Incentives for Export Services and Resident Individual Investors in Puerto Rico
For decades, the Government of Puerto Rico has offered aggressive incentives to businesses within certain industries that select to establish operations in Puerto Rico, making the island an excellent environment for business. In 2012 the Government of Puerto Rico enacted a number of statutes to foster the economic development of the island by attracting income from foreign sources. Two of the enacted statutes are Act No. 20 of January 17, 2012 (“Act 20“), known as the Act to Promote Export Services, and Act No. 22 of January 17, 2012 (“Act 22“), known as the “Act to Incentivize the Transfer of Investor Individuals to Puerto Rico”.
The purpose of Act 20 is to develop Puerto Rico as an international export services center through encouraging local businesses to expand their services outside the Island and to promote the development of new businesses.
The benefits under Act 20 include:
- 4% flat income tax rate
- 100% tax exempt distributions from earnings and profits
- 60% exemption on municipal license taxes
- Up to 100% exemption from property taxes during the first five years of operations
In order to be eligible for the incentives available under Act 20, an entity must have a bona fide office or establishment in Puerto Rico that provides or offers an eligible service, as such terms are defined in Act 20. Eligible services include corporate headquarters, professional services (such as legal, tax and accounting), electronic data processing centers, consulting (including economic, environmental, technological, scientific, management, marketing, human resources and audit), research and development, production and construction of drawings, architectural and engineering services and project management, storage and distribution centers, educational and training centers, and investment banking and financial services.
An eligible service must also qualify as either a service for export (services performed for non-resident and/or foreign entities that have no nexus to Puerto Rico) or a promoter service (services rendered to non-residents and/or foreign entities related to the establishment of new businesses in Puerto Rico).
The service provider must request and obtain a tax exemption grant to enjoy the benefits of Act 20 and said grant will have a term of 20 years. A grant is considered to be in the nature of a legally binding contract between the grantee and the Government of Puerto Rico.
At 22 has the purpose of attracting persons who have not been residents of the island to relocate and establish their residence in Puerto Rico.
Benefits under Act 22 (as recently amended) include:
- All interest and dividend income (including interest and dividends earned indirectly through Authorized Investment Companies or International Banking Entities) earned by a Puerto Rico Resident Investor during the Tax Exemption Period will be 100% exempt from all Puerto Rico income taxes.
- The Capital Gains realized during the Tax Exemption Period by a Puerto Rico Resident Investor that are attributable to the increase in value of securities occurring during the Tax Exemption Period will be 100% exempt from all Puerto Rico Income Taxes.
- The Long Term Capital Gains realized by a Puerto Rico Resident Investor after ten (10) years of the establishment of residency in Puerto Rico (but on or before December 31, 2035) that are attributable to the increase in value of securities occurring prior to the Tax Exemption Period will be subject to a 5% tax in lieu of any other Puerto Rico Income Taxes.
In order to be eligible for the benefits available under Act 22, the individual must be an investor that has not been a resident of Puerto Rico, as this term is defined by the Internal Revenue Code for a New Puerto Rico of 2011, at any time during the fifteen (15) year period ending on January 17, 2012 and that become residents of Puerto Rico, on or before December 31, 2035 (“PR Resident Investors“).
The tax incentives provided by Act 22 will apply to the period beginning on the date on which the individual investor becomes a PR Resident Investor, and ending on December 31, 2035 (the “Tax Exemption Period”). The individual investor must request and obtain a tax exemption grant to enjoy the benefits of Act 22. This notice only discusses the Puerto Rico taxes applicable to the PR Resident Investors. Individuals that are citizens or permanent residents of the United States must consider whether any federal taxes will apply under the U.S. Internal Revenue Code of 1986, as amended.
These laws, in addition to other incentives offered by the Government of Puerto Rico (such as the Puerto Rico Economic Incentives Act, which provides incentives for the industrial sector, the Puerto Rico Tourism Development Act, the Puerto Rico Film Incentives Act, to mention a few), provide an attractive environment for businesses in multiple sectors. To further discuss or obtain additional information on eligibility or how to apply for the benefits here discussed, please feel free to contact us at your convenience.
Last update: May 31, 2013