Overview of Puerto Rico Act 20 Tax Incentives
On January 17, 2012, the Legislative Assembly of Puerto Rico approved, Puerto Rico Act 20 Tax Incentives, a new legislation to promote the economic development of Puerto Rico through tax incentives: (i) Act 20 to Promote the Exportation of Services (the “Export Services Act”) and (ii) Act 22 to Promote the Relocation of Individual Investors to Puerto Rico (the “Individual Investors Act”). In this post, we will discuss the Act 20: Export Services Act. Act 22 is exclusively related to Individual Investors.
The purpose of the Export Services Act is to establish and develop in Puerto Rico an international export services center. Puerto Rico’s Act 20 seeks to encourage local service providers to expand their services to persons outside of Puerto Rico, promote the development of new businesses in Puerto Rico and stimulate the inbound transfer of foreign service providers to Puerto Rico. Puerto Rico Act 20 also creates a special fund for the continuous development of new tax incentives that will promote export services and the establishment of new businesses in Puerto Rico.
Applicability of Puerto Rico Act 20
The Export Services Act applies with respect to any entity with a bona fide office or establishment located in Puerto Rico that is or may be engaged in an eligible service (the “Eligible Business”).
While a new amendment includes more services, the initial Act includes the following as eligible services:
- research and development;
- advertising and public relations;
- economic, environmental, technological, scientific, management, marketing, human resources, information and audit consulting;
- advisory services 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;
- corporate headquarters;
- electronic data processing centers;
- development of computer programs;
- voice and data telecommunications between persons located outside of Puerto Rico;
- call centers;
- shared services centers (“shared services”) including but not limited to, accounting, finance, taxes, auditing, marketing, engineering, quality control, human resources, communications, electronic data processing and other centralized management services;
- storage and distributions centers (“hubs”);
- educational and training services;
- hospital and laboratory services;
- investment banking and other financial services; and
- any other service that the Government of Puerto Rico later determines that must be treated as an eligible service (collectively, the “Eligible Service”).
An Eligible Service must also qualify as either a service for exportation or a promoter service. Services for exportation are services performed for non-resident individuals and/or foreign entities that have no nexus with Puerto Rico (that is the Eligible Service is not, and will not be, related to the conduct of a trade, business or other activity in Puerto Rico).
Promoter services are services rendered to non-residents individuals and/or foreign entities related to the establishment of a new business in Puerto Rico, as defined by the Export Services Act.
Tax Exemption Decree
To enjoy the tax incentives granted under the Export Services Act the services provider must request and obtain a tax exemption decree under said act (the “Tax Exemption Decree”). Such decree will have term of 20 years, renewable for 10 additional years, provided certain conditions are satisfied.
The Tax Exemption Decree will constitute a contract with the Puerto Rico Government (through the Department of Economic Development and Commerce) not subject to subsequent legislative changes.
Service providers operating under a Tax Exemption Decree will enjoy the following tax incentives during the term of such decree:
- 4% flat income tax rate on Export Services Income (as defined below). This rate may be reduced to 3% when more than 90% of the Eligible Business’s gross income is derived from export services and such services are considered strategic services, according to the criteria established in the Export Services Act.
- 100% tax-exempt distributions from earnings and profits derived from the Export Services Income.
- 100% exemption from property taxes during the first five years of operations in the case of eligible services described in items (viii), (xii) and (xiii) of Section III.A above. After said 5-year period, a 90% exemption will apply during the term remaining under the Tax Exemption Decree.
Export Services Income
The term Export Services Income means net income derived by an Eligible Business subject to the following:
- In the case of new Puerto Rico businesses, all net income derived from an Eligible Service.
- In the case of existing Puerto Rico businesses, only that portion of net income derived from an Eligible Service that exceeds the average net income generated by such business during the three taxable years preceding the date a request for a Tax Exemption Decree is filed by such business.
- In the case of service promoters, only the net income derived from Eligible Services performed within the 12-month period ending on the day preceding the day the new business takes any of the following actions:
- Begins construction of the facilities to be used in Puerto Rico;
- Commences operations in Puerto Rico; or
- Executes a contract to acquire or lease facilities in Puerto Rico.
Please note, that recently Act 20 was amended and any new business applying for Act 20 must comply with a minimum of five (5) full-time employees (FTE) for the period of the grant, for which the company should be in compliance before the end of the 6th month after starting its operation. FTE are employees who work a 2,080 hours a year, including paid-time-off. 5 FTE equal 10,400 hours. Should the company have part-time employees, in order for the employee to be counted for the requirement, he/she must at least work 1,040 or more (or 50% of the time or more). In any case, the company must at least contract a minimum 10,400 hours if the company has a combination of FTE and part-time employees. In other words, an equivalent of 5 FTE must always be satisfied and no employee may work less than 50% of the time.
In general terms, the Puerto Rico Act 20 tax incentive application requires the following documents:
- Business plan / Eligible Services Description – in essence, a detailed description of what the company will provide. (We can help prepare a detailed business plan.)
- Financial Projections – detailing not only in a proforma the revenues, but expenses in detail (more specifically payroll and employment generation)
- Curriculum vitae – resume of the all shareholders
- Organizational chart – detailing the corporate governance and structure
- Shareholder background check – for each of the shareholders
- Other requirements, as per the OECI’s request.
At Porto Capital, we assist with the preparation of all these documents.
Fees and Annual Reports
The tax incentive application fee is $750.00 USD. Once the tax decree has been granted to the business, annual reports must be filed 30 days after the filing of the Puerto Rico Corporate Income Tax Return is filed.
New! Tax Savings Calculator
Visit our Puerto Rico Act 20 Tax Incentives Savings Calculator to get an estimate on how much you could potentially save by relocating your business to Puerto Rico.
Should you have any questions on how to go about the Puerto Rico Act 20 tax incentive application, be sure to contact me below.
Disclaimer: The content of this Summary of New Tax Incentives Legislations in Puerto Rico has been prepared for information purposes only. It is not intended as, and does not constitute, either legal advice or solicitation of any prospective client and Porto Capital, Inc. nor its affiliates have any obligation to update any of the information contained herein.