Puerto Rico is recently seeing a large influx of entities and individuals moving to the Island to do business. The reasons are simple: the US jurisdiction is a piece of paradise that’s culturally diverse, generally bilingual, with a great workforce and fertile ground for business. Recent governments have made significant strides in turning Puerto Rico into a business-friendly jurisdiction and the new reality of being able to work from anywhere, allows people that move to the Island to live and work where they vacation.
An important part of these efforts are the tax benefits that Puerto Rico offers. In this piece we set forth a high-level summary of three provisions that currently provide very competitive benefits for your or your clients. These are: Individual Resident Investor, Export of Services and Opportunity Zones. Please note that these benefits are in addition to the fact that Puerto Rico is a US Territory exempt from federal taxes.
1. INDIVIDUAL RESIDENT INVESTOR – Act 60-2019 Section 2021.01 (former Act 22)
Act 60-2019, the Puerto Rico Incentives Code, groups together most of Puerto Rico’s incentives laws into a single uniform code. Chapter 2 of the Code contains the incentives focused on individuals, including the Individual Resident Investor incentive previously offered (and commonly referenced under Act 22-2012.
This incentive is available to any individual that wasn’t a bona fide resident of Puerto Rico between January 17, 2006, and January 17, 2012 (these dates have varied at different times and should be confirmed at the time of application to confirm eligibility) and moves to PR. To become a bona fide resident of Puerto Rico, as defined in Section 937 of the Internal Revenue Code, individuals must comply with the Presence Test (non-consecutive 183 days), Tax Home Test, and Closer Connection Test. If any of these tests are not met, the individual may not be considered a bona fide resident of PR and may not enjoy the benefits of the incentive.
- Applicant wasn’t a Puerto Rico Resident between January 17, 2006, and January 17, 2012.
- Become and remain a bona fide Puerto Rico resident.
- Comply with a $10,000 annual donation to not for profit entities that operate in PR and are not controlled by the taxpayer of close relatives.
- Buy a residence within the first 2 years of getting the decree.
Benefits of the Individual Resident Investor Incentive
- INTERESTS AND DIVIDENDS – Derived after becoming resident of PR, from any source, willbe 100% exempt in PR. They may be subject to other jurisdictions taxes depending on the source of the income.
- SHORT TERM AND LONG-TERM PERSONAL PROPERTY CAPITAL GAINS – Gains from the sale of any personal property acquired after becoming a resident of PR will be 100% exempt from taxes in PR.
- SHORT TERM AND LONG-TERM GAINS OF PERSONAL PROPERTY ACQUIRED BEFORE PR RESIDENCY: The portion of the gain related to the appreciation of securities after establishing PR residency will be 100% exempt. The portion of the gain related to the appreciation of securities before establishing PR residency will be sourced to the applicable jurisdiction and may be subject to taxes.
2. EXPORT OF SERVICES – Act 60-2019 Section 2031.01 (formerly Act 20)
Act 60-2019, the Puerto Rico Incentives Code, groups together most of Puerto Rico’s incentives laws into a single uniform code. Chapter 3 of the Code contains the Export of Services Incentives previously offered (and commonly referenced as) under Act 20-2012.
This incentive, available both to Puerto Rico residents and people coming from abroad, applies with respect to any entity with a bona fide office or establishment located in Puerto Rico that is or may be engaged in an eligible service. Services must be performed for non-resident individuals and/or foreign entities that have no nexus with Puerto Rico and the Eligible Service provide must not be related to the conduct of a trade or business in Puerto Rico.
What are the Eligible Services?
- Research & development
- Advertising and public relations
- Consulting services
- Creative Industries Services
- Production of blueprints, architectural & engineering services, and project management.
- Professional services, such as legal, tax, and accounting.
- Electronic Data Processing Centers
- Computer Software Development
- Distribution and Licensing of software via physical distribution, cloud computing, blockchain, web based, SAAS, etc.
- Telecommunication Services
- Call Centers
- Shared Services Centers
- Educational and training services
- Investment banking and other financial services
Benefits of the Export of Services Incentive
- 4% Income tax rate on eligible services
- Tax Free Distributions to PR Residents
- 75% exemption on real and property taxes
- 50% exemption on volume of business taxes
- 15-year decree term, renewable for an additional 15-year period.
3. Puerto Rico is an Opportunity Zone
The Tax Cuts and Jobs Act created the qualified opportunity zone designation under Sections 1400Z-1 and 1400Z-2 of the Federal Internal Revenue Code (IRC). About 95% of the Island was designated an Opportunity Zone (OZ) while roughly 25% of each state met the thresholds for designation.
Act 60-2019, the Puerto Rico Tax Incentives Code, creates a framework for local Opportunity Zones and Qualified Opportunity Funds (QOFs) in Puerto Rico. Resolution 19-01 of the Committee of Priority Projects in Opportunity Zones, issued August 19, 2019, clarifies the Priority Project designation and cleared the path for increased investment opportunities.
Federal Benefits of investing in a QOF
- Deferral of taxes owed on eligible capital gains reinvested in a QOF until the earlier of December 31, 2026, or the date the investment is sold.
- Total exclusion from taxable income of capital gains realized upon the sale of the investment if held for at least ten (10) years.
QOFs are invited to explore all types of business opportunities in Puerto Rico that fit the federal framework. Most of the eligible business activities are incentivized under other sections of the Incentives Code, but if a particular business activity is not covered under any other incentive, the Opportunity Zones – Priority Projects Framework was created to address the opportunity.
To be eligible for the benefits of the OZ-Priority Project framework, the QOF must invest in an eligible business that (1) conducts the entirety of its business within an OZ, (2) the commercial activity undertaken is not eligible for tax exemptions under any other tax incentives law, (3) the business is managed by the QOF or an entity in which the QOF invests, and (4) the activity is considered a priority project.
A Priority Project is a trade or business, or other revenue generating activity which contributes to the diversification recovery or social transformation of the community in the eligible zone.
The initial list of priority projects within the opportunity zones, established that the following commercial activities shall qualify as priority projects:
- Development of residential real property that is Low-Income Housing as defined by the IRC or by the Puerto Rico Department of Housing, for sale or rent.
- Development of residential and/or commercial real property for sale or rent.
- Development of industrial real property or sale or rent.
- Substantial improvement of an existing commercial property for sale or rent.
Notwithstanding the foregoing list, the Committee can amend this Resolution, from time to time, in order to include additional commercial activities or eligible business and any interested person may request that a particular activity be designated a Priority Project at any time.
Local Benefits for Opportunity Zones – Priority Projects
- 18.5% Fixed Income Tax Rate on income derived eligible activities by an eligible business.
- 25% exemption on Real and Personal Property Taxes. Municipalities may increase this exemption up to 75%.
- 25% exemption on Municipal License and Municipal Construction Excise Taxes. Municipalities may increase this exemption up to 75%.
- Transferable investment credit of up to 25% of the amount invested on an QOF.
- Expedite Permit Process.
- Tax Free Dividends to PR Residents
What to do next?
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