Understanding Act 20 and Act 22

In 2012, the Puerto Rico government established two laws to increase foreign investment in the island. They are known as Acts 20 and 22 and are geared toward two different investors.  

 

Act 20, The Export Services Act, was created to encourage service-industry companies, such as financial services, consulting services and call centers, to conduct business out of Puerto Rico, providing a reduced corporate tax rate as well as exemptions on dividends to eligible service-related businesses in Puerto Rico. 

 

Benefits:

  • 4% corporate tax / fixed income tax rate
  • 100% tax exemption on dividends
  • 60% exemption on municipal taxes. If the business sets up shop in the designated “industrial development zone” location in Puerto Rico, you may be eligible for a 90% exemption on municipal taxes
  • 100% exemption on property taxes for the first 5 years, and then 90% exemption thereafter. Only certain export service businesses services are eligible.
  • No federal taxes on Puerto Rico source 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

Requirements:

  • The business must provide qualifying services (see the list of qualifying services below), from Puerto Rico, to recipients outside of Puerto Rico.
  • These services are commonly provided by a new local LLC or Corporation.
  • The owner must receive a reasonable salary based on the services provided to the business.
  • The business must file an annual report including information such as applicable permits, certifications, licenses and registrations.
  • Your decree may require hiring local employees, however the number depends on your specific business.

Business Services That are Eligible:

  • 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
  • Creative industries
  • 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 licensable 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
  • 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
  • Commercial and mercantile distribution of products manufactured in Puerto Rico for jurisdictions outside Puerto Rico
  • Assembly, bottling and packaging operations of products for export
  • Marketing centers
  • Trading companies
  • Telemedecine
  • Medical Tourism
  • Any other service designated by the Secretary of the Department of Economic Development and Commerce of Puerto Rico.

View the Act 20 application here.

 

Act 22, The Individual Investors Act, was established to lure wealthy individuals to move to the island, providing 100% exemptions on interest, dividends and certain capital gains to eligible applicants who become bona fide Puerto Rico residents.  The idea is to stimulate the economy with real estate investments, job creation, and general use of local services while stimulating the banking sector with capital.

 

Why Puerto Rico?

Unlike other “tax shelters,” like the Cayman Islands, when you become a resident of Puerto Rico you maintain your U.S. citizenship. In addition, you are not required to pay a painful 23.8% exit tax of your unrealized capital gains.  Even though Puerto Rico is a U.S. territory, Section 933 of the Internal Revenue Code of the United States of 1986 (the “US Code”), determines bona-fide residents are exempt from federal tax.  By becoming a Puerto Rico resident, they are only subject to federal income taxes on income derived from sources outside of Puerto Rico.

 

Benefits

  • 100% tax exemption from Puerto Rico income taxes on dividends
  • 100% tax exemption from Puerto Rico income taxes on all interest
  • 100% tax exception from Puerto Rico income taxes on all short-term and long-term capital gains accrued (after establishing residency)
  • In addition, by investing through certain investment vehicles like Trusts, the tax rate applied on interest and dividend capital gains income may be reduced to 0% or 10%, respectively, if it is coming from sources outside of Puerto Rico

Requirements

  • Become a bona fide resident on or before the taxable year ending December 31, 2035
  • You must not have been a resident of Puerto Rico 6 years prior to the effective date of the Act, January 17, 2012.
  • You must be present on the island at least 183 days or half the taxable year
  • You must not have a primary tax home outside of Puerto Rico
  • You are required to purchase residential property in Puerto Rico within 2 years of residency
  • You must show evidence of primary business and personal bank accounts in PR
  • You need to satisfy several closer connection guidelines

View the application for Act 22 here.

 

We at Isla Vida Real Estate are happy to answer any questions about purchasing real estate in Puerto Rico, and can recommend tax and legal advisers to help you take advantage of these laws, contact us today!