Officially named the Commonwealth of Puerto Rico (or Estado Libre Asociado de Puerto Rico), Puerto Rico is a self-governing, unincorporated territory of the United States. Located in the northeastern Caribbean, the island is a quick two-hour flight from the U.S. Long considered a tax haven, Puerto Rico draws mainland entrepreneurs seeking freedom from federal income taxes.
To promote and develop key industries, Puerto Rico has rolled out an impressive number of economic incentives that make living and investing there more compelling than ever before.
In this article, we’ll review just a few of the most appealing and important tax incentives for entrepreneurs and investors in Puerto Rico.
Puerto Rico introduced the Export Services Act (Act 20) and the Individual Investors Act (Act 22) in 2012. The purpose of these two acts was to draw foreign investors to Puerto Rico with tax incentives for starting businesses on the island. In July 2019, Acts 20 and 22 were consolidated, updated, and retitled as Act 60. The legislation, which came into effect in January 2020, provides some of the island’s most attractive tax rates for entrepreneurs.
This is a brief overview of the benefits included in Act 60:
How to qualify: In order to be eligible for Act 60, investors must become “bonafide” residents of Puerto Rico. To become a bonafide resident of Puerto Rico, you must meet the following qualifications:
In addition, to be eligible for the zero taxes on capital gains, interest, dividends, and royalties, individuals need to purchase a primary residence in Puerto Rico and make an annual charitable donation of $10,000 USD or more.
Enacted in 2008, the Economic Incentives for the Development of Puerto Rico Act is designed to promote the development of local industries and draw foreign investment of companies, particularly those dedicated to technology advancement. Benefits include:
Introduced in 2010, the Tourism Development Act is a series of tax credits and incentives for both new and existing tourism businesses that qualify. Qualifying businesses include hotels, condo-hotels, timeshares/vacation clubs, hostels, guesthouses, bed & breakfasts, theme parks, golf courses, and other entertainment or recreational tourism-related businesses.
Act 60 eliminated what was a 90% exemption on tourism development income (TDI), replacing it with a 4% flat tax on all income derived from tourism activity. This simplified tax supersedes all other tax liabilities for eligible businesses with a tax exemption decree.
While in practice, this represents a relatively small change in overall tax liabilities for most businesses, it streamlines the tax code, provides a greater degree of transparency, harmonizes various previously disparate elements of the tax law, and offers investors certain benefits that were previously unavailable.
Under the previous tax code, TDI in Puerto Rico (minus the 90% exemption) was subject to the applicable corporate tax rate of 18.5%, plus a graduated surcharge of up to 19% on net income above $275,000 USD, which resulted in an effective maximum corporate tax rate of 37.5%. Dividends paid out to shareholders were also subject to an additional tax—typically 15%, which is zeroed out under the new tax code.
The current tax structure represents a major simplification and reduction in the overall tax burden for investors in eligible tourism-related businesses.
Businesses operating in Puerto Rico providing taxable goods or services are required to collect a 10.5% Sales and Use Tax (SUT). In addition, all of Puerto Rico’s 78 municipalities are entitled to collect an additional 1% SUT.
The combined 11.5% SUT applies to the following items:
Eligible businesses with a tax decree qualify for up to a 100% exemption on SUT with respect to items acquired and used by the business in relation to the Tourist Activity.
This tax exemption provides major benefits for investors interested in developing commercial or rental properties in Puerto Rico by zeroing out the SUT liability on certain goods and services.
Under the Incentive Code, investors in eligible tourism and development-related businesses qualify for a significant tax credit. This credit is fully transferable; meaning investors can sell their tax credit to another party or third-party broker which can provide additional capital to reinvest in their business. Income from the transfer or sale of a tax credit is entirely tax-exempt.
Two different tax credits are available:
Besides increasing returns to investors for qualified development projects, tax returns also offer the opportunity to refinance projects after three years of operation which can lead to investors receiving back some or all of their original capital many years before a particular project is sold.
Puerto Rico’s current investor-friendly tax regime and permissive regulatory environment compare advantageously to other investment opportunities in the United States. For investors seeking to minimize their tax burden, Puerto Rico offers a comprehensive set of tax incentives (in addition to significant Opportunity Zone benefits) that are hard to beat.