Established in 2012, Puerto Rico’s Act 20 promotes the exportation of services from the US territory. The purpose is to attract foreign capital and professionals from the United States and abroad, all the while positioning Puerto Rico as an internal service center. Here’s a summary of Puerto Rico’s Act 20.
By providing exponentially reduced tax rates compared to it’s big brother, the Department of Economic Development of Puerto Rico feels that Act 20 leverages the island’s status as a territory, IRC 933, and facilitates the creation of jobs, island investment and companies.
Puerto Rico’s Act 20 allows you to set up an office in Puerto Rico, which will export services from the island to persons and companies located outside of Puerto Rico.
Puerto Rico’s Act 20 comes with a 20 year tax decree that guarantees you a 4% corporate rate on any export service income earned from work on the island.
As part of our service we can offer assistance with the filing application for the tax decree, moreover IRS compliance strategies, Hacienda compliance, feasibility study and business plans.
Puerto Rico’s Act 20 Tax benefits:
- 4% Maximum Corporate Rate (Fixed)
- 100% exemptions on Dividend and Distribution for PR Residents
- 60% Exemption on municipal gross receipts tax
- 4% Tax rate applicable to specific investment income
- Exemptions guaranteed for 20 years, renewable for 10 more if condition are met.
- 90% Exemption from property tax (100% exemption during the first 5 years, in the case of certain eligible services)
List of eligible export service:
- Research and development;
- Advertising and public relations;
- Consulting services, including, but not limited to, economic, scientific, environmental, technological, managerial, marketing, human resources, computer and auditing consulting services; Advisement on matters of any industry or business;
- Creative industries defined as any business with the potential to create jobs and income, principally on exportation of good and services in the following sectors: Design (graphic, industrial, fashion, interior) Art (music,visual art, performing arts, publications) Media (app development, video games, online media, digital content and multimedia) Creative Services (architecture and creative education);
- Production of blueprints, architectural and engineering services, and project management;
- Professional services such as legal, tax and accounting services;
- Centralized management services, including, but not limited to, strategic direction, planning, distribution, logistics and budgetary services carried out by the headquarters or similar regional offices of an entity engaged in rendering such services;
- Centers for electronic data processing;
- Development of computer software;
- Voice and data telecommunications between persons located outside of Puerto Rico;
- Call centers;
- Shared services centers, including, but not limited to, accounting, finance, tax, auditing, marketing, engineering, quality control, human resources, communications, electronic data processing, and other centralized management services;
- Storage and distribution centers of businesses dedicated to transportation of products and articles pertaining to third parties, also known as hubs;
- Educational and training services;
- Hospital and laboratory services;
- Investment banking and other financial services, including but not limited to, asset management, management of investment alternatives, management of activities related to private capital investment, management of hedge funds and high risk funds, management of pools of capital, management of trusts that serve to turn different types of assets into stocks, and management of escrow accounts;
What’s the catch?!? Or rather requirements for Puerto Rico’s Act 20:
The Company applying for act 20 must have at least 5 full time employees. The Act 20 Company will have 2 years starting on the date the business begins operating to hire these people, with firms usually hiring 3 to start and then adding 2 more.
Only employees (full time, part time, and temp) shall be counted on this requirement. Independent contractors do not count toward the requirement.
If you hire temporary workers, the total amount of full time employees maintained by the Company should be computed by dividing the total amount of hours worked by all employees during each taxable year over 2,080 hours, which resulting amount is considered the number of full time equivalents.
No Nexus to Puerto Rico for an Act 20 company
The company’s eligible activity must not be related to the conduct of business inside of Puerto Rico (if receivable transactions are serviced to a PR based client then there is a nexus). The purpose of this no nexus clause is to allow companies to develop on the island without depleting the existing local markets, by surplusing the local economy with “new money”.
But wait there’s more:
Puerto Rican residents don’t pay US federal taxes on Puerto Rico sourced income. If income is determined to be non PR-sourced, then regular rates on apply in sourced income.
Also, if the company decides to hire non PR Residents, then tax rates depends on:
- services performed (what the company did, if can be considered an eligible service)
- company sourcing (where did they perform it from, inside PR or abroad)
- the active residency (if who did the work is a bona-fide resident)\ if not then separate tax rate do apply
In most cases, a Puerto Rican resident is any US citizen living in Puerto Rico and spending a minimum 183 days a year on the island. Any US citizen can become an employee, they don’t need to have previously resided on the island.
Remember that anyone born in Puerto Rico is a US citizen. Travel between Puerto Rico and the US mainland is a domestic flight with no immigration controls.
The reason for Puerto Rico’s Act 20 is to bring employment to the island. It seems to be working as some very large businesses have moved to the territory.
If you would like to compare Puerto Rico’s Act 20 to the tax incentives available to offshore businesses, see: Panama vs Puerto Rico, which is right for your business?
For more information, or to speak with us about moving your business to Puerto Rico, you can reach me at (619) 550-2743 or at email@example.com. All consultations are free and confidential.