Act 60 Tax Incentives for Real Estate & Businesses in Puerto Rico

Puerto Rico is an incredibly attractive location for U.S. citizens to set up a business or buy Real Estate. This exotic island provides business owners with a range of various tax incentives that Americans are flocking to be a part of. As a result, Puerto Rico has become a major hot spot for wealthy Americans, major corporations, and also just normal small and mid-sized business entrepreneurs that want to legitimately lower their tax bills. Starting in 2012 Puerto Rico began offering huge tax advantages to different kinds of business that relocate to Puerto Rico. As part of a plan to end a decade-long recession which was exacerbated by Hurricane Maria in 2017, Puerto Rico made tax reforms that sought to attract businesses and investors to the island. What later became known as Puerto Rico’s ACT 60 Incentives Code was developed, which is a collection of Tax Exemptions and Incentives that Puerto Rico now offers to businesses and investors of all types in order to turn Puerto Rico into a great place for entrepreneurs and talented people to do business.

Things to Know About Puerto Rico’s ACT 60 Incentives Code

ACT 60 compiles all current tax incentive laws into a single code to promote the opportunities and tools needed to create sustainable development on the island. The two most popular tax incentives are known as Act 20: The Export Services Incentive and Act 22: The Individual Investor Incentive. These are the 2 specific tax decrees we focus most on, as they apply to the majority of applicants applying for tax exemptions in Puerto Rico. The objective of these acts was to entice investors and entrepreneurs to Puerto Rico for business and Real Estate investments. Later, they were combined in 2019 as Act 60. At present, it is a very tax-friendly law with the most appealing tax rates for U.S. citizens who turn are willing to physically move and become Puerto Rican residents.

We will speak in depth about these 2 specific incentives, Chapter 3 of the ACT 60 Incentives Code, or the Incentive for Export Services & Commerce, which allows Puerto Rican businesses to legally pay a 4% corporate tax rate, and Chapter 2 for Resident Individual Investors, which eliminates capital gains and dividends taxes for Investors who live in Puerto Rico. Our goal is to give clients and potential clients as much information as possible to make the best-informed decisions they can for their business. Everyone I’ve spoken to around the island who has moved and taken advantage of the tax incentives, regardless of where they moved from or what motivated the move, I’m yet to meet anybody that isn’t overjoyed to be saving 90% or more on what they used to pay in tax. Companies and individuals of all types have chosen to vote with their feet and see how good this offer really is. A personal friend who does construction throughout the Southeast USA, went from paying $400,000 a year when its all said and done, federal, state, and local city taxes in New Orleans where he’s from. Now since he’s moved to Puerto Rico, we hang out by the pool and he tells me how great it feels to be paying something like $35,000-$40,000 on the same amount of annual income. To put it simply, Puerto Rico has become a HUB for American businesspeople wishing to leave the United States for a more tax-friendly environment, simply because it’s such a compelling case for many people. You can SAVE an extra $100,000-$200,000 a year or more, and also live in a beautiful place with some of the best beaches, and a like-minded local community around you that is experiencing the same great lifestyle changes.

Act 60 Tax Decrees – Qualifies Your Business & Investment Income For Tax Exemptions

In order to take advantage of the ACT 60 Incentives, a business or individual must obtain a formal tax decree through DDEC, which basically amounts to a contract between the applicant and the Puerto Rican Government stating the allowed tax exemptions. This decree will clearly indicate the tax rates as well as conditions levied by ACT 60. It will be considered a formal agreement between the applicant & the Government of Puerto Rico. Once you’re given all the tax benefits, they will be guaranteed for the duration of the decree, irrespective of the subsequent modifications to the applicable tax laws in Puerto Rico. As far as the validity of the tax exemption decrees is concerned, the Export Services & Commerce decree will have a period of 15 years that can be further extended an additional 15 years, and the Resident Individual Investor decree is valid until December 31, 2035.

Becoming A Resident of Puerto Rico

For Americans wishing to legally reduce what they owe each year, it is not recommended that anyone attempt to cut corners by saying they live in Puerto Rico ‘on paper’ but, in reality they are spending 9 months a year back home in the United States. If the IRS finds out, then that person would owe tax for every year as if they had never left the United States, plus penalties, so it must be done the correct way. In order to properly capitalize on this massive tax-saving opportunity, the person or business will have to actually move to Puerto Rico for most of the year; it’s required that decree-holders must physically reside in Puerto Rico to be eligible for Act 60 tax incentives. To be considered a bona fide Puerto Rican resident, you will need to pass a series of tests indicating that Puerto Rico is your true tax home:

• Presence Test: You must be physically present in Puerto Rico Island for a minimum of 183 days during the taxable year. 
• Tax Home Test: You should not have any taxable home outside of the island. In other words, you must have no Tax Nexus domiciled in any place besides Puerto Rico. 
• Closer Connection Test: You should not have a closer connection to the United States than Puerto Rico. You need to provide evidence that you’ve relocated to the island. A deed to your property is usually required to finalize and obtain the Act 60 Tax Decree and show that you’ve satisfied the requirement to purchase a piece of property.
• To avoid any taxes on capital gains, dividends, royalties, and interest, individuals are required to buy a primary residence in PR within the first two years of obtaining the decree. Additionally, make an annual donation of $10,000 USD or more to local Puerto Rican non-profit organizations.

Tax Incentives for Resident Individual Investors – Chapter 2 of Puerto Rico’s ACT 60 Incentives Code

This specific decree is designed for high-income earners and those with income from investments, stock holdings, and/or capital gains on bonds, stocks, or cryptocurrency.  

• Short & Long-term Capital Gains from Personal Property

You can enjoy 100% tax exemptions on short and long-term capital gains on personal property. That means, if an investor sells a property (that was purchased after becoming a resident of PR) then all of the profits are exempt from capital gains taxes. 

• Short & Long-term Capital Gains from Personal Property Purchased Before Becoming a Resident

If property is sold that was purchased before acquiring Puerto Rican residency, then you can also save on taxes by deferring the capital gains tax due from before becoming a resident of PR. Another interesting topic in Puerto Rico is the island’s designation as an Opportunity Zone which is a major generator of Real Estate activity around the island. We’ll save Opportunity Zones for the topic of another article, but it gives investors the opportunity to defer capital gains taxes on unrealized gains on assets they owned before moving to Puerto Rico. Any capital gains associated with property or securities holdings that appreciated before moving to Puerto Rico will be subject to the applicable taxes in the previous jurisdiction, but if investors realize their previous gains and then reinvest those funds into Puerto Rico, they can direct the capital toward Opportunity Zone projects which would defer the tax they owe for a number of years.

• Dividends & Interest Exemptions

For dividends or interest income from stocks, crypto, and bonds that have been earned after becoming a resident in PR, there are no taxes; they are 100% tax-exempt. However, they may be subject to tax owed in other jurisdictions depending on the source of the income. 

This is how the Resident Individual Investor incentive under Act 60 is beneficial to Investors and future-investors considering Puerto Rico. Especially if you are a high-income earner, there is arguably no better tax arrangement for wealthy and high-income Americans anywhere in the world.

Instead of paying high U.S. federal income taxes, you can now eliminate that annual expense altogether. Many productive American businesses and investors are better off to start looking at investing in tangible, income-producing assets like Real Estate in Puerto Rico that produce strong cashflows, and are located in one of the hottest AirBnB markets anywhere in the world.

Tax Incentives for Export Services & Commerce – Chapter 3 of Puerto Rico’s ACT 60 Incentives Code

Chapter 3 of Act 60 pertains to U.S. companies that relocate to Puerto Rico in order to export their services to clients and customers outside of Puerto Rico. Qualifying businesses enjoy several attractive tax benefits by relocating to the island. The tax benefits make a very compelling case for American businesses and entrepreneurs to relocate and establish their head management office in Puerto Rico, or at least shift a portion of the company’s operations from the U.S. to Puerto Rico and achieve a much more tax-efficient operation if they can’t physically move the whole business. 

• 4% Corporate Income Tax Rate

ACT 60 decrees that qualifying businesses pay a flat 4% corporate income tax on qualifying Puerto Rican sourced income generated through the export of services from the island. It’s a great deal for online businesses that have the ability to operate from anywhere and can move their head office outside the US while still serving their American customers without any change to the overall business. To take advantage of this tax structure, an entrepreneur can incorporate their business in Puerto Rico and begin running their operations from Puerto Rico. In doing so, the business is exporting its services from Puerto Rico, to businesses or customers outside of Puerto Rico and legally paying 4% tax on all service income. The stateside operation stays the same, nothing changes except that now the Puerto Rican business is managing all US-based operations and handling staffing, payroll, advertising, service, and all the other areas of the business. Businesses from all kinds of different industries ranging from Healthcare and medical service providers, manufacturing, and tourism, to digital marketing, consulting, online retail and countless others can qualify for the tax exemptions as long as services are being exported from Puerto Rico to clients outside of Puerto Rico, and their company is set up to physically operate from the island. 

Companies that have a revenue of $3 million or more are also required to hire one local Puerto Rican employee to help generate local economic activity and jobs through the new businesses that relocate to PR.

• No Tax on Royalties, Interest, or Dividends

Qualifying Export Service businesses are not required to pay any taxes on interest, dividends, royalties, and capital gains from bonds, cryptocurrencies, or stocks. 

Here’s how you really capitalize on this tax arrangement:  As an employee of your Puerto Rico company, you can pay yourself a reasonable local salary and get the rest of your income in tax-exempted dividends. The dividend distributions you pay yourself are 100% tax-exempt. 

• 100% Tax-Exempt Distributions from Earnings & Profits

All qualifying companies enjoy zero U.S. federal income tax on distributions from revenue and profits from the export services. 

• 90% Exemption on Property Taxes

Act 60 offers qualifying businesses a tax exemption of 90% on property tax. (100% exemption during the first 5 years of operations)

• 50% Exemption on Municipal Taxes

All 78 municipalities of Puerto Rico are allowed to impose a tax on the gross receipts of any entity involved in business within a specified area. For property-associated with tourism businesses, the tax rate of 0.5%. Financial institutions need to pay 1.5%. However, eligible companies are exempted from 50% license taxes, excise taxes, and other municipal taxes. 

Impact of Act 60 on Puerto Rico’s Economy

As per DDEC reports, Act 60 beneficiaries have been able to directly & indirectly invest $2.5 billion into the Puerto Rican economy. This has created around 36,000 jobs, significantly upgrading the employment status of the island’s job market. Additionally, the Real Estate industry has also experienced a positive curve as 68% of Investors that have benefitted from this tax law have also purchased at least one property in Puerto Rico. 

Just like many other Americans taking advantage of this incredibly generous set of tax incentives, you should also consider making the life-changing decision to bring your business and your life to Puerto Rico. We don’t expect that a deal this sweet is going to last forever, we want to help you get Grandfathered-in to the one of the best tax-reduction programs available anywhere for American Entrepreneurs!

Jonathan Braswell
j.braswellconsulting@protonmail.ch

For anyone seriously looking at Puerto Rico as a new lifestyle option for you and your family, or if maybe you’re just considering Puerto Rico as one small part of YOUR ‘Plan B’, Book a Call with me so I can help you set your life and business up in Puerto Rico. I guarantee I can help you to avoid some of the expensive mistakes and headaches that I’ve seen several Gringos make as they’ve moved here. – https://calendly.com/jbraswellconsulting/puerto-rico-act-60-call