Residency Requirements for Export Services
There's a lot of information available that explains the Bona Fide residency requirements for your Act 22 decree, such as being present in Puerto Rico for 183 days of the year and passing the closer connection test. But did you know that the rules for Act 20 companies, and their owners, are a bit different?
Services performed in Puerto Rico
Being able to work from anywhere in the world is one of the perks that many internet-based and "export services" companies enjoy. It's also what makes it easier for many Act 20 companies to move operations to the island and benefit from the tax incentive. But once you make the move, you need to ensure that the services your company performs for its clients are all from Puerto Rico. Services performed from the mainland U.S. may still be taxable by the IRS.
How does this apply to me?
Let's say that you created a marketing consulting company in Puerto Rico and export that service to companies in the mainland U.S. without a nexus to Puerto Rico. The services that you’re paid for include Competitive Analysis, Advertising Recommendations and Optimizations, and Marketing Strategy Recommendations, to name a few.
Throughout the year, you perform these services from your office or other place of business in Puerto Rico via emails, calls, and video conference. However, if you decide to travel during the summer and visit California, where you will take some vacation time as well do some work, you’ll need to consider what type of work that is. If it includes the services that your company generates revenue from, like meeting a client to discuss their advertising performance and recommend optimizations, then it's no longer performed only from Puerto Rico and the IRS will expect you to pay taxes on a portion of your revenue.
Does this mean I can't work in the U.S. at all?
No, not exactly. There may be functions of your job that are not directly related to performing the service and do not directly impact your revenue or taxation. Using the same example of a Marketing Consultant, you can still attend tradeshows and conferences, pitch new clients, meet with media vendors, etc. These tasks help you grow your business but are not what you’re getting paid for and therefore don’t have a direct impact on your Act 20.
To avoid tax complications, make your vacation time a true getaway. Leave the work in Puerto Rico and enjoy your time off!
Learn more about the benefits and requirements of Act 20 with our detailed guide.