November 3, 2016
Due to its unique fiscal status as a United States territory that manages its own tax laws, Puerto Rico has a history of tax incentives laws for businesses to promote different types of industries.
In 2012 with the approval of Act 22, a new ingredient was added to these incentives to promote the relocation of individual investors to the Island, by providing 100% tax exemption on their interest, dividend and securities capital gains. Within the above mentioned unique fiscal status, any of this passive income considered non-Puerto Rico source will be taxed in the United States. However, source of income rules provide that, generally, securities capital gains derived by Puerto Rico bona-fide residents are sourced in Puerto Rico. Thus, this exemption, in conjunction with the ones that can be obtained when organizing an incentivized business in Puerto Rico, is the reason why many business owners and individual investors are deciding to establish their businesses and lives in Puerto Rico, let alone the all-year-round warm weather and astounding beaches.
The Act 20/Act 22 combination has become quite popular since it allows service businesses and its owners to enjoy a flat income tax rate of 4% with zero dividend taxation and zero capital gain taxation on future sales of the business. With the right planning, many businesses can enjoy tax savings under these laws by relocating at least some of the service functions of their businesses. However, Act 22 can be combined with many other business incentives laws, such as manufacturing, software development, international banking, tourism, filming, creative industries and other to achieve similar tax exemptions. Other exemptions such as municipal property taxes may be achieved.
The purpose of these laws is to create jobs and develop Puerto Rico’s economy. In return, the incentivized businesses derive substantial tax savings secured by a contract with Puerto Rico Government (tax decree) that can last from 10-20 years, depending on the type of business. The job requirement to obtain the benefits can be as low as 5 employees. Individual investors do not need to hire employees to become eligible for the Act 22 benefits.
Puerto Rico lawmakers and the general public are catering to newcomers and every day more individuals and families are making a happy integration into the Puerto Rican society. Even inheritance laws were amended to accommodate the needs of families from different cultures.
On June 30, 2016, a Financial Oversight and Management Board has been assigned to Puerto Rico by the United States Federal Government with the enactment of Public Law 114-187 (“Puerto Rico Oversight, Management, and Economic Stability Act”). This Oversight Board has ample powers over actions that may be taken by the Puerto Rico Government in pursuit of economic development, such as, new incentives laws or new tax decrees. Its main purpose is to provide a method for achieving fiscal responsibility and access to capital markets. We believe, however, that Puerto Rico tax incentives laws should not be substantially modified by reason of the Oversight Board, although the approval process for tax decrees may face some changes.
This publication is not intended to substitute legal advice.
By Janira Beltrán-Sellés
Pellot-González, Tax Attorneys & Counselors at Law, PSC