Tax Incentives in Puerto Rico
To increase employment and encourage development of key industries, Puerto Rico offers economic and tax incentives to attract corporations and wealthy business owners. The tax breaks are substantial but they come with strings.
In essence, Puerto Rico is our 51st state but it is economically challenged and scrambling for employers to boost their economy. To illustrate, Puerto Rico’s unemployment rate was at 17% in 2010 and with this aggressive tax break program, it is now down to 8%. Relative to the United States, 8% unemployment sounds high but imagine the economic impact of 17% unemployment rates.
Some US publications indicate that this tax package has created a cottage industry for the super rich and promoted by events called cocktails and compliance.
Corporate Income Tax of 4% – Act 20
The agreement between the United States and Puerto Rico allows American investors and corporations to only pay Puerto Rico tax on most forms of income. However, they must be willing to relocate to Puerto Rico and establish their bona fide residence there.
Individual Tax of 0% – Act 22
The Individual Investors Act targets high net worth investors with the promise of 0% tax on interest, dividends and capital gains while residing in Puerto Rico. And yes, you need to reside in Puerto Rico over 183 days each year.
Set Up a Company in Puerto Rico
Essentially, your company must be incorporated in Puerto Rico and you can do a tax-free reorganization of the company to a Puerto Rican corporation. Act 20 applies to service based organizations and the services need to be provided from Puerto Rico. In return for compliance, the tax rate can be reduced up to 90%.
While Act 20 applies to many service related businesses, there are other incentives that exist for manufacturing, green energy, hospitality, entertainment (film), banking, private equity, insurance and related financial service providers.