Recently, the Puerto Rico press has picked up the story that there is not enough oversight when it comes to compliance for Act 20 and Act 22 recipients. Noticel one of the islands news sources argues that the Government is handing out these tax incentives without a measurable way to quantify its effect. The further state that these tax incentives that were designed to promote employment and investments in Puerto Rico are just favoring the wealthy, high net worth individuals without any real benefit to Puerto Rico. Representative Rafael Hernández Montañez introduced legislation, that if approved, would raise the employment creation requirement from 3 to 5. As it stands now Act 20 has a 3 employee minimum for the company to operate on the island and still qualify for Act 20. Raising this requirement would cost companies substantially more, and would put them in a difficult position at a moment that they are trying to begin operations on the island. It is unclear whether this amendment will make it out of committee and into law but the fact of the matter is that companies have to plan for these types of scenarios.
The real strategy and planning comes into effect on the compliance side. Many companies and their advisors on the island focus on the application process exclusively. Of course the application process is important but what good is a Act 20 or Act 22 decree if you won’t get the benefits at the end of year one (1), or at the end of year five (5), ten (10) or twenty (20). Theoretically, the Puerto Rico government is in a position to grant these Act 20 and Act 22 decrees generously because it is up to the recipients to prove that they were in compliance through out the year. Every Act 20, by law, has to file an annual report proving that they meet and comply with all the statutory requirements of the law. Through internal requirements the DDEC, the agency that oversees this process, now requires that all Act 22 recipients file an annual report proving that they were in compliance. The risk falls on the investor or the principals of the companies. What happens if your not in compliance, then you loose tax exempt status, your possibly subject to penalties as well as becoming a target for the Internal Revenue Service (IRS). The effects could be disastrous.
It is up to the principals of the company or the investor to work with the legal advisors to create a long term plan that will not only keep themselves or the company in compliance but also plan for future regulation changes. Some of which can be anticipated. At the Law Offices of Zorrilla & Silvestrini, PA, we work with our clients to draw up a plan that will help the Act 20 and Act 22 recipients maintain their status while enjoying all the benefits the island has to offer. Compliance, if properly structured, will take care of itself, be it by internal controls set up with the company, or by the investor quantifying and solidifying their contacts on the island proving their Bona Fide residents status. Again we are not interested in just getting our clients approved for their Act 20 and Act 22 decrees and then moving on. Our priority is to keep our clients in compliance throughout the life of the decree. In essence we help them develop good internal protocols so they can take over their own reporting duties and not miss a beat. Of course, for the clients that don’t want to handle the reporting duties on their own, our firm offers the option of handling the reporting for them.
We believe that it is essential to keep a vigilant eye on new requirements and regulations. A lot of these new requirements can be planned for in advanced. Many of our clients who have partaken in our firm’s update and status meetings know already that reporting requirements and job creation are something they have to plan for in as they build their business in Puerto Rico. The new amendments that have been introduced are no surprise to them. Why not plan for growth and detailed reporting ahead of time. They know that reporting and employment growth have to be accounted for as they move forward in Puerto Rico. So they are ready for it.
Although, we are of the opinion that once the facts come out and the government produces hard numbers to prove the positive economic impact of Act 20 & Act 22 in Puerto Rico you will see a decline in these types of reactionary and ill advised legislations. Many of which are made to gain headlines and political capital.
Given these factors, it is nevertheless, advisable that anyone seeking to take advantage of Act 20 and Act 22 do so expeditiously so they can lock in their decrees and be assured of these tax savings.
If you have any questions regarding Act 20 and Act 22 or its benefits don’t hesitate to contact us at (800) 541-4542. Our business and tax lawyers will help you explore whether a relocation to Puerto Rico is right for you.