Puerto Rico has emerged as the premier destination for individuals and businesses seeking significant tax savings. The government of Puerto Rico is actively attracting businesses and investors to the island with compelling tax incentives, which include a notably low corporate tax rate of just 4% and a complete exemption from taxes on capital gains. These enticing tax breaks span a variety of industries, solidifying Puerto Rico’s reputation as America’s last true tax haven. This unique combination of benefits not only enhances the island’s appeal but also positions it as a strategic location for various enterprises looking to optimize their tax liabilities.

Criterion Advisors Group is dedicated to providing you with the essential information and, crucially, the education necessary to make informed decisions regarding tax and estate planning. Puerto Rico offers exceptional advantages in terms of tax benefits and estate management, which include robust asset protection measures. Our expertise allows us to effectively leverage the provisions outlined in Act 60, ensuring you qualify for the right incentives. This strategic approach enables you to legally shield yourself and your business from excessive tax burdens while taking full advantage of the available benefits.

Corporate Tax Savings

Our experienced team collaborates with corporations from the United States and around the globe to establish operations in Puerto Rico, enabling them to capitalize on the extensive array of tax benefits available. This initiative is not merely about relocating a business; it involves a comprehensive understanding of the local tax landscape to maximize savings. While other firms may promote the tax incentives associated with moving to Puerto Rico, they often fail to clarify the additional taxes that may apply at both the corporate and individual levels. By providing the correct guidance and options, these potential liabilities can be effectively minimized or avoided altogether, allowing businesses to focus on growth.

Criterion Advisors Group is committed to crafting a customized game plan that ensures you pay the least amount of taxes possible. We will detail which exemptions are applicable to your specific type of business and guide you on how to position your operations in Puerto Rico strategically. This positioning is crucial for qualifying for the largest tax breaks available while also minimizing or completely eliminating other taxes that may arise from particular events. Our mission is to empower clients with knowledge, enabling them to make informed decisions that align with their financial goals.

Big Tax Breaks for Corporations

Puerto Rico is successfully attracting both U.S. and foreign businesses with its robust tax incentives. In addition to the impressively low corporate tax rate, the island offers a 60% exemption on municipal taxes, which further enhances its appeal as a business destination. The extensive range of credits and exemptions specifically tailored to various industries, such as manufacturing and film production, adds to the attractiveness. A diverse array of businesses, including computer development firms, advertising agencies, financial services companies, and call centers, have already established operations in Puerto Rico, realizing substantial tax savings in the process.

Puerto Rico, America’s Best Tax Shelter

Puerto Rico has solidified its position as a serious contender among global locations that offer individuals protection from tax exposure. Unlike many other countries recognized as tax shelters, which often require individuals to renounce their U.S. citizenship, Puerto Rico allows its residents to maintain their U.S. citizenship status. This unique aspect means that Puerto Ricans are not subject to the “Ex Pat” requirements typically associated with offshore tax havens. Furthermore, it is particularly advantageous for U.S. citizens to note that the IRS has no jurisdiction over Puerto Rico, which means there are no exit taxes on capital gains should one decide to relocate.

Benefits That Go Beyond Taxes

Puerto Rico offers far more than just attractive tax savings; it provides an ideal atmosphere for business operations. The island’s banking system is backed and regulated by the FDIC, ensuring a secure financial environment. English and Spanish are the official languages, making communication seamless for U.S. businesses, as these are two of the most widely spoken languages globally. Additionally, American citizens do not need a passport to travel to Puerto Rico, which simplifies business operations further. Strategically located midway between North and South America, Puerto Rico serves as a vital link between these two continents, enhancing its appeal to global businesses and investors.

To qualify for tax incentives, export services and commerce must be conducted within Puerto Rico for customers located outside the island. The services offered should not have any connection to activities conducted within Puerto Rico itself, ensuring that the focus remains on external markets. This requirement is crucial for businesses aiming to maximize their tax benefits while adhering to local regulations.

The benefits and eligible activities under these tax incentives include the export of goods and services, finance, insurance, the visitor economy, manufacturing, agriculture, infrastructure, energy, creative industries, and entrepreneurship. These diverse sectors reflect the broad opportunities available for businesses aiming to thrive in Puerto Rico’s favorable economic climate.

What is Puerto Rico’s Act 60?

Nearly nine years ago, the government of Puerto Rico initiated a series of generous business tax incentives aimed at accelerating the island’s economic recovery. These incentives specifically target eligible entities within the service industry, which include accounting firms, advertising agencies, hedge funds, and various consulting firms. The first iteration of this legislation was introduced in January 2012 as Act 20, which was subsequently followed by several versions and amendments.

Act 20 established an exceptionally low corporation tax rate of just 4% for businesses operating within Puerto Rico, applicable to income generated from customers outside the territory. This provision focused on remote service capabilities, determining eligibility based on whether a company’s owners and employees could perform their roles in Puerto Rico while serving clients located in other countries. This criterion has been pivotal in shaping the island’s business landscape.

One of the most significant benefits this legislation conferred upon Puerto Rico’s economy is that tax residents are not subject to U.S. federal income tax. This responsibility for taxation is managed entirely by the government of Puerto Rico, allowing residents to enjoy a favorable tax environment that fosters growth and investment.

Act 20, which focused on export services, was ultimately repealed and replaced by Act 60 Export Services in January 2020. This transition brought about modifications to the eligibility requirements, making it essential for businesses considering a move to Puerto Rico to understand the updated tax advantages as outlined in Act 60. This understanding is crucial for those looking to benefit from the new provisions.

An Overview of the Tax Benefits Under Act 60 of Puerto Rico:

According to Act 60 of Puerto Rico, eligible businesses operating on the island and generating revenue from customers located outside of Puerto Rico are entitled to the following benefits for such income:

1. A tax rate of 4% applicable to corporations
2. A tax exemption of fifty percent for the municipality.
3. An exemption from local and state property taxes equal to 75%.
4. An exemption from taxes equal to one hundred percent on all distributions made from earnings and profits *
5. For the first five years of their existence, qualifying small and medium-sized firms can claim a tax exemption equal to the whole amount.

Requirements for Establishing Eligibility for Puerto Rico-Based Operations:

To begin, it is essential to understand that the term “operations within Puerto Rico” specifies that regardless of the value or nature of a company’s work product, the product must be manufactured on Puerto Rican soil. This requirement ensures that the economic benefits of the tax incentives are retained within the local economy.

Once a business owner has determined their eligibility based on the geographical location of their company, there are additional critical eligibility factors to consider. These factors include ensuring that every business owner and employee is fairly compensated for their work. This requirement not only reinforces fair labor practices but also aligns with the broader goals of economic development.

1. It is imperative that the income received by owners and workers be subject to taxation at the ordinary income tax rate for Puerto Rico, which can reach as high as 33% in some cases.
2. Businesses that fall within the scope of Act 60 are required to undergo independent audits by the Office of Industry Tax Exemption (OITE) at a minimum frequency of once every two years. This auditing process ensures compliance with the regulations and maintains the integrity of the tax incentive program.
3. Companies that have already been established and have submitted an application for the Act 20 version of the incentive may also be subject to audits; however, the specifics of this situation have not yet been fully addressed.
4. Companies that generate more than $3 million per year are expected to directly employ at least one individual from Puerto Rico who actively participates in business activities directly related to the company’s offerings. This requirement applies exclusively to businesses with annual revenues exceeding $3 million.

5. Act 60 Export Services Businesses May Not Have a Nexus with Puerto Rico. This stipulation is crucial for maintaining the integrity of the tax incentive program.

It is a common concern among business owners to question whether they can still qualify for the export services tax incentive if they serve customers both within and outside of Puerto Rico. The straightforward answer is no. According to the statute, a company must not have any connection or nexus with Puerto Rico in order to be eligible for the tax cut. This means that the services provided by a business must not be related in any way to the operations of a trade, business, or other activities conducted within Puerto Rico. Essentially, this condition mandates that any client of a business located in Puerto Rico must be based outside the island.

Business Entities that do not qualify for the Tax Benefits Under Act 60:

The following entities are ineligible for the tax incentives under Act 60 due to their perceived nexus with Puerto Rico:

1. Any company or organization that has generated revenue through activities conducted within the island’s borders for Puerto Rico customers.
2. When a sale of any property has occurred in Puerto Rico with the intent to use, consume, or dispose of the property there, and the proceeds from the sale are derived from funds that were already on the island.
3. Companies that have engaged in lobbying efforts concerning the rules, statutes, or administrative responsibilities of the government of Puerto Rico or any of its agencies.

4. Companies that have provided direct advice to the Puerto Rican government or any of its instrumentalities regarding the rules, laws, or administrative obligations of the government of Puerto Rico or its branches.
5. Entities that engage in any activities specifically designated by the Secretary of the Department of Economic Development for Puerto Rico.

There are approximately two dozen distinct types of companies that meet the requirements to be eligible for the Act 60 business program. At Criterion Advisors Group, we assist business owners who have specific inquiries regarding the eligibility of their business and other conditions for the Export Services tax incentives under Act 60. If you are a business owner with questions or concerns, please reach out to us via email at peter@criterionadvisorsgroup.com, by phone at 939-391-1860, or by completing our contact form. Our team is here to guide you through the process of obtaining a tax exemption decree for your business, assessing whether all or part of your business activities should be relocated, and ensuring that your relocation plans and all other eligibility criteria are met.