With all of the news reports of a financial crisis in Puerto Rico, it might surprise you to hear that there remain significant opportunities and advantages to doing business on the island. For decades, Puerto Rico has been proactive in establishing tax incentive programs to promote the relocation of certain business and industries to Puerto Rico in order to boost the commonwealth’s economy. Recently, the Government of Puerto Rico created a new incentive program designed to lure businesses and wealthy Americans to invest in, and/or relocate to the island and offer the necessary elements for the creation of a World Class International Service Center. In spite of a bleak economic outlook, the island’s reputation as a “best of both worlds” off-shore jurisdiction with tax incentives is beginning to catch on.
What Are Acts 20 and 22?
In recent years, the government of Puerto Rico established new policies that set corporate income tax rates and individual tax rates which are significantly lower than they are on the U.S. mainland.
Two of these most significant “Acts”, Act 20 and Act 22, have recently celebrated their fifth anniversary since being passed.
Act 22, the “Individual Investors Act,” provides 100% exemptions on interest, dividends and certain capital gains to eligible applicants who become bona fide Puerto Rico residents. Act 22 offers great incentives for high net worth individuals who may wish to relocate to the island. Unlike other areas of the Caribbean with attractive tax structures, such as the Cayman Islands, when you become a resident of Puerto Rico you have the great benefits of the tax advantages, while living in paradise, and still maintaining all the benefits of your U.S. citizenship.
However, it is Act 20 that is attracting businesses to the island. Act 20, the “Export Services Act,” provides a reduced fixed corporate tax rate, as well as tax exemptions on dividends to eligible service-related businesses that are based in Puerto Rico.
These incentives are proving of particular interest to the internet sector, and or other “cloud based” service businesses, that already have created an “off shore” structure to minimize their tax obligations. Such a business could simply shift their current structure to Puerto Rico, and in doing so would avoid the heavy taxes that are levied whenever they repatriate money to the U.S.
The benefits under Act 20 include:
- A 4% corporate tax/fixed income tax rate
- 100% tax exemption on dividends
- 60% exemption on municipal taxes. Further, if your business relocates to a designated “industrial development zone” in Puerto Rico, you may be eligible for a 90% exemption on municipal taxes
- For certain expert service businesses, there is a 100% exemption on property taxes for the first 5 years, and then 90% exemption thereafter
- No federal taxes on Puerto Rico sourced income
- 20-year decree guaranteeing the above rates, which is renewable for a further 10 years if certain conditions are met – a possible 30-year lock in of these rates
How MBAF Can Help
If you are already operating the type of “service business” that can take advantage of the Act 20 incentives, or are intrigued by these opportunities, and are considering starting a business that could best take advantage of them, we have recently created a practice specializing in this area.
We have developed significant expertise in helping U.S. persons doing business in Puerto Rico, to best leverage the Act 22 incentives. We have created a unique team of bankers, lawyers and other tax professionals, who are all well familiar with Puerto Rico taxation, and how it impacts U.S. persons and business.
Understanding Act 20 and the other tax benefits of doing business in Puerto Rico can be very 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.