Puerto Rico offer unique tax incentives
Puerto Rico’s unique status as one of five U.S. territories (‘possession’ in the IRS code) allows it to offer unique tax incentives. Without getting into the questions about whether Puerto Rico should be a territory (or a state or independent), it’s worthwhile to understand the implications of its status.
As residents of a territory of the U.S., Puerto Ricans are American citizens but do not have the right to vote in federal elections and do not have congressional representation. And since there can be no taxation without representation, Puerto Rico does not pay federal taxes. Instead, Puerto Rico has its own tax code and the IRS has special rules that apply to Puerto Rico.
Within this framework, Puerto Rico is able to make its own taxation laws for bona fide residents and companies operating from Puerto Rico. The government of Puerto Rico has taken this opportunity to create the Act 20 and 22 tax incentives, among other tax incentives and economic development initiatives.
How can I benefit from this?
The possibility of paying less tax appeals to everyone but the tax incentives were created to spur economic development so it’s not simply a matter of visiting the island and paying less in taxes. You need to meet the requirements established in the laws for Act 20 & 22 as well as the IRS regulations for moving to Puerto Rico.
One of the key factors for both Act 20 and 22 is residency. The easiest approach is to become a bona fide resident, living on the island for the majority of the year and earning your income in Puerto Rico. However, there’s flexibility in this depending on whether you’re Act 22, Act 20, or both and you’ll want to work with a trustworthy tax consultant on the specific details and structure that’s right for you.
Act 20 – For Export Service Companies
Who it applies to:
- Export services that are rendered from Puerto Rico to elsewhere in the world
- 4% corporate tax / fixed income tax rate
- 100% tax exemption on dividends for non-Puerto Rico shareholders
- 60% exemption on municipal taxes
- 100% exemption on property taxes for the first 5 years, and 90% exemption thereafter
- Services must be performed from Puerto Rico
- You may be required to hire employees in Puerto Rico based on your specific business. There is no set minimum number of employees anymore (new July 2017)
- Open a bank account in Puerto Rico
Act 22 – For Bona Fide Residents
Who it applies to:
- Individual Investors
- Those moving to Puerto Rico and were not residents for the 6 years leading up to January 2012
- Often includes owners of Act 20 companies
- 100% tax exemption on Puerto Rico-sourced dividends
- 100% tax exemption on Puerto Rico-sourced interest
- 100% tax exception from Puerto Rico income taxes on all short-term and long-term capital gains accrued (after establishing residency)
- Become a bona fide resident of Puerto Rico
- Buy property within 2 years
- Open a bank account in PR
- Donate $5,000 annually to a non-profit in Puerto Rico
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