Take Advantage of Tax Incentives for Owning Real Estate in Puerto Rico

Extraordinary new tax incentives make living and working in Puerto Rico more enticing than ever before for U.S. citizens. They create a sense of urgency for investors to move to PR and bring their business here.

Act 20 and 22

In January 17, 2012, Puerto Rico passed legislation making it a tax haven for U.S. citizens that become residents of Puerto Rico. The tax laws, known as Act 20, the Export Services Act, and Act 22, the Individual Investors Act, shields new residents residing in Puerto Rico for at least half of the year from paying most federal income taxes. The U.S. Tax Code generously exempts Puerto Rico sourced income from federal tax and, under the law, residents pay minimal or possibly no taxes on interests and dividends, as well as capital gains. Additionally, property taxes are significantly lower than property taxes in the mainland U.S. Thus, making Puerto Rico a mecca for exportation of international services worldwide.

Tax Exemption Decrees for Act 20 and 22
To benefit from Act 20 and 22, service provider and/or individual must submit online application through the Department of Economic Development & Commerce (DDEC) Online Applications Platform for Act 20, and for Act 22, through the Office of Industrial Tax Exemption of Puerto Rico. This to obtain a tax exemption decree which will provide full detail of tax rates and conditions mandated by the Act of Puerto Rico and the applicant. This will be considered a contract between the Government of Puerto Rico and the applicant. Once granted benefits, these will be secured during the term of the decree, regardless of changes in the Puerto Rico tax laws applicable. The decrees shall have a term of 20 years with possible 10-year extension in the case of Act 20 and until December 31, 2035 in the case of Act 22.

Act 20
Known as the “Export Services Act” is intended to promote the exportation of services by providing great resources and opportunities for U.S. companies to bring their business to Puerto Rico and make it a service center for the World. It also promotes academic and private sectors development and research by granting exemptions and assistance with energy costs to companies willing to invest on growth of these key areas. To become exempt, the business needs to apply for a tax concession via a tax exemption decree considered a contract with the Office of Industrial Tax Exemption of the Government of PR. The decree will be secured during the term, 20 years with possible 10-year extension, regardless of changes in the law itself. To qualify, the business cannot have any previous connections, dealings or nexus with Puerto Rico.

Incentives:

Fixed income tax rate of 4%
Fixed income tax rate of 3% in case of strategic services
Tax exemption of 100% on distributions from earnings and profits
Tax exemption of 90% of personal property taxes for certain business types up to first 5 years of operation (taxable portion subject to regular tax rate of up to 8.83%)
Tax exemption of 90% from real property taxes for certain business types up to first 5 years of operation (taxable portion subject to regular tax rate of up to 11.83%)
Tax exemption of 60% on municipal taxes (taxable portion subject to regular tax rate of .6%)
Among other tax exemptions for specific types of businesses
Tax grant approval process has been amended to be streamlined. Total grant approval process has been cut to a maximum of 35 working days.

Eligibility:

No nexus with Puerto Rico, eligible activity must not be related to the conduct of the trade, business or other activity in Puerto Rico.
Any service decreed by the Secretary of the Department of Economic Development and Commerce of PR
Advertising, public relations
Assembly, bottling and packaging operations of products for export
Call centers, telecommunications, service centers
Centers for electronic data processing
Centralized management services like strategic direction, planning, distribution, logistics and budgetary services.
Consulting services like economic, scientific, environmental, technological, managerial, marketing, human resources, computer and auditing
Computer software development
Creative industries
Distribution of commercial and mercantile products manufactured in PR to exterior
Educational and training services
Engineering and architectural plans and designs
Economic, technological, environmental, scientific
Engineering, Information Systems
Hospital and laboratory services
Investment Banking and other financial services
Marketing centers
Medical services, hospitals, laboratories
Production of blueprints, architectural and engineering services, and project management
Professional services such as legal, tax and accounting
Research and development
Shared services centers: accounting, finance, tax, auditing, marketing, engineering, quality control, human resources, communications, electronic data processing and others.
Storage and distribution centers
Trading services
Voice and data telecommunications for individuals outside of PR

Act 22
Known as “The Individual Investors Act”, the main focus of this law is to attract individual investors and promote that they relocate to the Island. How? With total exemption from local income taxes on all passive income from the point they become legal bona fide Puerto Rican residents. These new residents of Puerto Rico receive 100% exemption on dividends, interest on capital gains. Although Puerto Rico is a U.S. territory, pursuant to Section 933 of the U.S. Internal Revenue Code of 1986, Puerto Rico residents are not subject to federal income taxes derived from sources within the Island, they only subject to those derived from external sources.

Incentives:

Tax exemption of 100% from Puerto Rico income taxes on all interests
Tax exemption of 100% from Puerto Rico income taxes on all short-term and long-term capital gains accrued after the individual became a bona-fide resident of Puerto Rico (“Puerto Rico Gain”)
Capital gains accrued before the individual became bona-fide Puerto Rico resident will be subject to preferential local income tax rates (“Non-PR Built-in Gains”)
Individual investors are provided with an approved Grant that allows them to establish revocable or irrevocable Trusts and have them treated as Grantor Trusts for PR tax purposes.
Investors may transfer or bestow freely all or some of their assets to the above mentioned trusts.
Foreign Trusts duly created under foreign laws will be held valid in Puerto Rico.

The 20/22 Act Society
The 20/22 Act Society is a membership based non-profit organization that has become the epicenter for the 20/22 recipients and was created to foster a sense of community and a collective voice among those moving to Puerto Rico to take advantage of Acts 20, 22, and 273. The group who has been profiled by Bloomberg, Reuters, and Business Week among other business outlets, was founded by Robb Rill who was one of the first recipients of these grant and who moved his private equity firm to the island in late 2012. Our wealth of knowledge and trusted resources built over the years provides insight to our members regarding professional services as well as guidance on the necessary steps required when relocating to Puerto Rico to benefit properly from these Acts. The Society is committed to giving back to Puerto Rico in appreciation for the benefits, and through its philanthropic arm The 20/22 Act Foundation, provides grants to several locally based charities to give back to the Puerto Rican community at large.