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 through a series of tax incentives: Act 20, to promote the Exportation of Services (the “Export Services Act”).
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 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 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
- 4% Fixed Income Tax Rate on Income related to export of services or goods
- 0% US Federal Income Tax
- 100% Tax Exemption on Income Tax Rate from dividends or profit distributions
- 100% Tax exemption on Excise Tax and sales and use tax
- 100% real property taxes
- 60% tax exemption on municipal license taxes
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 are 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
- Research and development
- Advertising and public relations
- Commercial arts and graphic services
Consulting & Advisory Services
- Human resources
- Information and audit consulting
- Consulting on matters relating to any trade or business
- Educational and training services
Architectural & Engineering
- The production of construction drawings
- Architectural services
- Engineering services
- Project management
- Centralized management services
- Corporate headquarters
- Electronic data processing centers
- Development of computer programs
- Call centers voice and data telecommunications between persons located outside of Puerto Rico
- Shared services centers (“shared services”) including but not limited to, accounting
- Finance, taxes, auditing, marketing, engineering, quality control, human resources
- Communications, electronic data processing and other centralized management services
- Hospital and laboratory services
Distribution & Logistics
- Storage and distributions centers (“hubs”)
- Investment banking
- Other 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.
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 is 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:
- Business plan / Eligible Services Description – in essence, a detailed description of what the company will provide. (We can help prepare a detailed business plan)
- Financial Projections – detailing not only the pro forma revenues, but expenses in detail, specifically payroll and employment generation
- Curriculum vitae – resume of the all shareholders
- Organizational chart – describing the corporate governance and structure
- Shareholder background check – for each of the shareholders
- Other requirements, as per the OECI’s request
The tax incentive application fee is $750.00 USD. Once granted the tax decree, the business, annual reports must be filed 30 days after the filing of the Puerto Rico Corporate Income Tax Return is filed.