Eligibility Guidelines for Puerto Rico’s Act 60 Export Services Tax Advantages
- Posted: April 15, 2021
- Posted by: Travis Lynk
- Last Reviewed: April 15, 2021
In an effort to accelerate economic recovery in Puerto Rico, the U.S. government has provided generous business tax incentives for eligible service industry entities, ranging from accountants and ad agencies to hedge funds and other consulting firms, for nearly nine years. The initial iteration of this legislation came in the form of the Act 20 in January 2012.
In sum, Act 20 stipulated an extremely low (4%) corporate tax rate for Puerto Rico businesses operating within the territory’s borders on all income received from clients based outside of its borders. So, the first eligibility requirement for businesses seeking the tax break was that a business would have to offer remote service capabilities. In other words, the Act asked whether a business owner and its employees could work from Puerto Rico and still provide services to customers outside Puerto Rican borders.
One of the primary advantages of this legislation to the Puerto Rican economy was that the U.S. does not tax Puerto Rican residents. That responsibility is left up to the Puerto Rican government itself.
In January 2020, Act 20 was replaced with Act 60 Export Services, which has brought about changes to the eligibility requirements. Below, you can take a look at the tax incentives as they are presented under Act 60 Export Services to understand how entities currently considering a move to Puerto Rico can benefit.
Outline of Tax Incentives Under Puerto Rico’s Act 60
Eligible businesses operating inside Puerto Rican borders will receive the following benefits for all income sourced from clients based outside of the territory:
- A corporate tax rate of 4%
- A municipal tax exemption of 50%
- A 75% municipal and state property tax exemption*
- A 100% exemption from taxes on all distributions from earnings and profits
*Small and mid-sized businesses are eligible for a 100% tax exemption for their first five years.
Key Eligibility Requirements for Puerto Rico-based Operations
First, understand that the term “operations inside of Puerto Rico” means that whatever a business’s value or work output may be, the product must have been created on Puerto Rican soil. Once a business owner determines that they qualify based on the location of their business, there is another set of key eligibility requirements to consider:
- Every business owner and employee must be paid a reasonable salary for the work they do.
- The income that owners and employees are paid must be taxed at the ordinary income tax rate for Puerto Rico (sometimes reaching 33%). A business cannot pass through all of its net revenue at the corporate tax rate of 4%.
- Act 60 businesses are subject to independent audits once every two years at a minimum by the Office of Industrial Tax Exemption (OITE). Businesses established who filed for the Act 20 version of the incentive may also be subject to the audits, but that has not been clarified to date.
- Businesses generating $3M+ annually are required to directly employ at least one Puerto Rican resident who directly participates in business activities explicitly related to its offerings.
Act 60 Export Services Businesses May Not Have a Nexus with Puerto Rico
Business owners often question whether they may have clients both inside and outside of Puerto Rico and still qualify for this export services tax incentive. The short answer is no. To be eligible for the tax break, the legislation says a business must not have a nexus with Puerto Rico. This means the services a business provides cannot be related in any way to the conduct of trade, business, or other activities inside Puerto Rico.
At its core, this requirement stipulates that any client of a Puerto Rico-based business must be located outside the territory. To clarify, here is a list of disqualified entities (as they are considered to “have a nexus” with PR):
- Any business or entity that has participated in income-producing activities within Puerto Rico for other Puerto Rico customers
- When a sale of any property for use, consumption, or disposition in Puerto Rico has occurred and the income for those activities is derived from money already inside of the territory
- Businesses who have lobbied on the regulations, laws, and/or administrative duties of the Puerto Rican government or its instrumentalities
- Businesses that have directly counseled on the regulations, laws, and/or administrative duties of the Puerto Rican government or any of its instrumentalities
- Entities participating in any activities directly designated by the Puerto Rico Secretary of the Department of Economic Development
There are nearly two dozen categories of businesses that are eligible and can qualify as an Act 60 business. Business owners with specific questions regarding the eligibility of their company and other requirements for the Export Services tax incentive should reach out to us at PRelocate for help. We can advise you, for example, on how to secure a business’s tax exemption decree, determine whether all or only part of your business’s operations should be transferred, and ensure all other eligibility requirements are being met.
Disclaimer: PRelocate, LLC is not a law firm, 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 tax incentives, maintaining bona fide residence in Puerto Rico, and any other Puerto Rico tax or residency related issues.