- TAX ADVANTAGES OF INVESTING AND DOING BUSINESS IN PUERTO RICO
- September 29, 2016
Puerto Rico is coming out of an economic distress and there are some clear signs of economic recovery. We are seeing new faces which are mostly the result of tax incentives, currently available for export services companies and foreign investors that move to Puerto Rico. Motivated by the incentives, new residents are moving to Puerto Rico, creating jobs, buying real estate, using our schools, and revitalizing our economy in unprecedented ways.
THE TAX INCENTIVES
The new faces we are seeing are mostly the result of Acts No. 20 and Act No. 22 – two major tax incentives laws that were enacted in 2012. Together, these laws are helping Puerto Rico become a major services hub and are causing businessmen and women, investors, and entire families to relocate to Puerto Rico. Act No. 20 of January 17, 2012, as amended, also known as the “Act to Promote the Export of Services,” was designed to promote Puerto Rico as a hub for services companies. Under Act No. 20, services companies that move or commence their operations in Puerto Rico are offered very generous tax incentives if they meet one major requirement – they set up an office with at least three (3) employees in Puerto Rico. Since services can pretty much be provided from anywhere in this advanced technological age, the move to Puerto Rico has been a smooth transition for many United States-based and international companies.
ACT NO. 20 BENEFITS FOR EXPORT SERVICES COMPANIES INCLUDE:
• a 4% fixed Puerto Rico income tax rate for export services company income;
• 100% tax exemption on dividends or profit distributions from the export service business;
• 60% tax exemption on municipal taxes; and
• 90% tax exemption from real and personal property taxes
These income rates are minimal when compared to United States federal and state income tax rates that can often exceed 40%. Puerto Rico source income is exempted from taxation and the state and federal levels in the Continental United States.
Hand in hand with Act No. 20 is Act No. 22 of January 17, 2102, as amended, also known as the “Act to Promote the Relocation of Investors to Puerto Rico.” Act No. 22 was designed to incentivize investors to become residents of Puerto Rico. The benefits are minimal to no Puerto Rico taxes on investment income. To qualify, the individual must not have been a resident of Puerto Rico for the last six (6) years and must become a bona fide resident of Puerto Rico. For a United States citizen contemplating relocating to Puerto Rico, there are specific federal tax rules you will have to comply with which will determine whether the U.S. Internal Revenue Service will deem your move to Puerto Rico to be bona fide.
ACT NO. 22 BENEFITS INCLUDE:
• 100% tax exemption from Puerto Rico income taxes on all dividends;
• 100% tax exemption from Puerto Rico income taxes on all interest; and
• 100% tax exemption from Puerto Rico income taxes on all short-term and long-term capital gains accrued after the individual becomes a bona fide resident of Puerto Rico receiving tax benefits under Act No. 22. (Special rules apply to built-in gains accrued before establishing residency in Puerto Rico).
Together, these laws are bringing foreign investment and talent to Puerto Rico as well as opening up employment possibilities for a talented and qualified pool of Puerto Ricans.
In short, the economic tide is definitely turning and Act No. 20 and Act No. 22 are at the forefront. There is great promise and opportunity for Puerto Rico.