If you are thinking about moving your home or business abroad to find a “tax heaven” that is no longer necessary. Puerto Rico has enacted Act 20 and 22, offering significant tax benefits to attract businesses and individuals to the island. Puerto Rico is a US Commonwealth, which means it is part of the US but in some ways enjoys independence. Therefore, although the US has a general tax regime for its citizens, there are unique exceptions for Puerto Rican residents.
Act 20 Basics
On January 17, 2012 Puerto Rico enacted the Act 20 of 2012, as amended, known as the “Act to Promote the Export of Services” (the “Act 20”), providing tax exemptions and tax credits to businesses engaged in eligible activities in Puerto Rico. To enjoy such benefits, a business needs to become an exempt business by applying for a tax concession and obtaining a tax exemption decree. The decree is available for 20 years, with a possible 10-year extension.
Puerto Rico offers generous tax incentives to eligible businesses. Here are some examples:
- 4% fixed income tax rate on export service income (or even lower on certain cases, e.g. 3% for services considered strategic)
- 100% tax exemption on distributions from earnings and profits
- 90% tax exemption from personal and real property taxes for certain types of businesses (100% tax exemption for the first five years of operation)
- 60% tax exemption on municipal taxes (or even higher on certain cases)
Act 22 Basics
At the same time, Puerto Rico enacted the Act 22, known as the “Individual Investors Act” (the “Act 22”), to attract new residents there by offering a total exemption from Puerto Rico income taxes on all passive income and capital gains. The exemptions under the Act 22 are valid through December 31, 2035.
Here are some basic examples of the Act 22 tax exemptions:
- 100% tax exemption from Puerto Rico income taxes on all interest and dividend income (for income coming from sources outside of Puerto Rico, the tax rates may be reduced to 0% or 10%, respectively, by investing through certain Puerto Rico investment vehicles)
- 100% tax exemption on all capital gains accrued after becoming a Puerto Rico resident
Act 20 and 22 for Internet Business
To make it more attractive, Puerto Rico has recently eliminated the five employee requirement based on a law change signed on July 11, 2017. Now, there is no employment requirement. After moving your business to Puerto Rico, you will only pay 4% on Puerto Rico sourced business profit. And if you yourself move to Puerto Rico as well, you can then pay all the profits as dividends to yourself which are 100% tax exempted. Therefore, since internet business usually doesn’t involve many capital assets investment, relocating to Puerto Rico is relatively easy and may give you one of the most competitive tax incentives around, besides the all-year-around summer weather!
Disclaimer: This article is not intended to provide legal advice. Please consult an attorney for legal advice for your particular situation.
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