In January of 2012, Puerto Rico passed legislation making it a tax haven for U.S. citizens that become residents of Puerto Rico. The tax laws, known as Act 20, the Export Services Act, and Act 22, the Individual Investors Act, shields new residents residing in Puerto Rico for at least half of the year from paying most federal income taxes. The U.S. Tax Code generously exempts Puerto Rico sourced income from federal tax, and, under the law, residents pay minimal or possibly no taxes on interests and dividends, as well as capital gains. Additionally, property taxes are significantly lower than property taxes in the mainland U.S. Thus, making Puerto Rico a hot spot for exportation of international services worldwide.
These tax laws were the response to Puerto Rico’s ballooning national debt that started accumulating when the US government cut federal subsidies to the island in 1996. Beginning in 2012, Puerto Rico used its special status within the United States to create unique tax incentives that would lure successful employers down to the island to bring capital and create jobs.
Once granted, the benefits under Act 20 and 22 will be secured during the entire term of the act, regardless of changes in the Puerto Rico tax laws applicable. The act shall have a term of 15 years (from 2012) with possible 15-year extension in the case of Act 20 and until December 31, 2030 in the case of Act 22.
Act 60
In June 2019, Puerto Rico made substantial changes to its tax incentives that came into effect on January 1, 2020. Under this new law, known as the Incentives Code, Acts 20 and 22 have been consolidated into Act 60 and were subsequently renamed. More importantly, the requirements for each program have been adjusted. We will continue to use the old names of Act 20 and 22, but the information below will reflect the new changes.
Tax Exemptions Under Act 20
Act 20, known as the “Export Services Act”, provides tax exemptions and tax credits to businesses engaged in eligible activities in Puerto Rico. The tax exemptions offered by Act 20 are as follows:
Fixed Income Tax Rate
Act 20 allows qualifying businesses that export services from the island nation the opportunity to cut their corporate tax rate to only 4%. For services considered strategic, the fixed income tax rate drops to 3%.
Distributions from Earnings and Profits
Act 20 grants an 100% tax exemption on all distributions from earnings and profits.
Property Taxes
75% 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%
75% 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%
50% 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 50% exemption, the effective tax rate would be up to 0.02%
For guidance on qualifying for Act 20, check out our How to Qualify for Puerto Rico’s Act 20 blog being posted to our blog page soon.
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