Lately, in order take advantage of several unique tax incentives, more and more companies in the service industry have been relocating to Puerto Rico (PR). In particular, financial advisers, fund managers, law firms, marketing centers, and trading companies, have sought the advantages of becoming “Qualified Export Service Companies.”
Under Act 20-2012, Qualified Export Services Companies are entities created in PR that provide services from PR to customers or clients outside of PR. The tax incentives of relocating include the application of 4% tax rate in PR, coupled with zero US tax on PR net profits earned by qualified export services companies.
Act 22-2012 Tax Incentives
Another Act, Act 22-2012, provides incentives to individuals and investors.US citizens who become bona fide residents of PR also benefit from certain tax benefits offered in Puerto Rico. For example, bona fide residents do not pay US income tax on realized capital gains for assets acquired and sold after their residence starting date in PR.
The guidelines are a little bit more cumbersome for assets acquired before the individual’s residence starting date, but sold after the PR residence starting date. For this purpose, the value of assets held by the individual as of the residence starting date needs to be determined. In very general terms, capital gains on assets acquired before residence starting date and sold within ten (10) years are taxed in the US (allocable US portion only) at the long term capital gain rate existing on the date of sale. After 10 years from the residence starting date, any capital gain realized becomes free of US taxes. Bona fide residents will continue to pay PR taxes on capital gains at progressively lower rates until 15 years from their residence starting date. After 15 years, there are no PR taxes required for capital gains.
Bona fide residents also benefit from dividends received from their ownership interest in qualified export services companies. Bona fide residents who receive dividends from export services companies do not pay US income tax or PR income tax on those dividends, if more than 80% of the companies’ gross income during a three (3) year testing period is derived from a trade or business in PR. The tax results are more cumbersome, if there are earnings accumulated outside of PR, or from non-qualifying activities of the PR Company. In such cases, the earnings and profits need to be prorated to determine the taxable portion of dividend in the US and taxable portion of dividend in PR.
Businesses or individuals who may be interested in taking advantage of Act 20-2012 or Act 22-2012 tax incentives in Puerto Rico, are urged to contact the relocation specialists at MBAF.
Understanding and getting the most out of the tax incentives for relocation in PR can be quite complex. If you would like to benefit from our expertise in these areas, or if you have further questions on this Advisory, do not hesitate to contact our Tax and Accounting specialists, or call us at 1-800-239-1474.