Puerto Rico Act 20 - The Export Services Act
The government of Puerto Rico introduced Act 20, along with Act 22 (the Individual Investors Act, Ley 22, which applies to individuals) on January 17, 2012, with the goal of boosting the economy. Both these acts were implemented with attractive incentives with aim to lure investors and upper-class individuals to move to the island to do business.
Puerto Rico is actively seeking to become a larger hub of regional and international business activity. Act 20 was set up specifically with the service industry in mind. In the past, other industries such as manufacturing and tourism experienced growth spurts and increased contribution to the GDP due in part to concessions by the government to cultivate these sectors. Now, incentives under this policy have been created to spur activity in this sector.
Act 20, The Export Services Act, provides reduced corporate tax rate as well as tax exemption on dividends to eligible service-related businesses in Puerto Rico. It is hoped that the benefits under this act this will encourage both local and foreign service-industry companies, such as financial services, consulting services and call centers, to conduct business out of Puerto Rico.
What Are The Act 20 Benefits?
- 4% corporate tax / fixed income tax rate
- 100% tax exemption on dividends
- 60% exemption on municipal taxes. If the business sets up shop in the designated “industrial development zone” location in Puerto Rico, you may be eligible for a 90% exemption on municipal taxes
- 100% exemption on property taxes for the first 5 years, and then 90% exemption thereafter. Only certain export service businesses services are eligible.
- No federal taxes on Puerto Rico source income
- 20-year decree guaranteeing the above rates, which is renewable for a further 10 years if certain conditions are met – a possible 30-year lock in of these rates
Are you Eligible?
In order to receive all the benefits noted above, all businesses (both local-based and foreign-based) must meet the following requirements:
- The business must provide qualifying services (see the list of qualifying services below), from Puerto Rico, to recipients outside of Puerto Rico.
- These services are commonly provided by a new local LLC or Corporation.
- The business must employee 5 or more Puerto Rico residents.
- The owner of the business can be one of the 5 required employees.
- The business has 6 months to hire the first 3 employees, and 2 years to meet the full requirement.
- The owner must receive a reasonable salary based on the services provided to the business.
- The business must file an annual report including information such as applicable permits, certifications, licenses and registrations.
Still hesitant? Setting up in Puerto Rico may be easier than you think if you have an existing business. One common structure follows:
- The existing business (CurrentCo) continues to provide services to its clients.
- The owner moves to Puerto Rico and creates a new local LLC or Corporation (NewCo), counting as one of the 5 required employees.
- NewCo provides qualifying services to CurrentCo.
Please note that services provided by CurrentCo will not be eligible for any Act 20 tax concessions, just those of NewCo. If CurrentCo and NewCo are related entities (because of shared ownership), the transactions between the entities may need to be “Arm’s length” transactions and may require a pricing transfer study. Consult a tax professional for more information.
Another target of Act 20 Puerto Rico is the local business community. The government is hoping to encourage local service providers to expand their businesses by offering their services to clients located outside Puerto Rico.
What Types of Companies Are Considered “Service” Providers?
Please see excerpt of the Act outlining the areas of business that are eligible to receive benefits under Act 20:
- Research and development;
- Advertising and public relations;
- Consulting services, including, but not limited to, economic, scientific, environmental, technological, managerial, marketing, human resources, computer and auditing consulting services;
- Creative industries;
- Production of blueprints, architectural and engineering services, and project management;
- Professional services such as legal, tax and accounting services;
- Centralized management services, including, but not limited to, strategic direction, planning, distribution, logistics and budgetary services carried out by the headquarters or similar regional offices of an entity engaged in rendering such services;
- Centers for electronic data processing;
- Development of licensable computer software;
- Voice and data telecommunications between persons located outside of Puerto Rico;
- Call centers;
- Shared services centers, including, but not limited to, accounting, finance, tax, auditing, marketing, engineering, quality control, human resources, communications, electronic data processing, and other centralized management services;
- Storage and distribution centers;
- Educational and training services;
- Hospital and laboratory services;
- Investment banking and other financial services, including but not limited to, asset management, management of investment alternatives, management of activities related to private capital investment, management of hedge funds and high risk funds, management of pools of capital, management of trusts that serve to turn different types of assets into stocks, and management of escrow accounts;
- Commercial and mercantile distribution of products manufactured in Puerto Rico for jurisdictions outside Puerto Rico;
- Assembly, bottling and packaging operations of products for export;
- Marketing centers;
- Trading companies; and
- Any other service designated by the Secretary of the Department of Economic Development and Commerce of Puerto Rico.
Who is Moving to Puerto Rico?
If you are interested in this move, you’re not alone. Based on data released by the Department of Economic Development and Commerce, close to 400 businesses have reaped the benefits since the Act was implemented in 2012.
Though mainly consulting and financial services have been the pioneers, there have also been many advertising firms, computer development firms, and call centers. Not only has this increased activity contributed to the tune of about USD 150 million in investment, you can also feel satisfied by knowing you are contributing to the island’s local workforce – over 7000 new jobs have been created as a result of the Act.
Ready to file your Puerto Rico Act 20 Application?
As with all tax matters, we highly suggest consulting with a lawyer and accountant versed in the Act before submitting an application or moving your business to the island. You can see the Act 20 application here
Once you have your eligibility confirmed, you can move forward with filing the Export Services Act tax exemption decree.
The information provided above is just a summary of the implications under Act 20. Is your business ready to take the next step? See our listings of reviewed CPAs and Tax Consultants to find the best one for your business.