Understanding Puerto Rico
Business Tax Advantages
Starting a business and paying taxes in Puerto Rico can be very similar to operating in a typical US state. Since Puerto Rico is a US territory, you still pay tax to the IRS (and what amounts to a state tax) to Puerto Rico.
In 2012, however, Puerto Rico enacted legislation to make emigration from the US to Puerto Rico more attractive for business owners: Act 20, the Export Services Act, and Act 22, the Individual Investors Act. Seven years later, the Puerto Rico Incentives Code Act was passed, updating Acts 20 and 22 into a single consolidated Act 60-2019. This act significantly eases taxes on qualifying individuals and businesses that relocate to Puerto Rico.
To implement a Puerto Rico tax strategy and move some or all of your business interests to the island, you’ll need to work within the bounds of the Puerto Rico Incentives Code. Here you’ll find an overview of the act and how it is utilized by investors and business owners.
Act 60 for Individuals
Act 60 provides significant tax benefits for qualifying individuals. These include the following:
- 100% tax exemption from Puerto Rico on all income taxes on Puerto Rico-sourced dividends, interest, capital gains and cryptocurrency.
- Additionally, residents of Puerto Rico automatically avoid federal US taxes on income derived from Puerto Rico (there is “no taxation without representation” and Puerto Rico has no US representatives).
The intent of Act 60 is to attract individuals with a lot of money. However, there is a catch: you must become a qualifying Puerto Rico resident, which is not a simplistic prospect. Act 60’s requirements include having bonafide Puerto Rico resident status, which in turn requires passing a presence test in the territory.
Act 60 individual requirements
- You may not have been a resident of Puerto Rico at any point during the previous 10 years before relocating.
- You must make two $5,000 donations annually to qualifying nonprofits operating within Puerto Rico, which must not be owned or operated by the donor or a family member.
- You must also file an annual report to stay compliant with Act 60, along with a $5,000 annual fee.
- Within two years, you must purchase residential property in Puerto Rico.
- You must qualify as a bonafide resident of Puerto Rico.
Puerto Rico bonafide resident requirements
People living Puerto Rico must meet all the following qualifications to be considered a legally bonafide resident.
- Have no tax home outside of Puerto Rico for the taxable year.
- Have a closer connection to Puerto Rico than any other country including the United States (methods of demonstrating this include buying property in Puerto Rico, obtaining a local drivers license and voter registration, and relocating your family and possessions there).
- Pass the qualifications for a presence test during the tax year.
Presence test requirements
You must meet at least one of the following conditions to pass a presence test in Puerto Rico:
- Be present in Puerto Rico for at least 183 days of the current tax year
- Have been present in Puerto Rico for at least 549 days of the last three tax years (including the current one), and present for at least 60 days of each year.
- Have been present in the US for 90 days or less during the tax year
- Have been present for more days in Puerto Rico during the tax year than in the US, while making a maximum of $3,000 in earned income (such as wage, salary or professional fees) in the US.
- Have no significant connection to the US during the tax year.
After jumping through those hoops, you can enjoy your freedom from federal income tax and the array of benefits you’ll get from the Act 60 tax decree.
However, while Act 60 can be extremely useful for an individual set on lower the tax rates for their investment income, becoming a resident with closer ties to Puerto Rico than the US is impractical for many people. In addition, if you qualify for Act 60, the agreement is seen as a contract between you and the Puerto Rico government and cannot be undone or altered by legislation until 2035.
Act 60 for Businesses
Act 60 also aims to attract businesses which will then export their goods and services to states, territories and countries outside of Puerto Rico. The Act doesn’t help businesses to avoid taxes on services offered to residents of Puerto Rico, only on services offered from Puerto Rico to those not living in Puerto Rico.
In short, a business in Puerto Rico would not qualify for any tax incentives under Act 60 for income gained from sources within Puerto Rico, but that same business can qualify for tax incentives on its income from sources beyond Puerto Rico’s borders.
If you are interested in moving your business to Puerto Rico, Northwest offers Puerto Rico registered agent service, plus Puerto Rico foreign LLC and Puerto Rico foreign corporation services. Bear in mind, though, you will need the help of a competent tax attorney if you decide to start doing business in Puerto Rico for tax purposes.
Act 60 business tax benefits
- Fixed income tax rate of 4% on export services income
- 100% tax exemption from Puerto Rico on dividends and benefits distributed out of export services income
- Up to 50% back in transferable tax credits on research and development expenses
- 50% property tax exemption on both real and personal property taxes (100% exemption during the first five years for companies with a business volume under $3 million)
- Up to 75% off select municipal taxes, including 50% off municipal license taxes (companies with a business volume under $3 million also receive 100% exemption from municipal license taxes for five years)
The standard tax exemption grant period lasts for 15 years, with the potential for an additional 15 year extension.
Act 60 Business Requirements:
A business seeking Act 60 benefits must meet the following qualifications.
- Employ at least one Puerto Rico resident full-time, who meaningfully participates in business activities.
- Must provide services in Puerto Rico for customers outside of Puerto Rico, there can be no business nexus with Puerto Rico itself.
- The business can not have had prior dealings or nexus with Puerto Rico before qualifying.
- The business must be a Puerto Rico business. It can’t be incorporated in Wyoming and registered as a foreign corporation in Puerto Rico with no real physical presence. The business must be physically located in Puerto Rico. So, if your business is already in existence, you must move it to Puerto Rico.
In addition to these requirements, Puerto Rico has specified which categories of export service businesses are eligible to apply for Act 60.
- Research and development
- Advertising and public relations
- Consulting services (including economic, scientific, environmental, technological, managerial, marketing, human resources, computer, and auditing consulting services)
- Advice services on matters related to any trade or business
- Creative industries
- Production of blueprints, engineering, and architectural services, and project management
- Professional services such as legal, tax, and accounting services
- Centralized managerial services (including strategic direction, planning, and budgeting)
- Electronic data processing centers
- Computer software development
- Telecommunications voice and data between persons located outside of Puerto Rico
- Call centers
- Shared service centers
- Storage and distribution centers
- Educational and training services
- Hospital and laboratories services (including telemedicine facilities and medical tourism 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 coverage funds or high-risk funds, management of pools of capital, trust management that serves to convert different groups of assets into securities, and escrow account management services
- Commercial and mercantile distribution of products manufactured in Puerto Rico for jurisdictions outside Puerto Rico
- Assembly, bottling, and packaging operations of products for export
- Trading companies
- Blockchain-related services
Act 60 Tax Exemption Decree Application
Businesses and individuals seeking tax exemptions under Act 60 can submit an application for a contract with the Government of Puerto Rico through the Single Business Portal. Individuals who apply and are approved must supply a one-time $5,000 fee that benefits a Puerto Rico relocation fund.
You may need the help of a professional to complete the application. Puerto Rico has many CPA and tax attorney firms that would love to help you.
Why Puerto Rico Tax Strategy Appeals to US Citizens
As a US territory, Puerto Rico provides these simple benefits to investors and business owners moving to Puerto Rico:
- As a US Citizen, you can just move to Puerto Rico and become a resident without changing, altering, or renouncing citizenship status.
- You don’t have to pay a 23.8% exit tax on unrealized capital gains (things like stock and property that you own but haven’t sold yet)
That’s a much sweeter deal than having to give up citizenship and pay a big tax right off the bat.
Can I move my company to Puerto Rico for Act 60, but keep my primary residence in the US?
You certainly could base your company in Puerto Rico and keep the US territory as its home base, but without individual residence in Puerto Rico, the deal gets much saltier.
Puerto Rico residents have no representation by the US government, so even though they have US citizenship, they are not taxed by the IRS on income derived from sources in Puerto Rico. That makes being a resident there so tempting. You remain a US citizen, yet are not taxed on your income by the federal government because the source of income is from your business in Puerto Rico.
If you only move your company, though, you’ll be paying the federal government their fair share of your Puerto Rico-sourced income on your personal tax return. But the island of Puerto Rico will still give you all the same breaks. So, if you only move your company, you would have to think of Puerto Rico as your state. Their state corporate tax rate and incentives would be really nice, but your federal income taxes won’t change.
In short, unless your state has a high corporate tax rate, it may not be fiscally prudent to move your company to Puerto Rico if you’re not moving with it.