum of 183 days of each tax year.

The individual may not have a tax home outside of Puerto Rico during the taxable year.

The individual must have a closer connection to Puerto Rico than to any state within USA or any other foreign country.

Eligible individuals must not have been a resident of Puerto Rico at any time during the 6-year period preceding the effective date of the Individual Investors Act.

This relocation should result in new local investments in real estate, services and other consumption products, which are intended to contribute to the Island's economy.

Act 22 Tax Exemption Incentives

Income derived from sources within Puerto Rico by eligible individuals is not included in gross income and is exempt from taxation.

Individual Investors will enjoy 100% tax exemption from Puerto Rico income taxes on interest and dividend income derived during the Tax Exemption

Period. (as defined below).

Individual Investors that qualify as receiving income from a Puerto Rico source will not be subject to federal income taxation under the US Code.

Individual Investors may be able to reduce the tax rate applied on interest and dividend income coming from sources outside of Puerto Rico by investing in certain Puerto Rico investment vehicles.

Capital gains derived by eligible individual investors for investment appreciation accruing after becoming a Puerto Rico resident will be 100% exempted from Puerto Rico income taxes, if such gain is recognized prior to January 1, 2036.

Capital Gains derived by eligible individual investors will be subject to preferential income tax rates.

Additional Tax Incentives

There are a number of additional tax incentives available intended to make operations in Puerto Rico more profitable for a wide number of industries while stimulating local economic development.  For more information, please call.

Puerto Rico Properties 101 / Alonso-Mulet Commercial Real Estate does not guarantee the accuracy of the information contained within. Businesses and individual investors are strongly advised to consult their legal and/or financial advisor(s) regarding tax incentives and regulations as they may currently exist and be applicable.