FAQs | Relocate and Move to Puerto Rico with Act 20 & Act 22

FAQ

What are eligible service-based businesses for Act 20?

A qualifying business will offer services from Puerto Rico to businesses and persons outside of Puerto Rico. Only service-based income will qualify for Act 20. Business in the following areas are eligible to receive benefits under Act 20:

  • Research and development
  • Advertising and public relations
  • Consulting services, including, but not limited to, economic, scientific, environmental, technological, managerial, marketing, human resources, computer, and auditing consulting services
  • Advice services on matters related to any trade or business
  • Creative industries
  • Production of blueprints, engineering, and architectural services, and project management
  • 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 company engaged in the business of providing such services
  • Electronic data processing centers
  • Development of licensable computer software
  • Telecommunications – voice and data – between persons located outside of Puerto Rico
  • Call centers
  • Shared service centers
  • Storage and distribution centers
  • Educational and training services
  • Hospital and laboratory services, including telemedicine facilities and medical tourism 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 account management services
  • Commercial and mercantile distribution of products manufactured in Puerto Rico for jurisdictions outside Puerto Rico
  • Assembly, bottling, and packaging operations of products for export
  • Trading companies

What are the tax benefits for Act 20?

The primary benefits are as follows:

  1. 4% corporate tax on income that is sourced from Puerto Rico by eligible businesses
  2. 100% tax exemption on distributions to shareholders

When can I apply for Act 20?

You can apply for Act 20 at any time during the calendar year.

What is the process for applying for Act 20?

The individual needs to submit an application to the Office of Industrial Tax Exemption (OITE), which is a division of the Department of Economic Development and Commerce of Puerto Rico (DDEC).

How long does it take for an Act 20 application to be approved?

The amount of time varies based on the complexity of your business, completeness of application, and staffing at the OITE. You should expect about 60-90 days from application to confirmation.

How much does it cost to apply for Act 20?

  • $750 application fee
  • Note: not listed here are government fees related to business setup and compliance

When is the last day to apply for Act 20?

Applications for new decrees will be accepted until December 31, 2020. We recommend applying as soon as possible.

When is the start date for my Act 20 decree?

Act 20 is retroactive to the date of filing, which happens just after your date of application.

Do I need to move to Puerto Rico for Act 20?

No, Act 20 is based on the business and not the individual. However, Trump’s Tax Cuts and Jobs Act regarding retained earnings in controlled foreign corporations (CFCs) may disincentivize Act 20 shareholders from living in the US due to mandatory repatriation of retained earnings, or a  GILTI tax.

We recommend any Act 20 operators relocate to Puerto Rico.

Who is eligible for Act 20 tax exempt distributions on dividends?

Shareholders, partners, or members of an eligible business who hold a decree shall not be subject to income tax on distributions of dividends.

What is a “reasonable salary” for Act 20?

Administrative Determination 15-22 requires you to pay yourself a reasonable salary based on the functions you perform for the company. Although there may be some rules of thumb, there is no precise formula. It is important to consider that AD 15-22 only requires a salary when you devote 80% or more of your time to working for the Act 20 business.

When do I need a transfer pricing study to satisfy an “arm’s length” transaction associated with my Act 20 business?

You should consider a transfer pricing study a necessity if you will be doing business between your new Act company and another entity with shared ownership.

You should show intent by carrying out a transfer pricing analysis before starting business with your new Act 20. Your intent could be an internal spreadsheet or a full $50,000+ study. If going at it alone, be sure to acknowledge accepted methodologies and risks to set yourself up for success.

Do I need to set up a bank account in Puerto Rico for Act 20?

No, but it is recommended for ease of doing business and residency purposes.

What are the annual filings for Act 20?

  1. All eligible businesses that hold a decree shall file an annual income tax return with the Secretary of the Treasury, regardless of their gross or net income and separate from any other return they are required to file
  2. Every shareholder or partner of an eligible business that holds a decree granted under this Act shall file an annual income tax return with the Department of the Treasury
  3. All eligible businesses that hold a decree shall annually file with the Exemption Office an authenticated report containing the signature of the Chair, managing partner, or authorized representative

Can I transfer my Act 20 decree?

Yes, but this requires the prior consent of the Secretary.

Do I need to start an LLC or business in Puerto Rico for Act 20?

No, you may use your existing U.S. entity, but we recommend utilizing one for your application, ease of doing business, and audit readiness.

Do I need Act 22 in addition to an Act 20?

No, shareholders of an Act 20 business will not be subject to income tax on distributions of dividends.

Source: S.B. 2313; Section 6 (a)

Can a corporation own an Act 20 company?

No, Act 20 companies must be owned by an individual or group of individuals. You can’t own an Act 20 company from a U.S. corporation.

When can I apply for Act 22 during the year?

You can apply for Act 22 at any time during the calendar year, before or after you move to Puerto Rico. However, you must be a resident of Puerto Rico for your Act 22 to become effective.

Keep in mind the purpose of Act 22 is for an exemption on Puerto Rico income taxes. In conjunction with Act 22, for assets like personal property (stocks), you also need to appease the IRS by becoming a bona fide resident of Puerto Rico for the calendar year. These requirements are dictated by the IRS, and not Puerto Rico.

In general, to be bona fide resident of Puerto Rico, you need to satisfy the 183 day rule as part of the presence test, so we recommend applying and moving before July 1.

How much does it cost to apply for Act 22?

  • $750 application fee
  • $100 acceptance stamps ($50 x 2)
  • $5,000 one-time acceptance fee
  • $5,000 annual donation (this is required during the year you apply too)

What is the process for applying for Act 22?

The individual needs to submit an application to the Office of Industrial Tax Exemption (OITE), which is a division of the Department of Economic Development and Commerce of Puerto Rico (DDEC).

What are the tax benefits for Act 22?

Benefits are as follows:

  1. 100% exemption on capital gains tax for gains sourced (after you establish a tax home in Puerto Rico)
  2. 100% exemption from interest and dividend income (for gains sourced from Puerto Rico-based payers)

What is Puerto Rico sourced capital gains income?

Per the IRS, capital gains are sourced to the residence of the owner. Therefore, once an individual establishes their tax home (relocates) to Puerto Rico, any gains would be Puerto Rico sourced and eligible for Act 22.

What is Puerto Rico sourced interest and dividend income?

The source of income for dividends and interest is determined by the location of the payer. If the corporation is located in Delaware, it is U.S. source income. If the corporation is located in Puerto Rico, it is Puerto Rico source income. If you receive interest income from a U.S. payer, you may still owe the IRS taxes on that income, regardless of your place of residency.

How does being married impact Act 22 requirements?

Bona fide residency rules pertaining to Act 22 are applied separately to each spouse. However, it is recommended that both spouses each obtain a separate Act 22 tax decree.

In the event one spouse does not meet bona fide residency, only income attributable to the resident spouse will be entitled to the 933 Exclusion; 0ther income will be subject to U.S. income taxes.

Can I apply Act 22 to capital gains in my retirement accounts?

No, withdrawals from IRA, 401(k), and other U.S. tax deferred retirement accounts are not covered by Act 22.

How long does it take for an Act 22 application to be approved?

The time for an Act 22 application takes about 60 days from application submission to acceptance.

If I applied for Act 22 after June 2017, how do I make my $5,000 required annual donation?

You need to make a $5,000 annual donation to a 501 c(3) in each calendar year that you participate in Act 22. This is in addition to the $5,000 one-time application fee.

You provide proof of this donation to the PR government in your annual report, which is due 30 days after filing your income taxes (April 15).

How are capital gains on virtual currencies and stocks treated by the IRS?

In general, stocks and virtual currencies are treated as personal property for U.S. federal tax purposes. This means gains are allocated to the residence of the individual during which these gains were accrued.

Specifically for virtual currencies, the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability.

You can learn more via IRS guidance.

When is my Act 22 decree active? How do my relocation date and my application date work together?

Key dates related to Act 22:

  1. Establishing a tax home in Puerto Rico date – this is critical in determining gains on popular types of capital gains like stocks, as determined by the IRS.
  2. Relocation date (same as #1)
  3. Move date (same as #1)
  4. Act 22 application date – the date you apply
  5. Act 22 filing date – the date the OITE begins to formally review your application
  6. Act 22 pre-acceptance date – the date you submit fees and notarized documents for an approved application
  7. Act 22 acceptance date – the date you formally accept your decree

See our overview deck in the free downloads section, which includes an example of this topic.

How do I split a capital gain between appreciation before moving to PR and after moving to PR?

There are two types of investments:

  1. Marketable investments (has a public market price) – note the investment price on the day you move to Puerto Rico. This is the date that bifurcates your gains.
  2. Non-marketable investments (does not have a public market price) – using the “days of ownership” method, you would allocate your gains by dividing how many days in each jurisdiction you owned the asset.

What are the annual filings for Act 22?

There is an annual filing report which costs $300.

Does my spouse also need an Act 22, assuming we are married?

Yes, this is recommended.

Factors like community property, and life events like divorce and death may complicate your scenario.

What is the difference between a marketable and non-marketable security?

Marketable security

  • Marketable securities are financial instruments and foreign currencies which are actively traded and liquid. An example would be a public stock.

Non-marketable security

  • Non-marketable securities are usually US Savings Bonds, and private shares. Individuals cannot sell these types of securities to another investor. An example here would be business interest in a private company, which may or may not have a Fair Market Value (FMV) established.

If I'm expecting a future company liquidity event, can I benefit from Act 22?

Yes. In general you want to move to Puerto Rico, apply for Act 22, and exercise your shares as soon as possible. If you own substantial Restricted Stock Units (RSUs), you’re upside may be limited.

If you’ve already exercised shares, moving to Puerto Rico quickly is important because non-marketable share taxes are determined based on the amount of days you’ve lived in different jurisdictions.

What is the "Year of the Move" rule?

You will satisfy the tax home and closer connection tests in the tax year of changing your residence to the relevant possession if you meet all of the following:

  • You have not been a bona fide resident of the relevant possession in any of the 3 tax years immediately preceding your move.
  • In the year of the move, you do not have a tax home outside the relevant possession or a closer connection to the United States or a foreign country than to the relevant possession during any of the last 183 days of the tax year.
  • You are a bona fide resident of the relevant possession for each of the 3 tax years immediately following your move.

Resource: IRS Guidance

What is the the presence test?

If you are a U.S. citizen or resident alien, you will satisfy the presence test for the entire tax year if you meet one of the following conditions:

  1. You were present in the relevant possession for at least 183 days during the tax year.
  2. You were present in the relevant possession for at least 549 days during the 3-year period that includes the current tax year and the 2 immediately preceding tax years. During each year of the 3-year period, you must be present in the relevant possession for at least 60 days.
  3. You were present in the United States for no more than 90 days during the tax year.
  4. You had earned income in the United States of no more than a total of $3,000 and were present for more days in the relevant possession than in the United States during the tax year. Earned income is pay for personal services performed, such as wages, salaries, or professional fees.
  5. You had no significant connection to the United States during the tax year.

See our complete residency guide which provides more detail.

What is a tax home?

You will have met the tax home test if you did not have a tax home outside the relevant possession during any part of the tax year.

Your tax home is your regular or main place of business, employment, or post of duty regardless of where you maintain your family home. If you do not have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live. If you do not fit either of these categories, you are considered an itinerant and your tax home is wherever you work.

See our complete residency guide which provides more detail.

What is a closer connection?

You will have met the closer connection test if, during any part of the tax year, you do not have a closer connection to the United States or a foreign country than to the relevant U.S. possession.

You will be considered to have a closer connection to a possession than to the United States or to a foreign country if you have maintained more significant contacts with the possession(s) than with the United States or foreign country. In determining if you have maintained more significant contacts with the relevant possession, the facts and circumstances to be considered include, but are not limited to, the following:

  • The location of your permanent home
  • The location of your family
  • The location of personal belongings, such as automobiles, furniture, clothing, and jewelry owned by you and your family
  • The location of social, political, cultural, professional, or religious organizations with which you have a current relationship
  • The location where you conduct your routine personal banking activities
  • The location where you conduct business activities (other than those that go into determining your tax home)
  • The location of the jurisdiction in which you hold a driver’s license.
  • The location of the jurisdiction in which you vote
  • The location of charitable organizations to which you contribute
  • The country of residence you designate on forms and documents
  • The types of official forms and documents you file, such as Form W-8BEN or Form W-9

See our complete residency guide, which provides more details.

Do I need to sell my home in the U.S.?

While this is recommended, it is not required. This is only one component of the closer connection test.

As a rule of thumb, ensure the location of your permanent home is in Puerto Rico. You could also rent your U.S. home.

What is Form 8898?

Use Form 8898 to notify the IRS that you became or ceased to be a bona fide resident of a U.S. possession. The information you provide on this form is specific and important to executing a relocation to Puerto Rico.

You can learn more via IRS guidance.

What if I am a green card holder?

A holder of a green card is treated as a U.S. individual and is subject to the same taxes as any other U.S. person. You will also need a work visa when coming to Puerto Rico.

What is a US possession or territory?

US territories are islands under the jurisdiction of the United States. US possessions can be divided into two groups:

  1. Those that have their own governments and their own tax systems (Puerto Rico, US Virgin Islands, Guam, American Samoa, and The Commonwealth of the Northern Mariana Islands)
  2. Those that do not have their own governments or their own tax systems (Midway Island, Wake Island, Palmyra Island, Howland Island, Johnston Island, Baker Island, Kingman Reef, Jarvis Island, and other US islands, cays, and reefs that are not part of any of the fifty states).

Are Puerto Rican residents US citizens?

Yes, in 1917, the US Congress passed the Jones–Shafroth Act, which grants US citizenship to anyone born on the island.

Is a passport needed to travel to Puerto Rico?

No, you can expect the same travel requirements and TSA restrictions as traveling within the mainland.

How much does it cost to ship my vehicle to Puerto Rico?

The PR government charges a tax based on the value of the vehicle. Use this link to estimate your liability.

Does Puerto Rico pay US taxes?

Because Puerto Rico is a US territory, only government employees pay federal income tax. All other employers and employees pay no federal income taxes. Residents of Puerto Rico do pay federal payroll taxes, such as Social Security and Medicare taxes.

Employers in Puerto Rico are subject to both Federal Insurance Contributions Act (FICA) tax  and the Federal Unemployment Tax Act (FUTA).

Puerto Rico imposes a separate income tax in lieu of federal income tax.

Are banks in Puerto Rico FDIC insured?

Yes, FDIC deposit insurance covers the depositors of a failed FDIC-insured bank up to at least $250,000.

Resource: FDIC.GOV FAQ

What is the expatriation/repatriation tax when moving to/from Puerto Rico?

There is no expatriation, or exit tax, when moving to Puerto Rico. This can be as high as 23.8% on all assets for other jurisdictions.

For repatriation, as long as you earn this income as a Puerto Rico resident, there are no taxes. This money can be transferred freely. If you are not a resident, this would be tax deferral, and there would be a tax when/if you bring it back to the mainland. One option to avoid this tax would be to invest it offshore, or become a Puerto Rico resident and claim it tax free.

Is Puerto Rico safe?

Puerto Rico, as of 2016, was generally less safe than other U.S. states. Our take is that if you exercise caution, as you would in any major U.S. city, you will minimize your chances of being targeted by mostly opportunistic crime. The area where you live will determine crime rates.

Resource: FBI report, which lists crime by type

How much does it cost to move to Puerto Rico?

You can expect normal relocation costs, like license and vehicle registration, as you would for an interstate move. If you plan on transporting items like a car and personal belongings, shipping and possible excise costs will significantly increase the amount you spend. Fortunately, air travel and flight prices are comparable to U.S. mainland routes.

Where are popular places to live in Puerto Rico?

Here are a few of the most popular place to live for relocating individuals:

  • Old San Juan (OSJ) – old city living in San Juan
  • Condado / Miramar – high-rise living in San Juan
  • Ocean Park – residential living in San Juan
  • Bayamon / Guaynabo – suburb living 10 minutes south of San Juan
  • Dorado – gated golfing community 30 minutes west of San Juan
  • Palmas del Mar – boating suburb 60 minutes southeast of San Juan

Resource: Zillow Puerto Rico

Can a US citizen buy property in Puerto Rico?

Yes, although you can expect a slightly more complicated process and a longer timeline. Real property in Puerto Rico is governed by property laws of Puerto Rico.

How much does a house cost in Puerto Rico?

Check Zillow or another online platform for current home prices. We can help in recommending a realtor since properties are not always listed online or in a centralized MLS system.

Resource: Zillow Puerto Rico

Do homeowners in Puerto Rico pay property taxes?

Yes, property taxes are based on the last national appraisal in 1958 and are usually lower than most U.S. states (about 0.5% annually of property value).

What are Puerto Rico income tax brackets for 2018?

Net taxable income (USD)Tax
Not over 9,0000%
Over 9,000, but not over 25,0007% of the excess over USD 9,000
Over 25,000, but not over 41,500USD 1,120 plus 14% of the excess over USD 25,000
Over 41,500, but not over 61,500USD 3,430 plus 25% of the excess over USD 41,500
Over 61,500USD 8,430 plus 33% of the excess over USD 61,500

Which key documents do I need to bring with me to Puerto Rico?

You should bring all key identification and tax documents to Puerto Rico. This will ensure you are prepared in the event of an audit.

At a minimum, you should bring the following for the purposes of tax applications and registrations:

  1. Passport
  2. Original social security card
  3. Current driver’s license

Note: birth certificate is not required

What is a Controlled Foreign Corporation (CFC)?

A Controlled Foreign Corporation (CFC) is any corporation organized outside the US (a foreign corporation) that is more than 50% owned by US shareholders.

CFC rules are designed to limit tax deferral by using offshore low taxed entities. These rules concern income of an entity that is not currently taxed to the owners of the entity.

What is the global intangible low-taxed income tax (GILTI)?

The US “Tax Cuts and Jobs Act” of 2017 imposes a special tax on global intangible low-taxed income (GILTI). Generally, this tax is at a 10.5 percent rate on a US shareholder’s share of a CFC’s GILTI.

The GILTI tax is effective for taxable years beginning after December 31, 2017.

How is divorce treated for Act 20 and Act 22 decree holders?

You must have been a resident of Puerto Rico for one year to file divorce in Puerto Rico. In general, Puerto Rico courts split assets 50/50; therefore, you must consider what leaving Puerto Rico will do to your residency status.

Do residents of Puerto Rico file federal tax returns?

If you’re a bona fide resident of Puerto Rico during the entire tax year, you generally aren’t required to file a U.S. federal income tax return if your only income is from sources within Puerto Rico. If you’re a bona fide resident of Puerto Rico and a U.S. government employee, you must file a U.S. income tax return. Residents of Puerto Rico pay federal payroll taxes, including Social Security and Medicare taxes, just as residents of the States do.

How much are personal and corporate income taxe rates in Puerto Rico?

Personal

The island imposes a separate local Puerto Rico income tax in place of typical U.S. federal income tax. The personal income tax rate in Puerto Rico is 33% for net taxable income over $61,500. This is applicable to wages regardless of having an Act 20 or Act 22 decree.

Corporate

The corporate income tax rate is 39% (without tax incentives).

Do I owe self-employment tax if I live in Puerto Rico?

Yes, bona fide residents of a U.S. territory who have self-employment income must generally pay self-employment tax to the United States. Self-employment tax includes both Social Security and Medicare.

Self-employment tax is money that a small business owner must pay to the federal government to fund Medicare and Social Security. Self-employment tax is due when an individual has net earnings of $400 or more in self-employment income over the course of the tax year. In any business, both the company and the employee are taxed to pay for these two major social welfare programs. When an individual is self-employed, he or she is both the company and the employee, so he or she pays both shares of this tax.

What is the Foreign Earned Income Exclusion (FEIE)?

If you work and reside outside the U.S. and meet either the Bona Fide Resident or Physical Presence test (these tests are defined differently than those for Puerto Rico), you’re eligible to exclude up to $102,100 in foreign earned income as of the 2017 tax year.

This strategy would be an alternative to Puerto Rico-based tax incentives. When pursued in a country with a low or non-existent tax rate, an individual could see a large tax advantage on the FEIE amount.

You can learn more via IRS guidance.

Which annual tax filings are required for individuals living in Puerto Rico?

Annual income tax

  • U.S. residents need to file a 1040, U.S. Individual Income Tax Return
  • Bona fide Puerto Rico residents need to file a 482 Puerto Rico Income Tax Return

Annual self-employment tax

  • Both U.S. and Puerto Rico residents need to file a self employment tax return (Form 1040)

What is the municipal tax rate in Puerto Rico?

The volume of business tax (“Patente”) is between 0.0% and 0.50% of sales volume. Some municipalities give additional discounts.

What is the sales tax rate, or IVU, in Puerto Rico?

The Sales and Use Tax (SUT) is 11.5%; 10.5% is imposed by Puerto Rico’s Department of Treasury, while the additional percent goes to municipalities.

What is a registered agent?

A registered agent is a responsible third party who is registered in the same state in which a business entity was established and who is designated to receive service of process notices, correspondence from the Secretary of State, and other official government notifications, usually tax forms and notice of lawsuits, on behalf of the corporation or LLC.

If you do not have a physical location in the state in which your business is registered, you must select a registered agent to accept documents on your behalf. Puerto Rico needs to know it has a contact person for your business within the state at all times. P.O. boxes are not acceptable addresses for registered agents.

What is a Merchant's Number Certification?

This number is the official registry in the Department of the Treasury for all natural or juridical persons who do or wish to do business in Puerto Rico. The fines for not registering in the Department of Treasury can be up to $10,000.

What is a Use Permit, or “Carta de Consulta”?

Prior to applying for the municipal license, you need to apply for the Use Permit from the Municipality of San Juan, which is approved by the Permits Office of San Juan.

What is a municipal license, or “Patente Municipal”?

This license is required in order to start business in a municipality. A corporation engaged in trade or business in Puerto Rico is normally subject to the payment of municipal license taxes. The tax rate varies depending on the gross income, but ranges from 0.2% to 0.5% of revenue.