Act 20, known as the “Export Services Act”, provides tax exemptions and tax credits to businesses engaged in eligible activities in Puerto Rico and has made the island 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. The tax benefits Puerto Rico’s Act 20 offers are as follows:
- Corporate tax rate reduced to 4%;
- 100% tax exemption on all distributions from earnings and profits;
- 90% tax exemption from personal property taxes for certain types of businesses;
- 90% tax exemption from real property taxes for certain types of businesses; and
- 60% tax exemption on municipal taxes.
For more details on the benefits of Act 20, check out our Act 20: Puerto Rico Tax Incentives blog now.
To be able to take advantage of Act 20, there are 3 major steps you need to take for your company to qualify for these tax benefits.
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.
Set Up a Puerto Rican Company
The first step to qualify for Act 20 is to have your company incorporated in Puerto Rico. If you are trying to qualify an existing business, you can do a tax-free reorganization of the company to a Puerto Rican corporation, LLC, partnership, or another juridical person. But before you do that, you want to make sure your firm can be classified as one of the qualifying service-based businesses, as dictated by Puerto Rico’s Act 20. The service-based businesses that qualify for an Act 20 company include but are not limited to:
- Advertising and public relations
- Architectural and engineering services, project management, blueprint production, etc.
- Assembly, bottling and packaging operations for exported products
- Call centers
- Centralized management services (strategic direction, planning, distribution, logistics, and budgetary services)
- Commercial and mercantile distribution of products manufactured in Puerto Rico for export
- Computer software development
- Consulting services (economic, environmental, technological, scientific, managerial, marketing, human resources, computer, auditing, trade, business, etc.)
- Creative services (design, art, media, creative education, etc.)
- Educational and training services
- Electronic data processing centers
- Investment banking and other financial services
- Legal, tax, and accounting services
- Marketing centers (secretarial services, translation, information processing, communications, marketing, telemarketing, etc.)
- Medical, hospital and laboratory services
- Research and development
- Shared service centers
- Storage and distribution centers
- Trading companies
Establish an Office in Puerto Rico
The next step is to establish an office in Puerto Rico. This means you will need to have a physical presence in Puerto Rico, like an office, or your house if you count it as your office. In addition, if your Act 20 company produces $3 million or more in revenue, you must hire a full-time employee in Puerto Rico. If you are a bona fide resident of Puerto Rico, you can count yourself as the ‘employee’ as you actively manage your business.
If you choose to hire a Puerto Rican, they must be paid at least $10/hour, be doing real work, and have full social security benefits and all related employee coverage, including full taxation. As part of Puerto Rico’s Act 20, your firm will be subject to an audit every 2 years by the Puerto Rican government. Part of this audit will be checking to see if your Puerto Rican employee is doing real work or not.
Apply for a Tax Concession
The last major step is applying for a tax concession and obtaining a tax exemption decree, which can be by submitting your application via Puerto Rico’s Single Business Portal, but it is recommended that you use a lawyer to ensure a successful application. The Office of Industrial Tax Exemption (OITE) may take four to five months to extend the decree, but they will retroactively apply the 4% tax rate to your application date. Once you obtain a tax exemption decree, you lock in the benefits the Act offers until the end of the Act’s 15-year term (with the possibility of another 15-year extension), as long as you continue to comply with the requirements set. As a bonus, if you adhere to all the rules set by Act 20, and the services you offer are considered strategic to Puerto Rico, the corporate tax rate could be reduced to 3%.
MasterCompliance provides expert consulting, outsourcing, and implementation tools in planning and budgeting your firm’s compliance responsibilities. If there are any areas where you would like to explore additional assistance or services, please contact us.