25 Things to Know Before Moving to Puerto Rico - Relocate to Puerto Rico with Act 60, 20, 22

Blog: Articles to Help You Navigate Puerto Rico

Relocating to Puerto Rico and enjoying life under the warm Caribbean sun is a dream for many Americans. Also, since Puerto Rico is a U.S. territory, setting up a life on the island is relatively straightforward. Life in Puerto Rico comes with a vibrant Hispanic culture and delicious cuisine, as well as savings: the cost of living is generally lower than on the mainland. However, what makes relocating to Puerto Rico truly irresistible is the Act 60 tax incentives, which offer significant tax savings to individuals and businesses alike who move to Puerto Rico.

If you’re looking to take advantage of the Act 60 tax exemptions to enjoy a fruitful Caribbean life in Puerto Rico, take a look through this article for some important pre-move pointers.

Pointers about Act 60

1. The Act 60 Investor Resident Individual tax exemption only applies to certain types of income

The Act 60 Investor Resident Individual decree is a lucrative tax exemption that can save individuals thousands in taxes, depending on the type of income they earn. However, it’s important to note that the exemption doesn’t apply to all income an Investor Resident Individual decree holder earns.

The incentive offers a 100% tax exemption on interest, dividends, and capital gains on investment assets, from securities to crypto assets. If you derive a lot of money from capital gains, the Investor Resident Individual tax incentive can result in sizeable savings. But any income derived from salary is ineligible, and you’ll have to pay regular Puerto Rican income tax on it.

2. The Act 60 Export Services tax exemption only applies to certain types of income

The Act 60 Export Services tax incentive can lower a Puerto Rico–based business’s corporate tax liability to only 4%, which is a far cry from the 21% in the United States—which, in turn, is much lower than the 35% rate in place prior to the 2017 Tax Cuts and Jobs Act. It’s also considerably lower than the general Puerto Rican corporate tax rate of 37%. However, depending on the business’s activities, some of its income may not be eligible for the lower tax rate.

As the name of the decree suggests, only income derived from exported services qualifies for the 4% tax rate. Exempt income must be derived from services performed from Puerto Rico for clients outside of Puerto Rico. The types of companies can vary—from consulting businesses, to call centers, to graphic designers—but they must all export services abroad to reap the benefits of the Act 60 Export Services tax decree.

3. Act 60 Export Services isn’t available for sole proprietorships or self-employed individuals

The Act 60 Export Services tax incentive is only available to business entities, such as corporations or LLCs. In other words, sole proprietorships and self-employed individuals don’t qualify, even if their income is derived from qualifying exported service business activities. If you currently provide eligible services as a sole proprietor or individual, you’ll have to form a new business entity, such as a corporation or LLC, and restructure your business activities accordingly.

Depending on your industry, such restructuring may not be possible due to licensing and regulatory challenges. In other industries, the shift to a business entity may entail the rewriting of contracts with your clients or suppliers. Whatever your situation, be sure to carefully think about how you can form a Puerto Rican business entity that meets Act 60 Export Services requirements.

4. Act 60 Export Services businesses must pay the decree holder a “reasonable salary”

Under Act 60 Export Services, the corporate tax rate is 4%—but the income tax rate remains 33% for income exceeding $61,500. One may attempt to circumvent income tax due by taking all their personal income from their Export Services company in dividends and jointly applying for an Act 60 Investor Resident Individual decree to obtain a 100% tax exemption on them. Of course, it is possible to file for an Investor Resident Individual decree to forgo tax liability on dividends from your company. But you can’t forgo a salary.

The Act 60 Export Services act stipulates that an Act 60 Export Services company must pay the decree holder a “reasonable salary,” which is taxed at the regular Puerto Rican income tax rates. It’s worth it to hire a Puerto Rican tax expert to determine the lowest possible “reasonable salary,” allowing you to take the rest of your share of the company’s profits in dividends.

5. Act 60 Export Services businesses are exempt from U.S. tax withholding for payments from the United States

If your Act 60 Export Services business is owned 100% by bona fide Puerto Rican residents, any payments to the business from U.S. individuals or businesses are exempt from U.S. tax withholdings. To ensure that U.S. individuals and businesses do not inappropriately withhold on payments to your Act 60 Export Services business, you may need to fill out and send them an IRS Form W-8BEN-E. That also means such payers won’t need to provide you with IRS Form 1099 annually.

6. Act 60 Export Services businesses may need to report their income using accrual accounting

If your Act 60 Export Services business earns more than $1 million in annual gross revenue, the Puerto Rican government requires you to report your corporate income using accrual accounting. In essence, this means counting revenue or expenses when the transaction occurs rather than when the payment occurs. This differs from mainland rules, which stipulate that businesses with less than $25 million in annual revenues can freely choose between accrual accounting and cash accounting. The accrual method paints a more accurate picture of a company’s cash flows, but it’s more expensive to implement.

7. Act 60 Export Services businesses may be audited every year

If your Act 60 Export Services business makes more than $3 million in gross annual revenue, not only will you be forced to use accrual accounting, as explained above, but you’ll also have to have your financials audited yearly. Puerto Rico places significant bureaucratic obligations on its Act 60 Export Services tax-exempt businesses, and annual audits can truly constitute a headache for business owners. But there’s no way around it, so you must prepare for yearly audits if your company is big enough.

8. All Act 60 Export Services businesses must be registered in the municipality they operate in

No matter which Puerto Rican municipality your Act 60 Export Services business operates in, business owners are required to register with the municipality. Each municipality levies a small tax on the gross revenue a business entity generates within its boundaries, and these taxes apply to Act 60 Export Service businesses as well. Decree holders do enjoy a 50% tax exemption on municipal taxes (100% for the first five years in Vieques and Culebra), as well as a 100% exemption in their first semester of business. However, in most cases, be ready to pay a small amount of municipal tax.

9. Act 60 Export Services businesses should maximize their net income while minimizing their gross revenue

Considering the requirements imposed on higher-earning Act 60 Export Services businesses, the best business strategy is to minimize gross revenue while maximizing net revenue. If you can keep your revenue under $1 million, you’re free to use cash accounting. If you stay below $3 million, you can avoid annual audits. Carefully choosing a municipality can also be beneficial—if you set up shop in Vieques and Culebra, you can completely escape municipal taxes for the first five years of your decree.

10. You’ll be taxed on your worldwide income

In Puerto Rico, residents are taxed on their worldwide income, regardless of where it was earned or sourced to. So, if you earn income while in the mainland or a foreign country, you’ll nonetheless be obliged to report it on your Puerto Rico tax return and pay any taxes you may owe on it. But you must also report that income on your U.S. tax return and pay any taxes you owe on it to the federal government.

Don’t worry—it’s not quite as bad as it sounds. Puerto Rico issues tax credits for any taxes paid on such income to the federal or a foreign government, so you won’t be double-taxed, although you can’t escape the extra bureaucracy of filing tax returns in multiple jurisdictions. If the tax in question qualifies for the Act 60 tax exemptions, it won’t be high enough to warrant paying extra tax to Puerto Rico, but if it doesn’t, you may have to. If the Puerto Rican tax rate is higher than the U.S. or foreign rate, you’ll still have to pay the difference to the Puerto Rican government.

11. Some U.S.-based retirement plans may not count as Puerto Rico-sourced taxes

One of the merits of moving to Puerto Rico is that it’s a U.S. territory, making it easy to maintain your U.S.-based retirement plan. However, depending on the kind of retirement plan you have, the Puerto Rican government may not recognize it as tax-qualified, designating any gains earned in such plans as U.S.-based income. If the Puerto Rican government sees your retirement plan in this light, you may have to pay Puerto Rican tax on gains accrued after your move to Puerto Rico. If your retirement plan qualifies as a grantor trust under Puerto Rican law, however, your Export Services decree should protect you from tax liabilities.

Pointers about Banks

12. Puerto Rico bank services are slow and expensive

If you’re used to the banking conveniences of the mainland, you’re in for a surprise in Puerto Rico. Banking services are very slow—that’s what happens when banks rely on obsolete technology—and you can expect a deluge of fees for just about anything. Need a certified or manager’s check? You will when dealing with the government, and it incurs a hefty fee. Sending a wire transfer is similarly expensive—and you even have to pay to receive a wire transfer.

13. Puerto Rico banks often barrage clients with questions about transactions

Puerto Rico banks are extreme in their fraud prevention measures. It doesn’t matter who you are or how acquainted the bank is with you—for just about any transaction, from checks to wires, you can expect a barrage of invasive questions. You can also expect your checks to be returned for nonsensical reasons, even when you have sufficient capital in your account to cover them. Be prepared for a mountain of annoyances when dealing with Puerto Rican banks.

14. The Puerto Rico government generally requires certified checks or manager’s checks, not personal or corporate checks

In Puerto Rico, the government and the banks are pretty chummy. The government ensures it helps out its banker pals by mandating certified checks or manager’s checks for just about any payments to the government. So, whether you’re trying to pay your taxes, pay filing fees, or pay for parking tickets, be prepared to take a trip to the bank, waste an hour of your time, and pay a hefty fee to obtain a certified or manager’s check, even if the amount you’re paying is negligible.

Pointers about Notaries

15. In Puerto Rico, only lawyers can be notaries

In the mainland, some notaries are lawyers. In Puerto Rico, all notaries are lawyers. The law specifically states that notaries have to be lawyers, so whenever you need a document notarized, you’ll have to go to a lawyer—and pay the accompanying lawyer fees.

16. A notary’s signature is required for a lot of processes in Puerto Rico

If you think you won’t require a notary’s services very often in Puerto Rico, you’re sadly mistaken. Obtaining a notary’s signature is a mandatory part of numerous processes in Puerto Rico, from buying real estate, to obtaining or paying off a mortgage, to simply filing a municipal “Volume of Business” tax return. So, find a good one, and keep them close—you’ll be working with them a lot.

17. In Puerto Rico, notaries essentially serve as title companies in real estate transactions

Buying real estate in Puerto Rico? The Puerto Rican real estate market is vastly different from the market in the United States, and the process for undertaking real estate transactions is wholly foreign to Americans. One of the aspects unfamiliar to Americans is that notaries essentially provide the services of a title company. That means even more notary fees, which Puerto Rico has no shortage of—U.S. title companies are far more affordable.

18. A notary is necessary for both creating a mortgage and retiring or canceling it

If you’re getting a mortgage for your Puerto Rico property, expect huge notary fees. You have no choice but to include a notary in the process, and they must charge a statutory minimum, which is rendered as a percentage of the initial mortgage amount. And you incur this charge twice—once when the mortgage is created, and once again when the mortgage is retired or canceled. Certain corrupt laws, like the statutory minimum fee requirement for notary services in real estate, benefit Puerto Rican lawyers and bankers, and it’s the general public that bears the cost.

Pointers about Real Estate

19. Puerto Rico is a community property state

Puerto Rico is a community property state. If you hail from Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin, you’re already familiar with what that entails, since those states are also community property states. But if you’re not used to community property rules, you’ll have to redo all your estate and family planning accordingly.

In a community property state, any property purchased after marriage—even if purchased by only one spouse, without involvement from the other—is considered joint property of both spouses. Depending on your real estate and family situation, this could lead to a tricky divorce process, so it’s advised to plan accordingly.

20. Puerto Rico’s inheritance laws force inheritance to go to children

Want to will your Puerto Rico property to your spouse? Puerto Rico generally doesn’t allow property owners that freedom. According to Puerto Rico’s forced inheritance laws, properties must be left to blood relatives—first children, then grandchildren, then parents—before a spouse. So, if you have any children, grandchildren, or parents alive at the time of your death, they are all required by law to take a portion of your estate before your spouse can, even if you’ve willed the property to your spouse. To say Puerto Rico’s forced inheritance laws could complicate estate and family planning is an understatement. However, there is good news: Act 60 decree holders can circumnavigate the forced inheritance law if the property is transferred via certain types of trusts.

21. U.S. estate and gift taxes apply to U.S.-born Puerto Rican residents

When you hear that Puerto Rico doesn’t have any estate and gift tax, you may be relieved—until you realize it only applies to native-born Puerto Ricans. Even if you establish bona fide residency in Puerto Rico by passing the three residency tests, you’ll still be subject to federal U.S. estate and gift taxes, so make sure to plan accordingly.

Pointers about Legal Matters

22. Wills drafted on the mainland are generally unenforceable in Puerto Rico

If you’ve willed your Puerto Rico property to your spouse, Puerto Rico’s forced inheritance rule isn’t the only thing that will trip you up. Any will—regardless of what you will to whom—is generally unenforceable in Puerto Rico if it was drafted on the mainland. So, be sure to update your will as soon as possible after landing in Puerto Rico, and if you want to will your property to your spouse, make sure to consult an experienced Puerto Rican tax expert.

23. Postnuptials are essentially unenforced in Puerto Rico

If you have a postnuptial agreement, don’t expect it to be enforced in Puerto Rico. Postnuptial agreements are rarely enforceable on the island, and ones drafted on the mainland are even less likely to be honored. So, make sure to plan accordingly, as your postnuptial is essentially useless in Puerto Rico.

24. The law is not always enforced in Puerto Rico

Puerto Rico has laws. But they’re not like laws in the US—their enforcement is often rather arbitrary. Often, laws are enforced more to serve political purposes than to protect the general public. Be careful, because if the people in power don’t like you, you may find yourself on the wrong side of the law. If they like you, you may be able to freely violate certain laws—but the people in power change constantly, so be careful.

25. Use an Expediter

You’ll often see the services of “expediters” advertised for such processes as obtaining a Puerto Rican driver’s license—you could do it yourself, but the government may intentionally process your application incredibly slowly. On the other hand, if you hire an expediter and pay the accompanying fee, you can have your paperwork processed at normal speeds.

In Summary

Don’t let these pointers scare you off of starting a fresh life in Puerto Rico. The island is beautiful, lined with gorgeous beaches, it’s generally no more dangerous than the mainland, and everyday Puerto Ricans are friendly, fun-loving people. It’s just a good idea to know the bureaucratic environment you’re jumping into. Know what you need before you relocate to Puerto Rico, and mentally prepare yourself for the unsavory aspects of Puerto Rican life. That way, you’ll thrive in your new life on the island—alongside major tax savings.

Disclaimer: Neither PRelocate, LLC, nor any of its affiliates (together “PRelocate”) are law firms, and this is not legal advice. You should use common sense and rely on your own legal counsel for a formal legal opinion on Puerto Rico’s tax incentives, maintaining bona fide residence in Puerto Rico, and any other issues related to taxes or residency in Puerto Rico. PRelocate does not assume any responsibility for the contents of, or the consequences of using, any version of any real estate or other document templates or any spreadsheets found on our website (together, the “Materials”). Before using any Materials, you should consult with legal counsel licensed to practice in the relevant jurisdiction.

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