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Act 20 & Act 22 Tax Incentive

 

In 2012, Puerto Rico passed legislation making it a tax haven for U.S. citizens that become residents of Puerto Rico. The tax laws, known as Act 20, the Export Services Act, and Act 22, the Individual Investors Act, shields new residents residing in Puerto Rico for at least half of the year from paying most federal income taxes. The U.S. Tax Code generously exempts Puerto Rico sourced income from federal tax and, under the law, residents pay minimal or possibly no taxes on interests and dividends, as well as capital gains. Additionally, property taxes are significantly lower than property taxes in the mainland U.S. Thus, making Puerto Rico a mecca for exportation of international services worldwide.

 

Because residents of the island are considered U.S. citizens but subject to different tax laws, Americans avoid paying an exit tax of 23.8% on unrealized capital gains when relocating to Puerto Rico. All this makes Act 20 and 22 tax incentives appealing to owning real estate in Puerto Rico. The Act 20 and 22 incentives expire on December 31, 2035 and include 100% exemption on dividends, interest on capital gains for these new bona fide residents of Puerto Rico. To that end, individuals must be present physically on the Island 183 days in the year and cannot have been residents in PR 15 years before the date in which Act became effective. BDO, international firm of tax advisors, has established presence around the World to better inform on rules and requirements.

 

Act 20 

 

Enacted on January 17, 2012, Act 20, known as the “Export Services Act” is intended to promote the exportation of services by providing great resources and opportunities for U.S. companies to bring their business to Puerto Rico and make it a service center for the World. It also promotes academic and private sectors development and research by granting exemptions and assistance with energy costs to companies willing to invest on growth of these key areas. To become exempt, the business needs to apply for a tax concession via a tax exemption decree considered a contract with the Office of Industrial Tax Exemption of the Government of PR. The decree will be secured during the term, 20 years with possible 10 year extension, regardless of changes in the law itself. To qualify, the business cannot have any previous connections, dealings or nexus with Puerto Rico.

 

Incentives:

  • Corporate tax rate- 4%

  • Municipal taxes exemption- 60%

  • Tax exempt dividends- 100%

  • No federal taxes on PR source income

  • Guarantee of these rates up to 20 years

  • Among other tax exemptions for specific types of businesses

 

Eligible businesses:

  • Any service decreed by the Secretary of the Department of Economic Development and Commerce of PR

  • Advertising, public relations

  • Call centers, telecommunications, service centers

  • Consulting services

  • Commercial art and graphic services

  • Computer software development

  • Engineering and architectural plans and designs

  • Economic, technological, environmental, scientific

  • Engineering, Information Systems

  • Human Resources, Management services, Marketing

  • Investment Banking and other financial services

  • Medical services, hospitals, laboratories

  • Research and development

 

 

Act 22

 

Main focus of this law is to attract individual investors and promote that they relocate to the Island. How? With total exemption from local income taxes on all passive income from the point they become legal Puerto Rican residents. Capital gains accrued before the individual became bona fide PR resident will be subject to preferential local income tax rates. To benefit, the individual investor needs to apply for a tax exemption decree with the Office of Industrial Tax Exemption of PR. Benefits will be granted for the term of such decree, until December 31, 2035, regardless of any changes to the law itself.

Incentives:

 

  • Tax on short and long-term capital gains- 100% exemption

  • Tax on dividend and interest income for new residents of PR- 100% exemption

  • Federal taxes on PR based income- 100% exemption

 

Eligibility:

Benefits apply to bona fide residents of Puerto Rico, present on the Island for at least 183 days of the taxable year, does not have a tax home outside of PR during the taxable year and does not have a closer connections to the US or a foreign country than to PR.