Act 20

Legal Guidance for Investors Nationwide Seeking Puerto Rico Business and Tax Benefits

In 2012, Puerto Rico, which is a United States territory, enacted legislation that helps and aids its qualifying new residents to maximize their presence in Puerto Rico by offering business, property and tax incentives to the recipients of Act 20/ Act 22 decrees. By qualifying under the state law and properly relocating to Puerto Rico under federal regulations recipients of Act 20 and Act 22 can be exempt of Puerto Rico sourced income in effect potentially minimizing their federal income tax burden substantially. In 2014 alone, over 500 investors nationwide and from around the globe moved to take advantage of Puerto Rico’s new incentives. Our team of professionals is ready to help you along every step of the way and to make your relocation as smooth as possible. Attorney Angel Silvestrini is licensed to practice law in Puerto Rico, Florida, New York, Connecticut, and Massachusetts, giving Zorrilla & Silvestrini, PA an edge to be able to help you with your relocation. If you want to keep more of your hard-earned wealth in your control, Puerto Rico may be your solution.

IRS treatment for Puerto Rico residents:

The IRS or Internal Revenue Service of the United States has a special designation for Puerto Rico that has been in place for decades under 26 U.S.C § 933. It states:

“ The following items shall not be included in gross income and shall be exempt from taxation under this subtitle:

(1) Resident of Puerto Rico for entire taxable year

In the case of an individual who is a bona fide resident of Puerto Rico during the entire taxable year, income derived from sources within Puerto Rico (except amounts received for services performed as an employee of the United States or any agency thereof); but such individual shall not be allowed as a deduction from his gross income any deductions (other than the deduction under section 151, relating to personal exemptions), or any credit, properly allocable to or chargeable against amounts excluded from gross income under this paragraph.”

Usually, United States citizens are taxed on their worldwide income. This is true, irrespective of the country the income originates. This would generally mean that Puerto Rican residents would be subject to full federal taxation. However, as stated above, section 933 of the U.S. Internal Revenue Code (IRC) exempts residents of Puerto Rico from federal income tax on that portion of their income that originates in Puerto Rico.

This special treatment is based on the old adage “no taxation without representation”. Because Puerto Rico is not a state, it’s residents, although U.S. Citizens, don’t vote for congress nor for the presidency of the United States. They are not subject to the same taxation as residents of other states. Therefore, Congress enacted this chapter to address the unique relationship Puerto Rico has with the United States.

Advantages for Taxpayers Under Act 20

As discussed above, under federal regulation, the IRS does not tax the majority of Puerto Rico residents who derive their income from the Island. But Puerto Rico does tax it’s residents on the state level. Enter Act 20, a crucial component of the Puerto Rican legislation that was passed in 2012, also known as the Private Equity Funds Act. The effect of this law was to establish Puerto Rico as a service center exporting goods and services to the United States and around the globe, by incentivizing corporate relocation to the territory. In sum, the Act applies to entities with bona fide establishments in Puerto Rico that are engaging in exporting their products or services.

Services that satisfy this standard include financial services like investment banking, asset management or “hedge funds”, private equity firms, venture capital firms, energy companies, research and development companies, consulting firms, advertising and public relations firms. In addition, other types of business that qualify are companies that focus on computer or software programming, Internet sales business, e-commerce, call centers, IT & telecommunication businesses, web and print design services, management services, and other professional services. Companies that serve as “headquarters”, who house centralized management, which feeds other entities would qualify as well. More recently, a new amendment included manufacturing to the list of approved businesses. To qualify as an export service, the service or product provided must be directed at a foreign entity or non-resident person or customer that does not have a connection with Puerto Rico.

After these criteria are met, the qualifying entity must obtain a Tax Exemption Decree, which will last for a period of 20 years and can be renewed for an additional 10-year period. Essentially, the Tax Exemption Decree serves as a contract between the service provider and the Puerto Rican Government, and it ensures that the service provider will be immune from any future legislation modifying Act 20’s provisions.

The Tax Exemption Decree provides the service provider with a host of lucrative incentives. For example, it provides a full tax exemption for profit and earning distributions on any income that is generated from the export services. Additionally, service providers enjoy a flat income tax of (4%) four percent on any income from the export services. If 90 percent of the service provider’s income is generated from the service export business, the flat tax rate is reduced to (3) three percent. One of the greatest advantages provided under the Decree is a full property tax exemption for the first five years that the service export business is in operation. This applies to the corporate headquarters, shared service centers for accounting, human resources, marketing, and call centers. After the initial five-year period, the service export business will enjoy a 90 percent tax exemption for the duration of the Tax Exemption Decree period.

Discuss Your Relocation to Puerto Rico with a Skilled Tax Attorney

Puerto Rico offers some of the nation’s most beautiful scenery and is home to a rich cultural environment. However, some people may incorrectly think that relocating to the territory and enjoying the incentives under the laws is simple and fast. On the contrary it is a difficult process that is riddled with legal complexities. The dedicated Puerto Rico business and tax lawyers at Zorrilla & Silvestrini, PA, have offered legal counsel on Act 20 and Act 22 to numerous individuals and businesses throughout the U.S., including Florida, New York, Connecticut, and Massachusetts. We offer a phone consultation to help you learn more about how these laws can help you make the most of your wealth. Call us now at 1-800-541-4542 or contact us online.