If you are looking to settle your business or launch a new one in Puerto Rico, the process can be intimidating. Here are the essentials on Puerto Rico’s tax incentives for small and medium businesses and individuals via Kevane Grant Thorton:
On July 1st, 2019, the government of Puerto Rico enacted Act No. 60 (Puerto Rico Incentives Code). Under this code lies all current and outstanding tax incentive laws. The DDEC (The Puerto Rico Department of Economic Development and Commerce) is the primary government institution tasked with promoting industry and foreign direct investment in Puerto Rico.
The following is a list of the most important incentives currently in force in Puerto Rico:
- Small and medium businesses (PYMES)
- Exportation of goods or services
- International financial entities (IFEs)
- International insurers and reinsurers
- Public-private partnerships
- Private equity funds
- Cruise-ship industry
- Renewable energy
- Agroindustrial activities
- Film and creative industries
- Foreign trade zones
- Priority Projects for qualified opportunity zones (OZs)
The standard terms and incentives to exempt businesses under Act 60 are:
- 4% fixed income tax rate on eligible income
- 75% exemption on property taxes
- 50% exemption on municipal taxes
- tax exemption grant period standardized to 15 years, with an extension of 15 additional years;
- Eligible businesses with an annual projected or actual volume of business of more than $3 million shall maintain at least 1 employee if it’s a grantee of export services, and 3 employees for manufacturing services; and research and development tax credits.
1. Small and medium businesses (PYMES, acronym in Spanish):
Under Act 60, PYMES are eligible with average gross receipts of $3 million or less during the previous 3 years and are subject to additional benefits during the first 5 years of operations. If an eligible business classifies as a PYME, it will enjoy the following incentives during the first 5 years of operations:
- 2% fixed income tax rate on eligible income;
- 100% exemption on property taxes;
- 100% exemption on municipal taxes; and up to 30% tax
- credits on purchases of manufactured products in Puerto Rico.
Resident individual investors (previously Act 22-2012) seeks to attract new residents to the island by providing a total exemption from Puerto Rico’s income tax on all passive income realized or accrued after the individual becomes a bona fide resident of Puerto Rico.
- Under Act 22, the tax incentives applied to any individual investor that became a Puerto Rico resident on or before the taxable year ending on December 31, 2035, provided the individual was not a resident of Puerto Rico at any time during the 6-year period preceding January 17, 2012.
- Under Act 60, the residency test of December 31, 2035 remained unchanged, although the individual investor shall not have been a resident of Puerto Rico at any time during the 10-year period preceding July 1, 2019.
- Some of the tax incentives for individual investors are:
- 100% exemption from Puerto Rico income taxes on interest and dividend income derived during the tax exemption period;
- 100% exemption from Puerto Rico income taxes for capital gains derived by resident individual investor for appreciation of securities accrued after becoming a Puerto Rico resident, if such gain is recognized prior to January 1, 2036; securities held prior to the move are subject to regular capital gains rates if disposed within 10 years from the date of the move; or 5% if sold after 10 years but before 2035; and Grant expires on December 31, 2035.
- As requisite for the granting of these benefits, the individual investor must provide evidence of a personal or commercial bank account in a financial institution or credit union with a presence in Puerto Rico. If the individual investor has not moved to Puerto Rico, he or she may submit the evidence as soon as he or she resides in Puerto Rico.
- Furthermore, under Act 60, the individual investor must acquire residential property from an unrelated person, within 2 years after the effectiveness of the Grant, and shall make annual contributions of at least $10,000 to not-for-profit organizations operating in Puerto Rico duly certified as such by the Puerto Rico Department of Treasury.
3. Other Eligible Entities:
- Businesses in Vieques and Culebra
- strategic projects deemed by DDEC to have extraordinary importance for the economy of Puerto Rico
- new pioneer activities that possess special qualities for the socio-economic development of Puerto Rico.