TAX INCENTIVES

Puerto Rico is promoting itself as the next Singapore – but in US territory, retaining your citizenship, with local US federal courts and statelike familiarity.

Puerto Rico is promoting itself as the next Singapore. We know you have probably heard of the opportunities and understand the possible benefits tax wise, but a lot of questions must come to mind when it comes to the rest of the picture – what opportunities are there for my spouse, for our children? Where should we live? How is PR part of the US? Is it safe? Are there good schools and good doctors?  Etc., etc., etc…

Elite Arrivals fills that void with local knowledge, insight and guidance. As a group of bicultural experts on Puerto Rico, with unique wherewithal, we created Elite Arrivals to put our knowledge and network to use in facilitating your relocation needs.

BRIEF OVERVIEW OF SOME AVAILABLE INCENTIVES

Individual Investors Act (Act 22)
  • 100% tax exemption from Puerto Rico income taxes on all dividends for new Puerto Rico residents
  • 100% tax exemption from Puerto Rico income taxes on all interest for new Puerto Rico residents
  • 100% tax exemption from Puerto Rico income taxes on all short-term and long-term capital gains accrued after the individual becomes a bona- fide resident of Puerto Rico.
  • 0% federal taxes on Puerto Rico sourced income
  • Decree benefits secured until December 31, 2035.
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Amendments to Act 22 (Act 241)

Summary of changes to Act 22-2012 introduced by Act 241-2014:

  • Individuals that were not bona-fide residents of Puerto Rico for the 6-year period preceding the effective date of Act 22 (January 17, 2012) may now qualify as a Resident Individual Investor (“RII”) under Act 22 – a 9-year reduction from the original 15-year period.
  • A processing fee for applications under Act 22 is now required ($750).
  • An annual report with compliance information is now required by law – to be filed on or before April 15 of each year with an annual fee ($300). The Office of Industrial Tax Exemption is directed to perform a compliance audit of each grant at least every 2 years.
  • Grantor trust treatment for Puerto Rico income tax purposes may now be elected for trusts established under the laws of Puerto Rico by RII grantees.
  • Revocable as well as irrevocable trusts may now be established under the laws of Puerto Rico by RII grantees.
  • Trusts duly executed by RII grantees outside Puerto Rico are now protected from challenges based on conflicts or inconsistencies with Puerto Rico laws or regulations to the contrary.
  • RII grantees may now freely transfer during their lifetime any type of assets, regardless of their nature or location, to any of the aforementioned trusts irrespective of Puerto Rico laws or regulations to the contrary.
  • A $5,000 fee is now required from each grantee at the time of the issuance of a grant under Act 22.

 

SERVICES

Export Services (Act 20)
  • 4% corporate tax rate, which may be reduced to 3%
  • 100% tax exemption on dividends from export services businesses
  • Decree of 20 years, renewable for an additional 10 years
Click for details
International Financial Entities (IFE – ACT 273)
  • 4% income tax
  • 0% on dividends or other distributions of profits to non-Puerto Rico residents
  • 100% exemption on municipal taxes
  • 100% exemption on property taxes
Film and Creative Services
  • 40% tax credit on all payments to Puerto Rico residents
  • 20% tax credit on all payments to non-resident talent (including stunt doubles)
  • 25% tax credit on development or expansion costs of studios, laboratories, facilities for the international transmission of television images or other media and related infrastructure

MANUFACTURE AND AGRICULTURE

Manufacturing, Key Supplier Services, Research & Development
  • 4% income tax on industrial development income
  • 0% to 1% tax rate on income for pioneer or novel products manufactured in Puerto Rico
  • Up to 50% tax credit on purchases of products manufactured or recycled locally
  • Up to $5,000 for each job created during the first year
Agriculture
  • 100% exemption on taxes for agricultural equipment
  • 100% exemption on property taxes (land, buildings, vehicles, etc.)
  • 100% exemption on municipal taxes
  • 100% exemption on stamp payments

TRADE AND COMMERCE

Foreign Trade Zones (FTZ)
  • Largest non-contiguous FTZ system in the United States
  • Deferment of federal customs duties
  • Deferment of Puerto Rico excise taxes
  • 100% exemption of exports from the zone
Renewable Energy (Green Energy Fund)
  • Rebates of up to 60% of eligible costs for Tier 1 (0-100 kW) and up to 50% for Tier 2 (101 kW-1MW)
  • 60% refund on acquisition and installation costs incurred during the installation of renewable energy equipment for residential properties and small businesses (50% for other businesses).

TOURISM

Tourism and Hospitality
  • 10% tax credit on the total project cost
  • 100% exemption on municipal construction excise tax, taxes on imported goods, and sales tax
  • 100% exemption on municipal licenses
  • 90% exemption on income tax and property tax

About the Acts

Act 22

Puerto Rico Enacts Radical Tax Incentives to Attract New Capital to the Island On January 17, 2012, Puerto Rico enacted Act No. 22 of 2012, as amended, known as the “Individual Investors Act” (the “Act”). The Act may have profound implications for the continued economic recovery of Puerto Rico. The Act provides tax exemptions to eligible individuals residing in Puerto Rico. To avail from such benefits, an individual needs to become a resident of Puerto Rico and apply for a tax exemption decree. Eligibility The benefits of the Act are only available to bona-fide residents of Puerto Rico that were not bona-fide residents of Puerto Rico for the 15-year period preceding the enactment of the Act on January 12, 2012 (“Eligible Individuals”). Generally, a bona-fide resident of Puerto Rico is a person who: (1) is present for at least 183 days during the taxable year in Puerto Rico; (2) does not have a tax home outside of Puerto Rico during the taxable year; and (3) does not have a closer connection to the United States or a foreign country than to Puerto Rico. Although Puerto Rico is a U.S. territory, pursuant to Section 933 of the U.S. Internal Revenue Code of 1986, as amended, bona-fide residents of Puerto Rico are not subject to U.S. federal income taxes on income derived from sources within Puerto Rico. Therefore, U.S. citizens that are bona- fide residents of Puerto Rico benefiting from the Act will only be subject to federal income taxation on income derived from sources outside of Puerto Rico. Tax Exemptions The Act is designed to primarily attract to Puerto Rico high net worth individuals, empty nesters, retirees who currently relocate to other States and investors from U.S. and other countries. The Act provides the following benefits to new Puerto Rico bona-fide residents on qualified investments:

 

  • 100% tax exemption from Puerto Rico income taxes on all dividends;
  • 100% tax exemption from Puerto Rico income taxes on all interest; and
  • 100% tax exemption from Puerto Rico income taxes on all short-term and long-term capital gains accrued after the individual becomes a bona- fide resident of Puerto Rico (“Puerto Rico Gain”).

Built-in Capital Gains Also, capital gains realized by an Eligible Individual, but accrued before the individual became a bona-fide resident of Puerto Rico (“Non-PR Built– in Gains”), will be subject to preferential Puerto Rico income tax rates. If such gain is realized and recognized within 10 years after the date residence is established in Puerto Rico, it will be taxed at the income tax rate for capital gains applicable for the tax year in which the gain is realized (currently the capital tax rate is 15%) and at a 5% income tax rate if such gain is realized and recognized after said 10-year period. Pursuant to U.S. income tax regulations, U.S. residents moving to Puerto Rico will be subject to federal income taxes on any Non-PR Built-in Gains realized within 10 years after moving. However, Puerto Rico income taxes may be creditable against such federal income tax, and therefore, U.S. residents moving to Puerto Rico and realizing Non-PR Built-in Gains within a 10-year period after moving may only be subject to the excess of U.S. taxes over Puerto Rico taxes on such Non-PR Built-in Gains. In other words, under current law and tax rates, such individuals may only pay income taxes for the Non-PR Built- in Gains in an amount equal to the federal income tax rate imposed on such Non-PR Built-in Gains.  Example 1 – For example, if stock from a publicly traded company is acquired by a U.S. resident in 2006 for $40 and is worth $100 just before moving to Puerto Rico in 2012, and then it is sold by the Puerto Rico resident on 2018 for $200, the individual will be subject to income taxes for the gain realized on the sale as follows: After 10 years of moving from the U.S. to Puerto Rico, the income tax on the Non-PR Built-in Gains will not apply and bona-fide residents of Puerto Rico will only be subject to a 5% Puerto Rico income tax on any portion of the Non- PR Built-in Gain realized after 10 years from moving to Puerto Rico. Example 2 – If the stock acquired by the U.S. resident in Example 1 is sold by the Puerto Rico resident on 2023 for $200, the individual will be subject to income taxes for the gain realized on the sale as follows:

Cost $40 U.S. Tax PR Tax (5% under the Act) U.S. Tax after PR credit Net Tax (U.S. and PR)
Non-PR Built-in Gains $60 $0 $3 $0 $3
Puerto Rico Gain $100 $0 $0 $0 $0

Tax Exemption Decree To benefit from the Act, the individual investor needs to submit an application with the Office of Industrial Tax Exemption of Puerto Rico to obtain a tax exemption decree, which will provide full detail of tax rates and conditions mandated by the Act and will be considered a contract between the Government of Puerto Rico and the individual investor. Once the individual investor obtains the tax exemption decree, the benefits granted will be secured during the term of the decree, irrespective of any changes in the applicable Puerto Rico tax laws. The term of the decree will be until December 31, 2035.

Download the Act Return
Act 20
Tax Incentives to Promote Export Services in Puerto Rico

On January 17, 2012 Puerto Rico enacted Act No. 20 of 2012, as amended, known as the “Export Services Act” (the “Act”), to offer the necessary elements for the creation of a World Class International Service Center. The Act provides tax exemptions and tax credits to businesses engaged in eligible activities in Puerto Rico. To avail from such benefits, a business needs to become an exempt business by applying for a tax concession and obtaining a tax exemption decree.

Eligibility

The Act provides benefits for services provided from Puerto Rico to outside markets. Eligible activities to receive benefits under the Act are services in the following areas:

  • Research and development;
  • Advertising and public relations;
  • Economic, scientific, environmental, technological, managerial, marketing, human resources, engineering, information systems, auditing and consulting services;
  • Consulting services for any trade or business;
  • Commercial art and graphic services;
  • Production of engineering and architectural plans and designs, and related services;
  • Professional services such as legal, tax and accounting services;
  • Centralized managerial services, including, but not limited to, strategic direction, planning and budgeting, provided by regional headquarters or a headquarters company engaged in the business of providing such services;
  • Services performed by electronic data processing centers;
  • Development of licensable computer software;
  • Telecommunications voice and data between persons located outside of Puerto Rico;
  • Call centers;
  • Shared service centers;
  • Medical, hospital and laboratories services;
  • Investment banking and other financial services, including but not limited to asset management, management of investment alternatives, management of activities related to private capital investment, management of coverage funds or high risk funds, management of pools of capital, trust management that serves to convert different groups of assets into securities, and escrow accounts management services; and
  • Any other service designated by the Secretary of the Department of Economic Development and Commerce of Puerto Rico.

No Nexus with Puerto Rico

The eligible activity must not have a nexus with Puerto Rico. In other words, the service must not be related to the conduct of a trade, business or other activity in Puerto Rico to qualify for the benefits of the Act. Promoter Services are exempted from this general rule, as further explained below under Promoter Services.

The following services will be considered to have a nexus with Puerto Rico, and will not be eligible services:

  • Business or income producing activities that are or have been performed in Puerto Rico by the applying business;
  • The sale of any property for the use, consumption or disposition in Puerto Rico;
  • Counseling on the laws, regulations and administrative determinations of the Government of Puerto Rico and its instrumentalities;
  • Lobbying on the laws, regulations and administrative determinations of the Government of Puerto Rico and its instumentalities; and
  • Any other activity designated by the Secretary of the Department of Economic Development and Commerce of Puerto Rico.

Promoter Services

Services considered non-eligible for having a nexus with Puerto Rico can be considered Promoter Services, thus becoming eligible services, when rendered to non-resident individuals and/or foreign entities, if they are related to the establishment of a new business (as defined in the Act) in Puerto Rico. Only net income derived from Promoter Services performed within the 12- month period ending on the day preceding the day the new business takes the earliest of the following actions will be considered exempt service income: (1) executes a contract to acquire or lease facilities in Puerto Rico; (2) begins construction of the facilities to be used in Puerto Rico; or (3) commences operations in Puerto Rico.

Tax Exemptions

At its core, the Act essentially extends to a broad spectrum of service industries the benefits that have made Puerto Rico one of the world’s manufacturing leaders. Manufacturing accounts for 44% of Puerto Rico’s GDP, compared with a U.S. average of less than 10%. Now, services enterprises ranging from advertising to accounting to legal services, as well as hedge fund managers and a wide range of other consulting firms are eligible for the benefits of the Act. Eligible activities can benefit from the following benefits on income derived from customers located outside of Puerto Rico in relation to services rendered from Puerto Rico:

  • 4% fixed income tax rate;
  • 3% fixed income tax rate in the case of services considered strategic;
  • 100% tax exemption on distributions from earnings and profits;
  • 90% tax exemption from personal property taxes for certain types of businesses (100% tax exemption for the first five years of operation). The taxable portion will be subject to the regular tax rate, that currently can be up to 8.83%; therefore, after considering the 90% exemption, the effective tax rate would be up to 0.883%;
  • 90% tax exemption from real property taxes for certain types of businesses (100% tax exemption for the first five years of operation). The taxable portion will be subject to the regular tax rate, that currently can be up to 10.83%; therefore, after considering the 90% exemption, the effective tax rate would be up to 1.083%; and
  • 60% tax exemption on municipal taxes (90% tax exemption if business operates in the industrial development zone constituted by the municipalities of Vieques and Culebra). Any taxable portion will be subject to the regular tax rate, that currently can be up to 0.5%; therefore, after considering the 60% exemption, the effective tax rate would be up to 0.02%;

Tax Exemption Decree

To benefit from the Act, the service provider needs to submit an application with the Office of Industrial Tax Exemption of Puerto Rico to obtain a tax exemption decree, which will provide full detail of tax rates and conditions mandated by the Act and will be considered a contract between the Government of Puerto Rico and the service provider. Once the service provider obtains the tax exemption decree, the benefits granted will be secured during the term of the decree, irrespective of any changes in the applicable Puerto Rico tax laws. The decree shall have a term of 20 years, with a possible 10-year extension.

Puerto Rico Income Taxes

An exempt business operating in Puerto Rico under the Act by means of a Puerto Rico entity should not be subject to any taxes (such as a dividend tax, tollgate tax or other similar taxes) on its income from its eligible activities in Puerto Rico, other than the Puerto Rico fixed income tax rate established in the tax decree, regardless if said income is distributed or retained by the entity. Upon repatriation, the distributed income would be subject to the tax imposed by the jurisdiction in which the owners of the Puerto Rico entity reside, if any.

Download the ActReturn
Act 273

Act Number 273 of September 25, 2012 provides tax incentives to international financial entities that set up operations in Puerto Rico.

Objective: To make Puerto Rico an international banking and financial center by providing tax incentives for new banking and financial activity in Puerto Rico that is done for clients outside of Puerto Rico.

What is an IFE? An IFE is a Puerto Rico entity engaged in traditional banking or financial services for non-Puerto Rican clients. IFEs are under the supervision of the Office of the Commissioner of Financial Institutions.

Compelling value proposition for banking and financial service providers
• 4% Corporate Tax Rate: IFEs will enjoy a 4% flat income tax rate on its income
• 0% – 6% Dividend Tax Rate:
▪ Puerto Rico Shareholders: Distributions from earnings and profits derived from IFEs will be taxed at 6% for shareholders that are Puerto Rico residents.
▪ Non-Puerto Rico Shareholders: Non-residents will enjoy 100% exemption from Puerto Rico taxes on such dividends.

• 100% Exemption on Municipal Taxes:
▪ Municipalities in Puerto Rico may levy a gross receipts tax of up to 1.5% for financial services.
▪ IFEs will enjoy a 100% exemption on such municipal taxes

• 100% Exemption on Property Taxes

REQUIREMENTS UNDER 273 – simple and easy to meet

License from Regulator
• IFEs are subject to the oversight of the Office of the Commissioner of Financial Institutions (OCIF, by its Spanish acronym).
• OCIF will issue a license after reviewing application and performing due-diligence on the proposed IFE and its principals.

Capitalization
• IFEs must have at least $5 million in capital, of which at least $250,000 must be completely paid-in.
• OCIF may lower the capital requirements to as low as $500,000 for IFEs performing limited activities.

Free and Clear Assets
• IFEs must also maintain at least $300,000 in assets that are free and clear from any liens, or it must provide a financial guaranty in the same amount.
• OFIC may lower such requirement for certain IFEs .
Employees
• IFEs must maintain at least 4 full-time employees working at its offices located in Puerto Rico.

IFEs are authorized to do certain types of transactions

PERMITTED TRANSACTIONS: IFEs are authorized to engage in traditional banking and financial transactions with clients outside of Puerto Rico, including transactions related to:
• Accepting deposits
• Borrowing money
• Lending
• Letters of credit
• Refinancings
• Underwriting
• Trade financing
• Trust services
• Foreign currency exchange
• Securities brokerage
• Clearinghouse services
• Asset management
• Other financial services

LOCAL TRANSACTIONS: IFEs are generally not permitted to do transactions with local Puerto Rico counterparties, except in certain cases such as these:
• Certain transactions involving the Government Development Bank and the Economic Development Bank of Puerto Rico
• Certain transactions and activities involving securities issued by the Government of Puerto Rico
• Participation in local loan syndications originated by a local bank
• Purchasing of substandard or non-performing loans from Puerto Rico entities

IFE’s are except from certain US banking laws, but not from others
Excepted
US International Banking Act: Puerto Rico is considered a foreign jurisdiction under the US International Banking Act of 1978 (IBA), therefore all IFEs in Puerto Rico are exempt from the IBA’s requirements for domestic financial institutions.
• U.S. Bank Holding Company Act: Puerto Rico IFEs are also generally exempt from the U.S. Bank Holding Company Act (BHCA) and thus may be affiliated with commercial institutions. However, if the IFE accepts demand deposits and issues commercial loans, it will be considered a Bank under the BHCA.

Applicable
• All IFEs must ensure that they comply with any applicable U.S. federal laws and regulations, such as:
• Bank Secrecy Act
• US Patriot Act
• Office of Foreign Asset Control (OFAC) of the United States Department of the
Treasury

Process for setting up an IFE
A predictable process and tax certainty for 45 years

• Permit to Organize: Any entity may apply for a permit with the Office of the Commissioner of Financial Institutions (OFIC) to organize an IFE. The application can be obtained from OCIF. OFIC will review the application to determine the suitability of the proposed IFE, focusing on the financial solvency, the credit and commercial banking experience and the integrity of the applicants and their directors and officers.

• Organization: Applicants with a permit to organize an IFE must file such permit, along with the organizational documents, with the Department of State to register and officially organize the IFE.

• License to Operate: OCIF will issue a license to operate to the newly organized IFEs that meet the requirements under the Act, including the minimum capital requirements.

• Decrees: To enjoy the tax benefits under the Act, IFEs must request and obtain a tax exemption decree by submitting a copy of its IFE license to the Secretary of the Department of Economic Development and Commerce of Puerto Rico. Within 15 days, the Secretary will sign the decree.

– 45 Years: Such decree will have term of 15 years, renewable for two additional 15 year periods, subject to certain conditions.
– Certainty: The Tax Exemption Decree will constitute a contract with the Puerto Rico Government not subject to subsequent legislative changes.

Download the Act
FORMS
Application for the Act 22 Incentives – Download and fill-out the two-page Application, which is available here: http://www2.pr.gov/agencias/oeci/Pages/Solicitudes.aspx.

Application for Act 20 Incentives – After selecting a legal entity, you may download and fill-out the Application: http://www2.pr.gov/agencias/oeci/Documents/Solicitudes/Solicitudes/Application%20for%20Act%2020%20Fillable.pdf

Legal Entity – Choose the legal entity that will apply for the Act 20 incentives. You may choose to apply through a Puerto Rican registered legal entity, though this is not required. You may create a Puerto Rican corporation so through the website of the Department of State of the Government of Puerto Rico at: https://prcorpfiling.f1hst.com/CorporationSearch.aspx

Application for the International Financial Center Incentives - Application for the International Financial Center Incentives

Application for Act 73 and Green Energy Fund: Application for Tax Grant 73 and Green Energy Fund Incentives