Act 20 – Puerto Rico Tax Incentives on Services And Trading

Overview of Puerto Rico Act 20 Tax Incentives

The Legislature of Puerto Rico approved the Act 20 Puerto Rico Tax Incentives Law to promote the economic development of Puerto Rico. The Export Services Act, Act 20, promotes the Exportation of Services.

Puerto Rico operates as a Foreign Tax Structure, where federal income taxes do not apply. It works under a Controlled Foreign Corporation (CFCs) tax treatment, in which federal income taxes defer until repatriation of profits occurs.

Every tax incentive granted constitutes a contract with the government of Puerto Rico that is legally guaranteed and protected by United States law and will be unaffected by any future legislation.

Purpose of Puerto Rico Tax Incentives

Puerto Rico has created an aggressive incentive program to connect with the global economy in order to establish an ever-growing array of service industries and to establish Puerto Rico as an international service center hub.

Puerto Rico seeks to attract outside service entities through tax incentives that encourage investors to relocate to the Island for the purposes of stimulating economic growth and social improvement.

Puerto Rico’s Act 20 also seeks to encourage local service providers to expand their services to persons outside Puerto Rico and promote the development of new businesses in Puerto Rico.

Act 20 Puerto Rico Tax Incentives

The 20-year tax government decree, renewable for an additional ten-year period, allows 100% property tax exemption for the first five years of operation for certain export services including: corporate headquarters, call centers, shared service centers for accounting, finance, marketing, human resources, and other centralized management services. After the 5-year period expires, a 90% tax exemption will apply for the remainder of the Tax Exemption Decree.

In the case of service promoters, only the net income derived from Eligible Services performed within the 12-month period ending on the day preceding the day the new business is eligible.

Puerto Rico Taxes Eligibility

Act 20 applies to any entity with a bona fide establishment in Puerto Rico that is engaged in an eligible service for export. Available services include but are not limited to:

Trading Hub Medical & Research

Creative Services

Consulting & Advisory Services

Architectural & Engineering

Professional services

Service Centers

Distribution & Logistics

Financial Services

An Eligible Service must qualify as either a service for exportation or a promoter service. Services for exportation are services performed for non-resident individuals and foreign entities that have no nexus with Puerto Rico, which means that the eligible service is not, and will not be, related to the conduct of trade, business, or other activity in Puerto Rico. Promoter services are services rendered to non-resident individuals and foreign entities related to the establishment of a new business in Puerto Rico, as defined by the Export Services Act.

Tax Exemption Decree

An eligible service provider is required to obtain a Tax Exemption Decree that will endure for a term of 20 years and may be renewed for an additional 10 years. The Tax Exemption Decree constitutes a contract between the service provider and the Government of Puerto Rico and will be unaffected by any future legislation.

Employment Requirement

Please note that Act 20 was recently amended, and any new business applying for Act 20 must comply with a minimum of 5 full-time employees (FTE) for the period of the grant, for which the company should be in compliance before the end of the 6th month after starting its operation. FTE are employees who work 2,080 hours a year, including paid time off. 5 FTEs are equal to 10,400 hours. If the company needs to recruit part-time employees, in order to qualify for this requirement, he/she must at least work 1,040 (50%) hours or more.

Tax Act 20 Application

In general terms, the Puerto Rico Act 20 tax incentive application requires the following documents:

The tax incentive application fee is $750.00 USD. Once granted the tax decree, the business, must file annual reports  30 days after the filing of the Puerto Rico Corporate Income Tax Return.

Learn more about other Puerto Rico Tax Incentives