If there is one thing that Puerto Rico knows about it is that tax incentives can make or break your economy. For over 40 years Puerto Rico experienced economic boom because of incentives that were provided to US subsidiaries operating under Section 936 of the internal revenue code. Then in 2006, it all came crashing down when this section of the internal revenue code was phased out, as a result of legislation signed by President Clinton in 1996. Since that time, Puerto Rico has been in such a bad recession that many of the local people are now referring to this period as the “lost decade”.
But luckily for us, all was not lost and Puerto Rico is doing everything they can to come back better and stronger than they were before. One way they are doing this is by putting into place a number of new tax acts that have been designed to help spur their economy. One of these acts is Act 20, or as it is often referred to The Export Services Act, which was signed into law on January 17, 2012.
The purpose of this act is to provide reduced corporate tax rates, as well as tax exemptions on dividends, to eligible service related businesses in Puerto Rico. It is hoped that the benefits under this act will encourage a wide variety of service companies, such as CPA firms, consulting companies, and marketing giants to move their business operations to Puerto Rico.
What are the benefits of Act 20?
- 4% fixed corporate tax rate
- 60% exemption on municipal taxes (highest rate is 1.5%)
- 100% exemption on property taxes (90% after 5 years)
- 100% exemption on real estate taxes (90% after 5 years)
- 100% tax exemption on distributions from earnings and profits
What are the requirements?
- The business must provide qualified services from Puerto Rico to recipients outside of Puerto Rico (see the list of qualified services below)
- The business must fill out and submit an application with the applicable fee
- The business must employ a minimum of 5 Puerto Rico residents
- The owner of the business can be one of the five required employees
- The business must hire three employees within the first 6 months and five employees within the first two years
- If the owner is working in the business he must receive a reasonable salary based upon the services he provides
- The business must file an annual report including information such as applicable permits, certifications, licenses, and registrations.
How long do the benefits last?
- A 20 year decree is issued from the government from the date of your application
- If certain conditions are met the decree will be extended for an additional 10 years
What types of businesses are considered qualified service providers?
- Research and Development
- Advertising and public relations
- Advice on matters relating to any trade or business
- Commercial arts and graphic services
- Production of construction drawings, architectural and engineering services and project management
- Professional services, such as legal, tax and accounting
- Centralized management services
- Centers for electronic data processing
- Development of computer programs
- Telecommunication voice and data between persons located outside Puerto Rico
- Call centers
- Shared services centers
- Storage and distribution centers
- Educational and training centers
- Hospitals and laboratories
- Investment banking and other financial services
- Any other service that is later decided to be treated as an ‘eligible service” for the best interest of Puerto Rico
Who is moving to Puerto Rico?
Based upon data released by the Department of Economic Development and Commerce over 500 businesses have moved to Puerto Rico since the act was implemented in 2012. These businesses have invested over $150 million into the island and have created over 7,000 jobs. Although most of the pioneers were consulting and financial firms, the island has recently seen an influx from some of the world’s largest CPA firms.
Are you ready to learn more?
This article is designed to give you an overview of the basics of how Act 20 works. If you would like to learn more about whether this Act is right for you and your business, please call our offices at 787-691-0107 to schedule a free consultation with one of our Puerto Rico tax experts. During this consultation, they will discuss in more detail how Act 20 can benefit your specific business and can assist you in scheduling a trip to Puerto Rico to learn more.