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Buyer's Guide: Tax Incentives


 
Few places on earth offer a return on investment the way Puerto Rico does. With an ever-growing array of services and emerging industries, part of your success will be directly attributable to the incentives available.
 
In order to bolster a diversified economy, the local government has created an aggressive economic and tax incentives program with the purpose of helping operations on the island become more profitable to those companies who establish themselves here.
 
Act 20
Enacted in 2012, along with Act 22, this tax incentive law aimed to boost the country’s economy by helping wealthy outsiders to make the transition to island life. Act 20 is more commonly known as the “Export Services Act”.
 
It is designed to provide incentives through low tax rates and exemptions for companies that wish to establish or expand export services in Puerto Rico. If you have a business and you are interested in providing services to outside markets from Puerto Rico, you may be eligible for incentives.
 
Qualifying services are many and varied. You may be eligible for tax incentives under Act 20 if you work in advertising and Publica Relations, research and development, engineering (of almost every stripe), accounting, computer software development, investment banking, or dozens of other fields. If you’re not sure whether you qualify, it’s probably best to speak to a lawyer or accountant to find out.
 
Under Act 20 you could enjoy benefits like a 4% corporate tax rate, as well as exemptions on property taxes, dividends, and profit distributions (100% exemption for those that qualify).
 
Act 22
This Act, known as the “Individual Investors Act”, went into effect at the same time as Act 20, which is why the two may seem similar at first glance. Both, for example, offer a 4% corporate tax rate and exemptions. However, Act 22 focuses less on business earnings and more on personal income.
 
In order to benefit from Act 20, you must establish or expand your business in Puerto Rico. To gain tax incentives under Act 22, you need only become a “bonafide” resident, meaning you’re in the country a minimum of 183 days out of the tax year, you don’t have a tax home outside Puerto Rico, and you don’t have a closer connection in any other country than you do in Puerto Rico.
 
As a resident, you will not be subject to U.S. federal income tax (even though it is a U.S. territory). If you’re deemed eligible for Act 22 incentives, you’ll also enjoy 100% exemption for capital gains, dividends, and interest income on all passive income earned after becoming a resident.
 
The idea is that the money you save on taxes will be reinvested into Puerto Rico’s economy. In other words, you get a tax haven and Puerto Rico gains access to your wealth not through taxes, but through your spending. 
 
Act 73
Enacted in 2008, Act 73 is also known as the “Economic Incentives for the Development of Puerto Rico Act”. The title may be long-winded, but the concept is simple: to provide tax incentives designed to develop local industry, drive economic growth, and encourage outside investments.
 
Eligible activities could include commercial manufacturing, recycling activities, hydroponic planting and cultivation, construction of sustainable communities, and more. There is also a diverse range of tax credits and exemptions linked to this Act.
 
DISCLAIMER
This article should not be regarded as offering a complete explanation of taxation and legal matters in Puerto Rico. No person, entity or corporation should rely on this article in whole or in part and readers are advised to obtain comprehensive advice in relation to their personal circumstances from a qualified professional person or firm of advisors prior to taking any action.