Determining a Salary for Export Services Businesses

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Determining wage compensation for Export Services 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 terms of 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 Export Services companies.

Previous Salary Caps for Act 60 Export Services 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 Export Services Company Officer-Owners

On October 13, 2015, the Secretary of the Treasury released Administrative Determination 15-22, which provides new definitions concerning the salary determinations for officer-owners of Act 60 Export Services businesses. Specifically, the new ruling defines an officer-owner as a shareholder or partner who is a bona fide PR resident and holds a proprietary interest in an Act 60 Export Services company in which he or she dedicates at least 80% of his or her time to business matters.

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 Export Services 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.

Disclaimer: The contents of this post are meant for informational purposes only and should not be construed as legal or financial advice. Please consult a legal professional for more information on your specific situation.

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