Act 60 of 2019 known as Tax Incentive Code, provides tax exemptions to businesses and investors that relocate to, or are established in, Puerto Rico. With proper tax planning and preparation, qualifying individuals can significantly reduce their tax liability to nearly zero on income and assets generated and acquired once becoming Puerto Rican residents.
- Under Internal Revenue Code §933, Puerto Rico source income is excluded from U.S. federal tax. U.S. tax code Section 933 allows a “bona fide” resident of Puerto Rico to exclude Puerto Rico-source income from his or her U.S. gross income for U.S. tax purposes.
- Qualifying residents have 100% tax exemption from Puerto Rico taxes on dividend and interest income, as well as long-term capital gains accrued after becoming a resident.
- U.S. source income is still subject to U.S. taxes at their regular rates, but Puerto Rico source income for the individual may be taxed at 0% for Federal and Puerto Rico income tax purposes, including interest and dividends from sources in Puerto Rico, as well as capital gains.
- A bona fide resident of Puerto Rico is an individual who:
- Presence Test – Is physically present in Puerto Rico for at least 183 days during the taxable year;
- Tax Home Test – Does not have a tax home outside of Puerto Rico during the taxable year; and
- Closer Connection Test – Does not have a closer connection to the United States or a foreign country than to Puerto Rico.
- If the bona fide resident owns an entity by which it conducts business in Puerto Rico, this is considered a “possession corporation” by the resident, and the dividend paid to that individual will be taxed at 0%. U.S. source income, however, will be taxed at ordinary federal rates.
- For realized but unrecognized capital gains from prior to becoming a resident, the individual may enjoy a 5% Puerto Rico tax rate on said capital gains, if they are recognized after 10 years of residency. However, if the unrecognized gain is US-sourced, it will still be taxable in the US.
- In order to obtain these benefits, the individual investor must request and obtain a decree of tax exemption. Act 60 provides that the decree will be a contract between the individual and the Government of Puerto Rico, which cannot be modified unilaterally.
- Individual Investors must meet, among others, the following requirements:
- Make an annual donation of at least $10,000 to local nonprofits not owned by the resident, certified under P.R. law.
- Purchase real property in Puerto Rico for use as principal residence, within 2 years
- File an Annual Report with a filing fee of $5,000.
- The individual cannot have been a resident of Puerto Rico for at least 10 years prior
- Additionally, the individual must fill out the I.R.S. Form 8898 – Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession.
Exportation of Services
Act 60 of 2019 known as Tax Incentive Code, provides tax exemptions to businesses and investors that relocate to, or are established in, Puerto Rico. Chapter 3 of Puerto Rico’s Act 60 of 2019 for Exportation of Services offers a great mechanism for reducing income taxes and obtaining exemptions from property, municipal and dividend taxes for income generated and property employed by companies exporting services from Puerto Rico.
A U.S. citizen who becomes a bona fide Puerto Rico resident and relocates his/her business(es) to Puerto Rico, may enjoy incentives for their business, such as: (1) 4% corporate tax/fixed income tax rate; (2) 100% exemption on property taxes; (3) 100% exemption on dividends from export services. An “eligible service” is defined as one which: (1) Has a bona fide office in Puerto Rico; (2); Performs services for non-resident or foreign entities without nexus to Puerto Rico, and; (3) Does not conduct of trade, business or other activity in Puerto Rico.
- The types of services that may be eligible are:
- Research and development;
- Advertising and public relations;
- Consulting (Economic, environmental, technological, scientific, marketing, human resources, computer);
- Creative Industries – design (graphic, industrial, fashion, and interior design); arts (music, visual, performing, publishing); media (apps, video games, online, digital); creative services (architecture and creative education);
- Construction plans; engineering, architectural, project management;
- Legal, tax and accounting services;
- Data processing;
- Computer programming;
- Call centers;
- Centralized management services (accounting, finance, tax, auditing, marketing, engineering, quality control, human resources, communications, electronic data processing);
- Hospitals and laboratory services;
- Investment banking and other financial services;
- Any other service that the Secretary deems must be eligible for being in the best interest for the social and economic wellbeing of Puerto Rico.
- Generally, businesses with over $3 million in annual volume are subject to an income tax rate of 4% of net income derived from the exempt operation (i.e. services exported outside of P.R.); and a 75% exemption from personal and real property taxes. If the volume is $3 million or less, the income tax is 2% for five years, and 4% after that.
- Dividends or profits generated by the exempt operation are fully exempt from Puerto Rico income tax.
- Municipal taxes for businesses with a volume of over $3 million is 50%; for those with a volume of $3 million or less, they are 100% exempt during the first five years, and 50% after that.
- Businesses with an annual volume over $3 million, must employ at least one full-time employee resident of Puerto Rico, who can be the same owner/employee. Businesses with an annual volume of $3 million or less are not required to employ a P.R. resident.
- The exemption period lasts 15 years, and can be extended for 15 more.
- To obtain the benefits of this Chapter, the business must request and obtain a decree of tax exemption, which is a contract between the business and the Government of Puerto Rico.