Savvy business owners and operators are always looking for ways to keep more of their revenue, and reducing taxes is a great place to start. Because your location plays such a central role in the taxes you pay, you may find yourself looking for a business-friendly spot for your operation.
This might be especially true if you’re running a business in one of the 10 worst state tax climates in the U.S., as ranked by the Tax Foundation’s State Business Tax Climate Index. The list takes into account a number of different factors—including corporate, property, sales, and unemployment taxes—and rates how well states structure their tax systems. The 10 worst?
- Alabama
- Louisiana
- Vermont
- Maryland
- Arkansas
- Minnesota
- Connecticut
- New York
- California
- New Jersey
Even if you’re not located in one of these states, you may simply want to investigate your options to see if you can uncover a better situation that leaves you with more profits after all your taxes have been paid.
Enter Puerto Rico and its newly-revamped tax laws.
A Quick History of Puerto Rico’s Attractive Tax Incentives
In 2012, Puerto Rico put in place two economic incentives to attract corporations and individuals to the island, with the goal of fostering economic development:
- Act 20, which offered a low 4% corporate income tax rate for companies who relocate, as well as a 100% exemption on distributions from earnings and profits, among other benefits.
- Act 22, which targeted high-net-worth individuals by promising 0% tax on interest, dividends, and capital gains earned while living in Puerto Rico.
In June 2019, the government of Puerto Rico made some significant changes to these incentives and consolidated the benefits of Acts 20 and 22 under a new law: Act 60, el Código de Incentivos de Puerto Rico (the Puerto Rico Incentives Code). The act took effect on January 1, 2020.
Next, we’ll run you through the provisions of Act 60 and what they could mean for you if you decide to relocate your business to the U.S. territory of Puerto Rico.
An Introduction to Act 60—and Its Benefits for Businesses & Individuals
Businesses that relocate to Puerto Rico and export services to individuals or companies located outside the territory can enjoy a unique set of benefits under Act 60. In particular, a number of companies have gone all-virtual in response to the COVID-19 pandemic, and this kind structure is the perfect setup for Act 60’s incentives. That said, there are a series of requirements that both the company and its owners have to meet, but we’ll get to that in a moment.
First, let’s cover what Act 60 has to offer business owners, which includes:
- A 4% corporate tax rate
- A 0% rate on distributions of dividends
- 75% exemption on property tax
- 75% exemption on municipal construction rate
- 50% exemptions on municipal license tax
Additionally, if you choose to locate a small to medium-sized business on Vieques or Culebra, the two smaller islands that lie just east of Puerto Rico, you’ll get a few extra incentives for the first five years.
Individuals who qualify for Act 60 also enjoy significant tax breaks, including a 100% tax exemption from Puerto Rico income taxes on:
- Dividends
- Interest
- Short-term and long-term capital gains
- Cryptocurrencies and other crypto assets
Note: There are a few nuances that apply to these incentives, including the fact that this exemption doesn’t apply from dividends sourced in the U.S., nor does it apply to interest income or real estate in the U.S.
Additionally, in order to qualify for benefits under Act 60, businesses need to meet a specific set of criteria.
#1: Eligible Types of Business
As we mentioned earlier, businesses must focus on exporting services outside Puerto Rico to qualify for Act 60. Additionally, they also must belong to one of the listed types of eligible businesses, which include:
- Research and development
- Advertising and public relations
- Consulting services, including economic, environmental, technological, scientific, managerial, marketing, human resources, computer, and auditing services
- Business consulting
- Creative industries
- Drafting of construction plans and engineering, architectural, and project management services
- Professional services such as legal, tax, and accounting services
- Centralized management services, such as strategic direction, planning, and budgeting
- Electronic data processing centers
- Computer software development
- Distribution of software, as well as licensing, subscription, and service fees
- Voice, video, audio, and data telecommunications between persons located outside Puerto Rico
- Call centers
- Shared service centers, including accounting, finance, tax, auditing, marketing, and other centralized management services
- Educational and training services
- Hospital and laboratories services, including medical tourism and telemedicine sites
- Investment banking and other financial services
- Marketing centers providing space and services including secretarial, translation, and other data processing services to businesses outside Puerto Rico
- Other services deemed eligible because they are considered to be in the best interest and for the social and economic well-being of Puerto Rico
Additionally, in order to be eligible for the Act 60 benefits, any businesses with an annual volume greater than $3 million must directly employ at least one full-time employee, who must be a Puerto Rican resident and materially participate in the business’s activities.
To review all of the requirements within the statute, you can find an English translation of Act 60 on the Invest Puerto Rico website.
#2: Bona Fide Residence
Entrepreneurs and business owners who want to take advantage of Act 60 also have a few personal requirements to meet. The most notable—and the one that generates the most questions—is the requirement that owners establish bona fide residence in Puerto Rico.
In other words, in order to benefit from the act’s incentives, those who wish to qualify can’t be Puerto Rican residents in name only. Instead, they need to pass a multi-part test that qualifies them for bona fide residence, which includes:
- The presence test, which tracks your physical location throughout the year. The key is proving to the IRS that you weren’t in the continental U.S. for a significant amount of time during the year. If you spend at least 183 days in Puerto Rico during each tax year, you’ll pass this part of the test easily.
- The tax home test, which examines your primary place of employment (or residence, if you don’t have a primary place of employment).
- The closer connection test, which looks at things like where your family lives, where your belongings are located, and more. In other words, if your family lives in Florida, you likely won’t pass this portion of the test.
Meeting these requirements within the right period can be tricky, but they’re critical to taking advantage of all of Act 60’s tax benefits. You may want to consult with a professional to make sure you get all the details right—and document them properly.
Finally, one note: Act 60 has changed one of the key provisions around individual eligibility. In order to qualify, you must not have lived in Puerto Rico since January 1, 2010.
Is Puerto Rico the Right Spot for Your Business?
If you’ve ever dreamed of living on a Caribbean island, Puerto Rico offers a lot of benefits for U.S. businesses and business owners. If you qualify for the Act 60 incentives, you’ll reap a number of tax benefits that can allow you to keep more of your business revenue almost immediately. You’ll also find a friendly community of entrepreneurs and business owners in Puerto Rico to network and socialize with. (And did we mention the gorgeous, white sand beaches?)
Just make sure you stay in close contact with your trusted professionals, including your accountant and your legal team. They’ll help you navigate the qualification process and the paperwork, so you’ll be all set to enjoy your life and your business on la Isla del Encanto—the Island of Enchantment.
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