Puerto Rico Tax Incentives – Introduction
Puerto Rico offers attractive tax incentives to lure high-net-worth individuals and businesses to the island, fostering local economic growth.
The Puerto Rico Incentives Code of 2019, known as Act 60, provides significant tax advantages for those who qualify as bona fide residents and meet certain economic contribution requirements.
Overview of Act 60
Act 60 consolidates and updates previous tax incentives, including Act 20 and Act 22, targeting a variety of sectors such as individual investors, businesses, manufacturers, international financial entities, and private equity funds.
Act 20: Export Services Act
Act 20 provides tax incentives for companies based in Puerto Rico that export services to other regions.
Benefits include a fixed income tax rate of 4% on eligible export services and a complete tax exemption on dividends from earnings and profits.
Eligible businesses must maintain a bona fide office in Puerto Rico and render services to clients outside the island.
Key Benefits for Act 20 Businesses
- Income Tax: Fixed at 4% on net income from eligible export services.
- Dividends: 100% tax exemption on distributions.
- Property Taxes: 75% exemption on personal and real property taxes for businesses with over $3 million in volume.
- Municipal Taxes: 50% exemption on municipal license taxes for businesses with over $3 million in volume.
Act 22: Relocation of Individual Investors
Act 22 offers a 100% tax exemption on dividends, interest, and capital gains for new Puerto Rico residents.
To qualify, individuals must be bona fide residents, meeting criteria such as spending the majority of the year in Puerto Rico, having no tax home outside Puerto Rico, and showing stronger connections to Puerto Rico than any other location.
Bona Fide Resident Test
- Presence: Must be in Puerto Rico for at least 183 days in a tax year.
- Tax Home: No tax home outside of Puerto Rico.
- Closer Connection: Must have a closer connection to Puerto Rico than to any other location.
Additional requirements include an annual $10,000 donation to local nonprofits and purchasing residential property within two years of establishing residency.
IRS Scrutiny and Compliance
Due to the generous nature of these tax breaks, the IRS has increased its enforcement efforts to prevent abuse of Act 60 incentives.
In 2021, the IRS launched a compliance campaign targeting potentially fraudulent claims, focusing on whether individuals and businesses genuinely meet the residency and income sourcing requirements.
Compliance Tips
- Documentation: Maintain thorough records of time spent in Puerto Rico and sources of income.
- Economic Contributions: Ensure all required contributions, such as donations and property purchases, are properly documented and timely executed.
- Professional Advice: Engage experienced tax counsel to navigate the complexities of Act 60 and ensure full compliance with both Puerto Rican and U.S. federal tax laws.
Puerto Rico Tax Incentives – Conclusion
Puerto Rico’s tax incentives offer substantial benefits, but they come with strict compliance requirements.
Properly navigating these can avoid IRS scrutiny and potential penalties.
For those considering a move to Puerto Rico, consulting with experienced tax attorneys is crucial to optimize benefits and ensure compliance.
Final thoughts
If you have any queries on Puerto Rico and its tax incentives then please get in touch.