Tax Incentives

Act 20 // Act 22  

Few places on earth offer a return on investment the way Puerto Rico does. With an ever-growing array of services and emerging industries, part of your success will be directly attributable to the available incentives. In order to bolster the manufacturing sector and other strategic areas, the local government has created aggressive economic and tax incentives programs with the purpose of helping operations on the island become more profitable to those companies who manufacture here.

– Incentives Overview –

Act 20 – Export Services

Puerto Rico Tax Incentives On January 17, 2012 Puerto Rico enacted Act No. 20 of 2012, as amended, known as the “Export Services Act” (the “Act”), to offer the necessary elements for the creation of a World Class International Service Center. The Act provides tax exemptions and tax credits to businesses engaged in eligible activities in Puerto Rico. To avail from such benefits, a business needs to become an exempt business by applying for a tax concession and obtaining a tax exemption decree.

The Act provides benefits for services provided from Puerto Rico to outside markets. Eligible activities to receive benefits under the Act are services in the following areas:

  • Research and development
  • Advertising and public relations
  • Economic, scientific, environmental, technological, managerial, marketing, human resources, engineering,information systems, auditing and consulting services
  • Consulting services for any trade or business
  • Commercial art and graphic services
  • Production of engineering and architectural plans and designs, and related services
  • Professional services such as legal, tax and accounting services
  • Centralized managerial services, including, but not limited to, strategic direction, planning and budgeting, provided by regional headquarters or a headquarters company engaged in the business of providing such services
  • Services performed by electronic data processing centers
  • Development of licensee computer software
  • Telecommunications voice and data between persons located outside of Puerto Rico
  • Call centers
  • Shared service centers
  • Medical, hospital and laboratories services
  • Investment banking and other financial services, including but not limited to asset management, management of investment alternatives, management of activities related to private capital investment, management of coverage funds or high risk funds, management of pools of capital, trust management that serves to convert different groups of assets into securities, and escrow accounts management services
  • Any other service designated by the Secretary of the Department of Economic Development and Commerce of Puerto Rico

Act 22 – Individual Investors Act

On January 17, 2012, Puerto Rico enacted Act No. 22 of 2012, as amended, known as the “Individual Investors Act” (the “Act”). The Act may have profound implications for the continued economic recovery of Puerto Rico. The Act provides tax exemptions to eligible individuals residing in Puerto Rico. To avail from such benefits, an individual needs to become a resident of Puerto Rico and apply for a tax exemption decree.

Eligibility: The benefits of Act No. 22, are only available to bona-fide residents of Puerto Rico that were not bona-fide residents of Puerto Rico for the 6-year period preceding the enactment of the Act on January 12, 2012 (“Eligible Individuals”). Generally, a bona-fide resident of Puerto Rico is a person who: (1) is present for at least 183 days during the taxable year in Puerto Rico; (2) does not have a tax home outside of Puerto Rico during the taxable year; and (3) does not have a closer connection to the United States or a foreign country than to Puerto Rico.

Although Puerto Rico is a U.S. territory, pursuant to Section 933 of the U.S. Internal Revenue Code of 1986, as amended, bona-fide residents of Puerto Rico are not subject to U.S. federal income taxes on income derived from sources within Puerto Rico.

Therefore, U.S. citizens that are bona-fide residents of Puerto Rico benefiting from the Act will only be subject to federal income taxation on income derived from sources outside of Puerto Rico.

Act 273 – International Financial Center Regulatory Act

On September 25, 2012 (“Act 273”), Puerto Rico enacted Act No. 273, also known as the “International Financial Center Regulatory Act” (the “Act”). The Act provides tax exemptions to businesses engaged in eligible activities in Puerto Rico. To avail from such benefits, a business needs to become an International Financial Entity (“IFE”) by applying for a permit and license and obtaining a tax exemption decree.

Eligibility: An IFE may be any person, that is not an individual, and that is incorporated or organized under the laws of Puerto Rico, the United States, or any other country. Any person interested in organizing an IFE needs to file an application for a permit with the Office of the Commissioner of Financial Institutions, pay a non-refundable application fee of $5,000 and must comply with all of the requirements established in the “Bank Secrecy Act,” if applicable. Once a permit is issued, the IFE may be organized subject to the following requirements:

  • The amount of its authorized capital stock shall not be less than $5 million and at least $250,000 shall be fully paid at the time the license is issued.
  • The IFE shall employ a minimum of 4 persons at its business office or offices in Puerto Rico. The IFE may request a discretionary waiver to lower said employment requirement. Once the IFE is organized and the Commissioner receives the organization certification by the Puerto Rico State Department, the IFE may apply for a license. A certified copy of the articles of incorporation and other corporate documents will be required for the IFE license to be issued. The Act provides a list of permitted and prohibited transactions in which the IFE may engage. Permitted transactions will be specified in the IFE’s license.

Permitted Transactions:

With the Commissioner’s approval, the IFE may:

  • Participate in syndicated non-conforming loans with local banks. This activity will be permitted for the year 2012 and the following 5 calendar years.
  • Acquire classified or non-performing/ distressed loans from local banks. This activity will be permitted for the year 2012 and the following 2 calendar years. However, the sale of any property that served as guarantee for said loans could be performed after such period, that is, after December 31, 2014.
  • Accept deposits from foreign persons.
  • Accept properly collateralize deposits or borrow duly secured money from the Governmental Development Bank and the Economic Development Bank.
  • Establish branches outside of Puerto Rico, in the United States mainland and its possessions, or in other foreign countries.

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