Determining a Salary for Puerto Rico Act 20 Business Owners - Relocate to Puerto Rico with Act 20 & Act 22

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Determining a Salary for Puerto Rico Act 20 Business Owners

 

Determining wage compensation for Act 20 officer-owners has been problematic in the past since many officer-owners also benefit from tax distribution benefits. This creates a conflict of interest for officer-owners in setting a reasonable salary, which will inevitably be taxed at a higher rate. A 2015 Administrative Determination from the government of Puerto Rico has put parameters in place to resolve this issue by increasing the officer-owner “reasonable annual salary” cap to $350,000 annually. This change allows the Secretary of the Treasury greater autonomy to evaluate the reasonableness of income received from services rendered to the Act 20 company.

Previous Salary Caps for Act 20 Company Officer-Owners

Prior to October 13, 2015, per Administrative Determination 10-06, salaries for officer-owners were the lower of $250,000 annually, or 30% percent of the partner share in profits.

New Salary Caps for Act 20 Company Officer-Owners

On October 13, 2015, the Secretary of the Treasury released Administrative Determination 15-22, providing new definitions concerning salary determinations for officer-owners of Act 20 businesses. Specifically, the new ruling defines an officer-owner as a shareholder or partner holding a proprietary interest in an Act 20 company dedicating at least 80% of its time to business matters, while also being a bona fide PR resident.

AD 15-22 boosted the maximum allowable salary by $100,000 to $350,000. Because the Treasury Department neither confirmed nor removed the 30% profit limitation previously defined in AD 10-06, tax experts are advising that officer-owners presume this 30% threshold still stands.

Ultimately, if an eligible Act 20 officer-owner receives a salary of less than $350,000 annually, he or she may be subject to an evaluation of the reasonableness of the income received.

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