What’s the tax rate for an Act 20 – Export Services Company?
The Company will pay a corporate income tax rate of 4%. Any retained earnings distributed to its shareholders will be taxed at 0% by the Puerto Rico Department of Treasury.
Do I need to have an office in Puerto Rico?
Yes, you need to have an office or bona fide establishment. In other words, you cannot incorporate in the Puerto Rico, apply for the tax decree and maintain an operation outside of Commonwealth of Puerto Rico.
Is it a requirement to have a bank account at a Puerto Rico bank?
No, Act 20 companies are not required to open a bank account at one of the local banking institutions. (This is only a requirement for Act 22, which is not related to businesses.) The company has the option to open the bank account a regular FDIC-insured bank in Puerto Rico or in the United States. Alternatively, it can open an account at a “cooperativa” (savings and loans). Banks in Puerto Rico are regulated by the same laws as banks in the United States: Federal Deposit Insurance Corporation, U.S. Securities and Exchange Commission, Financial Industry Regulatory Authority, and any other agency, depending on particular regulations. They are also regulated by the state authorities like: OCIF (Office of the Financial Institution Commissioner).
That said, as of the writing of this FAQ, no requirement against opening a bank account with a major institution in the United States existed.
Do I need to incorporate in Puerto Rico?
It is not a specific requirement, but for sourcing and compliance issue, we recommend registering a Puerto Rico entity. This can be a Corporation or Limited Liability Company. The Puerto Rico Corporations Law is modeled after American Bar Association Model Business Corporations Act (MBCA) and very similar to Delaware law. The MBCA is used by the majority of the states in the United States. This eliminates most of the uncertainties on how corporate law works in Puerto Rico.
Do I incorporate a Corporation or a Limited Liability Company?
We recommend LLC for single-owners and/or a limited amount of shareholders. In some cases, we recommend a regular Corporation.
What should be the Company’s tax status? A C-Corporation or S-Corporation?
We (almost always) recommend electing to be treated as a C-Corporation, because S-Corporations (or flow-through entities) are traced back to the tax jurisdiction of the shareholder.
What about the court system in Puerto Rico?
Puerto Rico’s legal system is structured in almost identical fashion to that of most states. Puerto Rico has state courts and a US District Court for Puerto Rico. State courts cannot go against federal law and/or federal jurisprudence (in the same circuit). The US District Court for Puerto Rico is part of the First Circuit – United States Court of Appeals (in Boston, MA).
Do I need to hire employees?
Yes. Puerto Rico Act-20’s objective is to create jobs. While the requirement used to be three (3) employees, it was not a requirement by law. It was required by the DDEC. On November 17, 2015, Act 187 was approved. Act 187 establishes a minimum employment requirement of five (5) full-time jobs for the period of the grant per eligible business for applications submitted on or after December 1st, 2015. Porto Capital can recommend several staffing agencies in case you require assistance in the recruitment of your personnel.
Can the owner(s) be one of those employees?
Yes. Owners of Act-20 approved entities can be one (1) of the five (5) employees. That said, owners must have a market rate salary and comply with Administrative Determination 15-22. In summary, an Official-Owner (anyone shareholder or partner having an ownership interest in an Act 20 company) who meets the following requirements:
- Devotes no less than eighty (80) percent of their time to the eligible activity under the laws of Export Services; and,
- Is a resident of Puerto Rico, as such term is defined in Section 1010.01 (a) (30) of the Code, applicable during the taxable year
- Must have a market salary. This will be capped at $350,000.
We recommend reading our translation of DA-15-22, in order to get a better understanding of the requirements. In summary, just like in the United States (and as required by the Internal Revenue Service) an owner cannot have a low salary, in order to avoid taxation.
What’s the application process like?
The process takes anywhere from 60-120 days, in most cases. Porto Capital usually takes 2 weeks to complete the application, given clients normally take a week to gather all required documentation. That said, the Company can take advantage of the tax incentives, as the tax decree can be traced back retroactively to the filing date of the application.
What’s the required documentation?
- Incorporation documents
- Tax / Employer Identification Numbers
- State Tax Compliance Forms
- Background check on owners
- Business Plans
- Licenses, as they apply to particular industries
- Any other document that the DEDC deems relevant to understand the nature of the services to be provided.
Can I have employees outside of Puerto Rico?
The simple answer is you should not have employees outside of Puerto Rico. This is a complicated answer that requires an: “it depends”.
Does the owner have to be a Puerto Rico bona fide resident?
No. The owner is not required to live in Puerto Rico. That said, if the owner is not resident, it cannot count as an employees for purposes of the employment requirement.
What other compliance is required?
- Complying with all local laws and regulations, as any other business in Puerto Rico.
- Filing of an annual report to the DEDC, along with a $300 fee.
- The DDEC will audit the Company every two (2) years to make sure that the Company employs five (5) full-time employees (FTE).
What’s the definition of a Full-Time Employee (FTE)?
This is a summary of what’s redacted in a tax decree for the employee requirement:
… The term “direct employees” used in this condition includes the Grantee’s full-time and part-time employees residing in Puerto Rico, engaged in the activities covered by the Grant. For purposes of determining the number of full¬ time direct employees that have been employed by the Grantee during a full, twelve-month taxable year in the activities covered by this Grant, the Grantee shall compute the total hours worked by all of the above direct employees during the taxable year and divide those total hours 2080… For the purpose of determining the total hours worked, hours of vacation and authorized leave shall be included, but overtime hours worked in excess of 40 hours per week shall not be so included…
… In no event shall the hours of an employee who works less than 20 hours week on average be included for purposes of this paragraph…
What’s the Income Tax Rate for Individuals in Puerto Rico?
The personal income tax rates are somewhat similar to the United States, although lower in most cases. If you are an owner-employee, you will pay regular income taxes on your salary and 0% on the dividend distributions from the Company. The Company will be taxed 4% on its export services net income. (Net income = sales minus expenses).