Act 20 & Act 22 Tax Incentives
The Tax Advantages of Owning Real Estate in Puerto Rico
Extraordinary new tax incentives make living and working in Puerto Rico more enticing than ever before for U.S. citizens. They create a sense of urgency for investors to move to PR and bring their business here.
ACT 20 and 22
In January 17, 2012, Puerto Rico passed legislation making it a tax haven for U.S. citizens that become residents of Puerto Rico. The tax laws, known as Act 20, the Export Services Act, and Act 22, the Individual Investors Act, shields new residents residing in Puerto Rico for at least half of the year from paying most federal income taxes. The U.S. Tax Code generously exempts Puerto Rico sourced income from federal tax and, under the law, residents pay minimal or possibly no taxes on interests and dividends, as well as capital gains. Additionally, property taxes are significantly lower than property taxes in the mainland U.S. Thus, making Puerto Rico a mecca for exportation of international services worldwide.
Tax Exemption Decrees for ACT 20 and 22
To benefit from Act 20 and 22, service provider and/or individual must submit online application through the Department of Economic Development & Commerce (DDEC) Online Applications Platform for Act 20, and for Act 22, through the Office of Industrial Tax Exemption of Puerto Rico. This to obtain a tax exemption decree which will provide full detail of tax rates and conditions mandated by the Act of Puerto Rico and the applicant. This will be considered a contract between the Government of Puerto Rico and the applicant. Once granted benefits, these will be secured during the term of the decree, regardless of changes in the Puerto Rico tax laws applicable. The decrees shall have a term of 20 years with possible 10-year extension in the case of Act 20 and until December 31, 2035 in the case of Act 22.
Known as the “Export Services Act” is intended to promote the exportation of services by providing great resources and opportunities for U.S. companies to bring their business to Puerto Rico and make it a service center for the World. It also promotes academic and private sectors development and research by granting exemptions and assistance with energy costs to companies willing to invest on growth of these key areas. To become exempt, the business needs to apply for a tax concession via a tax exemption decree considered a contract with the Office of Industrial Tax Exemption of the Government of PR. The decree will be secured during the term, 20 years with possible 10-year extension, regardless of changes in the law itself. To qualify, the business cannot have any previous connections, dealings or nexus with Puerto Rico.
- Fixed income tax rate of 4%
- Fixed income tax rate of 3% in case of strategic services
- Tax exemption of 100% on distributions from earnings and profits
- Tax exemption of 90% of personal property taxes for certain business types up to first 5 years of operation (taxable portion subject to regular tax rate of up to 8.83%)
- Tax exemption of 90% from real property taxes for certain business types up to first 5 years of operation (taxable portion subject to regular tax rate of up to 11.83%)
- Tax exemption of 60% on municipal taxes (taxable portion subject to regular tax rate of .6%)
- Among other tax exemptions for specific types of businesses
- Tax grant approval process has been ammended to be streamlined. Total grant approval process has been cut to a maximum of 35 working days.
- No nexus with Puerto Rico, eligible activity must not be related to the conduct of the trade, business or other activity in Puerto Rico.
- Any service decreed by the Secretary of the Department of Economic Development and Commerce of PR
- Advertising, public relations
- Assembly, bottling and packaging operations of products for export
- Call centers, telecommunications, service centers
- Centers for electronic data processing
- Centralized management services like strategic direction, planning, distribution, logistics and budgetary services.
- Consulting services like economic, scientific, environmental, technological, managerial, marketing, human resources, computer and auditing
- Computer software development
- Creative industries
- Distribution of commercial and mercantile products manufactured in PR to exterior
- Educational and training services
- Engineering and architectural plans and designs
- Economic, technological, environmental, scientific
- Engineering, Information Systems
- Hospital and laboratory services
- Investment Banking and other financial services
- Marketing centers
- Medical services, hospitals, laboratories
- Production of blueprints, architectural and engineering services, and project management
- Professional services such as legal, tax and accounting
- Research and development
- Shared services centers: accounting, finance, tax, auditing, marketing, engineering, quality control, human resources, communications, electronic data processing and others.
- Storage and distribution centers
- Trading services
- Voice and data telecommunications for individuals outside of PR
Known as “The Individual Investors Act”, the main focus of this law is to attract individual investors and promote that they relocate to the Island. How? With total exemption from local income taxes on all passive income from the point they become legal bona fide Puerto Rican residents. These new residents of Puerto Rico receive 100% exemption on dividends, interest on capital gains. Although Puerto Rico is a U.S. territory, pursuant to Section 933 of the U.S. Internal Revenue Code of 1986, Puerto Rico residents are not subject to federal income taxes derived from sources within the Island, they only subject to those derived from external sources.
- Tax exemption of 100% from Puerto Rico income taxes on dividends
- Tax exemption of 100% from Puerto Rico income taxes on all interests
- Tax exemption of 100% from Puerto Rico income taxes on all short-term and long-term capital gains accrued after the individual became a bona-fide resident of Puerto Rico (“Puerto Rico Gain”)
- Capital gains accrued before the individual became bona-fide Puerto Rico resident will be subject to preferential local income tax rates (“Non-PR Built-in Gains”)
- Individual investors are provided with an approved Grant that allows them to establish revocable or irrevocable Trusts and have them treated as Grantor Trusts for PR tax purposes.
- Investors may transfer or bestow freely all or some of their assets to the abovementioned trusts.
- Foreign Trusts duly created under foreign laws will be held valid in Puerto Rico.
- Individuals must be present physically on the Island 183 days in the taxable year
- Cannot have a tax home outside of Puerto Rico
- Cannot have been residents in PR 6 years prior to the date in which Act became effective on January 12, 2012
- Cannot have a closer connection to United States or any other foreign country than to Puerto Rico
- Annual report with the Office of Insdustrial Tax Exemption due April 15th including evidence of compliance of conditions and requirements of the grant for taxable year immediately before the filing date of report.
- $5,000 fee is due upon the approval of any Grant under Law 22 in addition to fee due with filing of Grant application.
- To qualify for the Act 22 incentives, all gains must be recognized prior to January 1, 2036.
New Ammendments for Act 22 applicants that file for a tax incentives grant after December 1st, 2015:
- Acquire a residential property in the first 2 years since the date of the notification of residency.
- The presentation of the Deed of Purchase & Sale is mandatory.
- Provide evidence of a bank account in a local financial institution.
The 20/22 Act Society
The 20/22 Act Society is a membership based non-profit organization that has become the epicenter for the 20/22 recipients and was created to foster a sense of community and a collective voice among those moving to Puerto Rico to take advantage of Acts 20, 22, and 273. The group who has been profiled by Bloomberg, Reuters, and Business Week among other business outlets, was founded by Robb Rill who was one of the first recipients of these grant and who moved his private equity firm to the island in late 2012. Our wealth of knowledge and trusted resources built over the years provides insight to our members regarding professional services as well as guidance on the necessary steps required when relocating to Puerto Rico to benefit properly from these Acts. The Society is committed to giving back to Puerto Rico in appreciation for the benefits, and through its philanthropic arm The 20/22 Act Foundation, provides grants to several locally based charities to give back to the Puerto Rican community at large. For more information, please refer to: www.the2022actsociety.org
Additional Tax Advantages
In September 25 of 2012, Puerto Rico enacted Act 273, also known as the "International Financial Center Regulatory Act". The Act provides for certain benefits to apply to businesses engaged in eligible financial activities in Puerto Rico.
International Financial Entities incentives include:
- Fixed income tax rate of 4%
- Not subject to taxation or withholding provisions for non-residents due to exclusion of 100% from interest, financing charges or partnership benefits not considered gross income from Puerto Rico sources.
- Fixed income tax rate of 6% on dividends and other distributions of profits.
- Tax exemption of 100% on real and personal property belonging to an IFE.
- Tax exemption of 100% on municipal license taxes.
- 7.5% of funds generated from IFE’s income taxes will be deposited in Special Fund for the Development of Services for Export and Promotion of Economic Development and Commerce, created by Act 20.
- Entity cannot be incorporated or organized under the laws of Puerto Rico.
- Must employ at least four people.
- Becomes an International Financial Entity (“IFE”) applying for a permit and license and obtaining a tax exemption decree with the Office of the Commissioner of Financial Institutions. Decree effective for 15 years, two extensions of 15 years each may be available.
- Makes non-refundable payment of $5,000 complying with all requirements established in the Bank Secrecy Act, if applicable.
- Amount of its authorized of capital stock, proposed and/or initial paid-in capital as the case may be, shall not be less than $5 million or higher amount as required by the Commissioner.
- Follow list of permitted and prohibited transactions the IFE may engage in specified in its license.
On November 12, 2014, Act 185 known as “Private Equity Funds Act” was enacted as part of the efforts to improve access to capital for entrepreneurs and businesses in different activity and development stages. The Act provides a structure for investors to deploy capital with limited personal liability and without double taxation, while enjoying certain tax benefits such as exemptions, deductions and fixed income tax rates. Qualifying funds are “Private Equity Funds” and “Puerto Rico Private Equity Funds” which investors have the right to select if qualified so long as notified to the Puerto Rico Treasury Department. Qualifying investors are partners of a partnership under the Act which have to be “Accredited Investors” as detailed by the Act.
- Partnership or limited liability company organized under laws of United States, foreign jurisdiction or the Commonwealth of Puerto Rico engaged in business of securities and financial instruments investment not offered in public stock exchange markets in U.S. or foreign country.
- Office located in Puerto Rico
- 80% of its paid-in capital invested in non-publicly traded securities and financial instruments
- 20% remaining invested in one of the short-term instruments allowed by the Act
- Within 4 years of organization, “Private Equity Fund” must maintain a min. of 15% of the paid-in capital invested in non-traded securities or financial instruments engage in active trade or business in Puerto Rico that makes 80% of its gross income during the last three years from sources within Puerto Rico.
- “Puerto Rico Private Equity Fund” to maintain a min. of 60% of the paid-in capital invested in non-traded securities or financial instruments engage in active trade or business in Puerto Rico that makes 80% of its gross income during the last three years from sources within Puerto Rico.
- Investors qualify as “Accredited Investors” under the Act.
- Has “Registered Investment Advisor” as described by the Act.
- Operates as a diversified investment fund.
- Has minimum capital of $10 million within two years after first issuance of proprietary interests and an advisory board with at least one of its investors or limited partners as member.
- If organized outside of Puerto Rico, the fund has to derive at least 80% of its gross income from a Puerto Rico source and be engaged in trade or business in Puerto Rico.
- Eligible Funds enjoy 0% tax on interest and dividends income or capital gains, 100% exemption from municipal license taxes as well as personal and real property taxes.
- Accredited investors pay 10% income tax on interest and dividends generated through the fund by investors.
- Accredited investors pay 0% on income tax of capital gains realized through the fund by investors from PR sources.
- Accredited investors pay 5% income tax on capital gains realized by the fund’s investors from sale of their proprietary interests in the fund.
- Accredited investors granted 100% exemption from municipal license taxes related to distributions to investors.
- For investors residents of Puerto Rico fund’s net losses may be deducted to the extent losses derive from entity with at least 80% Puerto Rico sourced income.
- “Private Equity Fund” entitled to 30% tax deduction on initial investment
- “Puerto Rico Private Equity Fund” entitled to 60% income tax deduction on initial investment
- General partners, registered investment advisors and private equity firms are granted 5% income tax on interest and dividends generated from the above mentioned as well as 2.5% income tax on capital gains realized by the above mentioned from the fund.
Known as the “Public-Private Partnership Act” enacted on June 8, 2009, provides legal framework to promote the use of such partnerships (“PPPs”), as a strategy for development. It authorizes government entities to enter into these partnerships with private firms to produce public facilities that comply with list of qualifying projects detailed in the Act. Partnership contracts have 50 years’ duration but can be extended up to 25 additional years, subject to Legislative approval.
- Must participate in the request for proposal designed by the Authority for such PPP and comply with requirements established on it by the Authority.
- Person authorized to do business in Puerto Rico.
- Needs available corporate, equity capital, securities or other financial resources necessary for proper operation.
- Good reputation, experience, managerial and technical capacities to develop and administer.
- Certification that no member of the PPP is a passive economic agent of the PPP nor has been convicted of corruption or crimes listed in Act 458.
- Small scale projects (with estimated $55 million budget) enjoy expedited process of evaluation.
- Exemption of 100% in real and personal property taxes
- Exemptions and/or payment agreements on municipal license fees, excise or municipal taxes.
- Fixed income tax rate of 10% over net income derived from operations in the partnership contract.
- Fixed income tax rate of 20% over net income derived from operations of “special partnerships”.
The Tourism Development Act as it is better known, facilitates and promotes World-class tourism initiatives. Benefits will remain valid 10 years from opening of the project with possible 10-year extension under the Act.
- Guesthouses, hotels, hostels, condo-hotels, timeshares, vacation clubs.
- Theme parks, golf courses managed by or associated with hotel that is an exempt business, marina or port facility.
- Natural resources used as entertainment
- Other recreationally used facilities that encourage tourism
- Must be fully financed project by private capital investments, a world-class hotel with at least 4-star rating and have a variety of commercial or recreational establishments.
- Tax credits can equal lesser than 10% of total project cost or 50% investors’ cash
- Municipal construction excise tax exemption of 100%
- Imported goods and sales tax exemption of 100%
- Municipal licenses exemption of 100%
- Income tax 90% exemption
- Property tax 90% exemption
Creates the basis for the International Insurance Center (“IIC”) which provides a competitive environment for international insurers and reinsurers to cover risks outside of Puerto Rico under secure but flexible regulatory system with attractive tax benefits such as long-term status that will guarantee benefits for initial period of 15 years and possible two added periods of 15 years.
- Alternative risk management strategies as captive or associated captive insurers
- Insurers or reinsurers’ vehicle to enter Latin America or U.S. markets
- Special purpose vehicles
- Vehicle for integrated insurance plans
- Corporate reorganization using integrational insurers holding companies
- Segregated assets plans to serve high net worth individual markets
- Securitization programs
- Premium taxes 100% exemption
- Exemptions of 100% on dividends and other profit distributions made by the International Insurer and International Insurer Holding Company.
- Municipal franchise and real and personal property taxes exemption.
- Exemption from withholding taxes on payments of dividends and other profit distributions made to third parties, and from filling tax returns with the Puerto Rico Internal Revenue Service.
- Isolation of proceeds and benefits paid by international insurers due to income taxes liquidation.
- Tax exemption of up to $1.2 million on net income applicable at individual cell level for Protected Cell Company arrangements and at company level.
- Preferred 4% tax rate on net income guaranteed by a decree effective over 15 years with possible renewal.
In 2008, Act 73, the Economic Incentives Act for the Development of Puerto Rico, otherwise known as Manufacturing Incentives Act, was enacted. This to provide incentives and tax exemptions and credits to eligible businesses. The program promotes the continued development of local industries and attracts foreign investment of companies all around the Globe, particular those dedicated to technology advancement. Additionally, it promotes investments on research, development and initiatives from the academic and private sectors by granting credits and exemptions to them. It also helps to decrease operational and energy related costs for these companies moving to the Island to improve its economy.
- Fixed tax of 4%
- Income tax from innovative activities of 0-1%
- Tax credit of up to 50% for purchasing local and recycled local products
- Tax credit of up to $5,000 for job creation
- Tax credit of up to 50% for research and development
- Tax credit of up to 50% for investment in efficient energy use
- Rebates for investing in structures, machinery and equipment