Puerto Rico has become increasingly appealing to U.S. citizens looking to live and work in a tax-friendly environment, thanks to its unique tax incentives. These benefits have spurred a growing interest among businesses and individual investors. Puerto Rico’s Act 60 incentives, evolving from Act 20 and Act 22, have been a key tool for economic development.
To fully grasp the impact of Act 60, it is essential to understand its historical roots and the legislative journey from the consolidation of Acts 20 and 22, among others, to the current Act 60.
Historical Context: From Act 20/22 to Act 60
Acts 20 and 22 were introduced in 2012 with the aim of transforming Puerto Rico into a competitive global business hub. Act 20 focused on tax incentives for businesses exporting services, while Act 22 offered significant tax benefits to individual investors relocating to Puerto Rico. These acts were part of a broader strategy to revive Puerto Rico’s economy, which had been struggling with recession and fiscal challenges.
Recognizing the success of these initiatives but also aiming for a more streamlined and comprehensive approach, the Puerto Rican government enacted Act 60 in 2019. Act 60 consolidated and expanded upon the tax exemptions and other benefits of Acts 20 and 22, creating a more cohesive framework for economic incentives.
Tax Benefits in Act 60
Act 60 offers a wide array of tax benefits designed to attract both individual investors and businesses to Puerto Rico, driving economic growth and development.
Benefits for Individuals:
-
Tax Exemption: Individual investors can enjoy a 100% tax exemption on interest, dividends, and capital gains, resulting in substantial tax savings (White Coat Investor).
-
Lifestyle: Living in a tropical paradise with modern amenities and a lower cost of living compared to many mainland U.S. locations.
Benefits for Businesses:
-
Reduced Corporate Tax: Eligible businesses benefit from a 4% corporate tax rate, significantly lower than the U.S. federal corporate tax rate.
-
Job Creation Incentives: Businesses can take advantage of incentives designed to encourage job creation and economic activity.
-
Operational Costs: Lower operational costs due to favorable tax conditions and potential subsidies for certain sectors like manufacturing and renewable energy. (Clear Ocean Group)
Considerations for Federal and Puerto Rico Income Taxes
For US citizens, the tax benefits offered by Puerto Rico’s Act 60 can be quite appealing, especially if they can qualify as bona fide residents of Puerto Rico. However, understanding the specific requirements and implications is essential to determine whether the move is worthwhile.
The Concept of a Bona Fide Resident of Puerto Rico
The US Internal Revenue Code (IRC) generally taxes US citizens on all of their global income. However, Section 933 of the IRC provides an important exception for residents of Puerto Rico. According to this provision, individuals who are bona fide residents of Puerto Rico for an entire taxable year receive a tax exemption from federal income taxes on Puerto Rico source income. This tax exemption does not extend to federal employees, but for others, it can result in significant tax savings.
To take advantage of the tax exemption, two key criteria must be met:
1. Bona Fide Residency: The individual must qualify as a bona fide resident of Puerto Rico for the entire taxable year under US IRC guidelines.
2. Puerto Rico Source Income: The income must be sourced from within Puerto Rico as defined by the IRC.
Popular Tax Exemptions from Act 20 and Act 22
Export Services under Act 60 (formerly Act 20)
Act 60 provides significant incentives for service-based businesses that export their services from Puerto Rico, continuing the legacy of Act 20.
Incentives for Export Services:
-
Corporate Tax Rate: Eligible service businesses benefit from a reduced corporate tax rate of 4%.
-
Dividends: Distribution of earnings and profits are 100% tax-exempt to non-Puerto Rican resident shareholders.
-
Service Types: Qualifying services include financial services, consulting, professional services, call centers, research and development, and more.
Individual Investors Under Act 60 (formerly Act 22)
Act 60 offers powerful incentives for individual investors looking to relocate to Puerto Rico, building on the benefits previously available under Act 22.
Incentives for Individual Investors:
-
Tax Exemption on Passive Income: Bona fide residents of Puerto Rico are eligible for a 100% exemption on local income taxes for dividends, interest, and certain capital gains earned after establishing residency.
-
No Federal Income Tax on Puerto Rico-Sourced Income: Under Section 933 of the U.S. Internal Revenue Code, income sourced from Puerto Rico is exempt from federal income taxes for bona fide residents, offering a significant tax advantage.
-
Long-Term Stability: The benefits provided under Act 60 are secured through a tax exemption decree, ensuring long-term tax relief even if future laws change.
Additional Tax Benefits Under Act 60
Puerto Rico’s incentives aim to attract high-value service businesses to the island, creating jobs, fostering innovation, and contributing to the island’s economic development. These businesses can significantly lower their tax burden by establishing operations in Puerto Rico while benefiting from a skilled workforce and strategic location.
Puerto Rico’s government has enacted a host of other incentives under Act 60 in addition to the popular Individual Investors and Export Services programs. This is in an effort to attract a variety of businesses such as storage and distribution centers, electronic data processing centers, voice and data telecommunications, laboratory services, and many more that the island needs more of.
Act 60 – International Financial Entities: Chapter 4 of Act 60 offers specific benefits to businesses engaged in eligible financial activities within Puerto Rico.
Act 60 – Private Equity Funds: Also within Chapter 4, Act 60 provides a framework for private equity funds, allowing investors to deploy capital with limited personal liability and enjoy various tax benefits, including exemptions, deductions, and fixed income tax rates. These funds cater to investors who qualify as “Accredited Investors” under Act 60.
Act 60 – Tourism Incentives: Chapter 5 of Act 60 incentivizes the tourism industry, promoting world-class tourism initiatives with benefits that typically last for 15 years, with an option to extend for an additional 15 years.
Act 60 and Act 399 – International Insurance Center: Act 399, enacted in 2004, establishes the legal framework for creating an International Insurance Center in Puerto Rico. This center offers a competitive environment for international insurers and reinsurers, who can secure attractive tax benefits under Act 60 for an initial period of 15 years, with potential renewals.
Act 60 – Manufacturing: Chapter 6 of Act 60 provides tax incentives and credits to businesses in the manufacturing sector. The Act encourages the growth of local industries, attracts foreign investment, and supports research and development initiatives from both academic and private sectors.
Act 29 – Public-Private Partnership Act: Enacted on June 8, 2009, Act 29 promotes the use of public-private partnerships (PPPs) to develop infrastructure projects and deliver services more efficiently. Partnership agreements under this Act cannot exceed 50 years but can be extended for additional terms, collectively not exceeding 25 years, subject to approval by the relevant government authorities.
Requirements to Qualify and Maintain Tax Exemption
General Act 60 Requirements
For individuals and businesses to benefit from Act 60, certain requirements must be met. These prerequisites ensure that the incentives are granted to those genuinely contributing to Puerto Rico’s economy.
Export Services (Act 20) Business Requirements:
-
Eligible Services: The business must provide eligible services, such as professional services, call centers, consulting, investment management, and more, that are exported from Puerto Rico.
-
Local Employees: Must employ a certain number of local employees depending on the type of business.
-
Office Space: Must maintain an office or establishment in Puerto Rico.
Individual Investors (Act 22) Requirements:
-
Residency: Must become a bona fide resident of Puerto Rico, which involves spending at least 183 days on the island each year, not having a tax home outside Puerto Rico, and demonstrating closer connections to Puerto Rico than to any other location.
-
Newcomers: Only individuals who were not residents of Puerto Rico for the past 10 years are eligible for the benefits.
All Act 60 incentives require filing annual reports to demonstrate compliance with the Act’s terms.
Residency Requirements
Act 60 sets specific residency requirements for individual investors to ensure they genuinely integrate into Puerto Rican society and contribute to the local economy.
Residency Requirements for Individual Investors:
-
Physical Presence: Investors must spend at least 183 days per year in Puerto Rico.
-
Closer Connection Test: Investors must demonstrate that their primary connections (family, home, business) are closer to Puerto Rico than to any other location.
-
Tax Home: The individual’s tax home must be in Puerto Rico, meaning that Puerto Rico is the main location of their business activities.
These requirements are designed to ensure that the benefits of Act 60 are granted to those who are genuinely contributing to Puerto Rico’s economy and community.
Act 60 Application
The application process for Act 60 benefits can be straightforward if the steps are followed correctly. For detailed instructions on how to apply, please refer to the official Puerto Rico Department of Economic Development and Commerce (DDEC) portal.
Step-by-Step Guide:
-
Preparation: Gather all necessary documentation, including proof of residency, business registration, and financial statements.
-
Application Submission: Submit the application through the DDEC portal.
-
Review Process: The application will be reviewed by the DDEC, which may request additional information or documentation.
-
Approval: Upon approval, a decree will be issued outlining the specific benefits and conditions applicable to the applicant.
-
Compliance: Regularly file the required annual reports and ensure ongoing compliance with the decree’s conditions.
Tips and Common Pitfalls:
-
Documentation: Ensure all documentation is accurate and complete to avoid delays.
-
Professional Advice: Consider hiring a local attorney or consultant who specializes in Act 60 applications to navigate the process smoothly.
-
Deadlines: Adhere to all deadlines for applications and annual reports to maintain eligibility.
-
Local Requirements: Pay attention to local employee requirements and ensure compliance with labor laws.
Common Questions and Misconceptions
Act 60 has been surrounded by various misconceptions, often overshadowing its true impact and benefits. Let’s address some common questions and concerns.
Is it just large corporations and the uber-wealthy who benefit from Act 60?
No, Act 60 offers incentives for a wide range of entrepreneurs and businesses, including small and medium-sized enterprises (SMEs), particularly those in service-based industries. This includes benefits such as a reduced corporate tax rate of 4% and exemptions on property and municipal taxes, which make it attractive for a diverse array of businesses to establish operations in Puerto Rico.
Can my decree be taken away?
Once your application for any of the tax incentives is approved, the Puerto Rican government then issues a tax exemption decree that outlines the specific tax rates and conditions set by Act 60. This decree acts as a binding contract between the applicant and the Government of Puerto Rico.
Once granted, the benefits are secured for the term of the decree, regardless of any future changes to Puerto Rico’s tax laws. The decree for Export Services is valid for 15 years, with an option for a 15-year extension, while the Resident Individual Investor decree remains in effect until December 31, 2035.
How do Puerto Rico income taxes impact my overall tax liability?
Under the U.S. Internal Revenue Code, Puerto Rico-sourced income is exempt from federal income tax. Act 60 goes further, offering minimal or even zero taxes on interest, dividends, and certain capital gains for Puerto Rico residents. Additionally, property taxes on the island are substantially lower than those in the mainland U.S., making Puerto Rico a prime location for exporting international services.