Puerto Rico is a territory of the United States, and Puerto Ricans are US citizens who have a US passport.
Puerto Rico Entities and bona fide residents of Puerto Rico do not pay Federal Income Taxes on Puerto Rico source income.
Tax Benefits include exemptions on most dividends, interest and capital gains from Puerto Rican income and much lower income tax rates.
Signed into law on July 1, 2019, and coming into effect on Jan 1, 2020, the Puerto Rico Incentives Code, or Act 60, consolidates and modifies various tax incentives, decrees and benefits, including among others: Act 20, the Promotion of Export Services Act; Act 22, the Act to Promote the Relocation of Individual Investors to Puerto Rico and Act 135, the Young Entrepreneurs Incentive and Financing Act.
All tax exemptions granted in this Code are considered to constitute a contract between the Government of Puerto Rico, the Exempt Business, its shareholders, partners, and owners.
The Code consists of eleven chapters. Chapter 1 explains the changes made to the economic incentives, which include organizing exemptions by industry segments and sectors to allow for various incentive laws to be grouped together under a single category, as stated hereinbelow:
Chapter 2: Individuals (Act 22-2012)
Chapter 3: Export of Good & Services
Chapter 4: Finance, Investments and Insurance
Chapter 5: Visitor Economy
Chapter 6: Manufacturing
Chapter 7: Infrastructure & Green Energy
Chapter 8: Agro-Industries
Chapter 9: Creative Industries
Chapter 10: Entrepreneurship
Chapter 11: Other Industries
In order to qualify for the tax benefits under Chapter 2 of the Incentives Code, the applicant must be a bona fide resident of Puerto Rico for the entire tax year.
Chapter 2 applies to any individual investor who becomes a Puerto Rico resident (“Individual Investor”) on or before the taxable year ending on December 31, 2035, provided that the individual was not a resident of Puerto Rico at any time from January 17, 2006 to January 17, 2012.
As per the U.S. Internal Revenue Code (Sections 933 and 937), a bona-fide resident of Puerto Rico is a person who meets the following tests:
1) Presence Test. The individual must meet one of the following: (1) be present in Puerto Rico for at least 183 days during the calendar year; (2) be present in the United States for no more than 90 days during the calendar year; (3) have no earned income from sources within the United States (that is, compensation for labor or personal services rendered by the manager in the United States exceeding $3,000) and be present in Puerto Rico for more days than in the United States; (4) be present in Puerto Rico for a minimum of 549 days during the three-year period that includes the cur- rent tax year and the two preceding calendar years, as long as he is also present in Puerto Rico for a minimum of 60 days during each of those three years; or (5) have no ‘‘significant connection’’ to the United States.
2) Tax Home Test. The individual’s regular (or principal, if more than one) place of business that he or she claims for purposes of determining income tax deductions for traveling expenses while away from home in the pursuit of a trade or business must be in Puerto Rico. Thus, to meet the tax home test, the individual must spend substantially more time working from his office in Puerto Rico than from an office in the United States or a foreign country.
3) Closer Connection Test. The individual must have a closer connection to Puerto Rico than the U.S. or any other foreign country. The closer connection is determined by a variety of factors including but not limited to the following: (1) the location of the individual’s permanent home; (2) the location of the individual’s family; (3) the location of the individual’s personal belongings, such as automobiles, furniture, clothing, and jewelry; (4) the location of social, political, cultural, or religious organizations with which the individual has relationships; (5) the location where the individual conducts routine personal banking activities; (6) the location where the individual conducts business activities (other than those that constitute the individual’s tax home); (7) the location where the individual holds a driver’s license; (8) the location where the individual votes; and (9) the country of residence designated by the individual on all official government forms, documents, and tax returns. The significant connections analysis can also take into account similar factors that attempt to show that the individual is no longer living in the United States.
Under the code, half of the donation is payable to a government-approved charity and the other half to a Puerto Rican charity of the grantees' choice. Grantees must purchase real estate property in Puerto Rico within two years of obtaining the decree. The property must be the individual investor's primary residence throughout the validity of the decree and cannot be rented out.
The initial decree is now granted for a term of 15 years and may be extended for an additional 15 years.
Chapter 3 of Act 60 applies to any entity with a bona-fide establishment in Puerto Rico that is engaged in an eligible service for export (from Puerto Rico to clients outside Puerto Rico).
Eligible services include but are not limited to:
Get the most out of the Puerto Rico Incentives Code