Puerto Rico’s special status as a US territory allows it to provide very attractive tax incentives that it would not be able to otherwise . Here is the list of what we believe are the best tax incentives:
- Best for Young Entrepeneurs: Act 135
- Best for Expats with Passive Income: Act 22
- Best for Online Businesses: Act 20
- Best for Private Equity: Act 185
- Best for Doctors: Act 14
Let’s go into the details into why each of this are the best in their respective categories:
Best for Young Entrepeneurs: Act 135
Act 135 is available only to entrepeneurs under the age of 35 who are starting a new business. The gist of the act is that the first $500,000 in income generated by the corporation is exempt from taxation. Those under 26 years of age can also gain exemption for the first $40,000 of personal income.
Best for Expats with Passive Income: Act 22
Act 22 provides the most tax-efficient structure for a US citizen with passive income anywhere in the world. The main requirement for Act 22 is that the individual must not have been a resident of Puerto Rico prior to 2006; which in effect means almost all the recipients of the act today are expats. Those that qualify receive a total exemption on all capital gains taxes as long as the individual becomes and remains a bona-fide resident of Puerto Rico. One of the main caveats of this act is that the individual must give a $5,000 donation to a registered charity in Puerto Rico.
Best for Online Businesses: Act 20
Act 20 is often used in combination with Act 22 and the two are often referenced together, but it is important to understand that they have meaningful differences. Act 20 is designed for businesses, while Act 22 is meant for individuals. In order to qualify for Act 20, the business needs to be established in Puerto Rico, and more than 80% of its revenue must be generated by sources outside of Puerto Rico. Once a business qualifies for Act 20, it will pay a flat corporate tax of 4% of net income, and any dividend distributions from the business will be tax-free. In addition, the business receives a 60% exemption from the “patente municipal“, which is a tax levied by the municipalities on the gross revenue of the business. One thing to factor into the Act 20 calculation is that before dividends can be distributed, all employees must be paid a fair market salary. This means that if you are the manager of the business, the business needs to pay you a taxable salary before it can pay you tax free dividends.
Best for Private Equity: Act 185
Act 185 was designed specifically for private equity funds of at least $10 million who establish themselves in the island. Funds that invest more than 60% will typically pay a 4% tax rate. There are various intricacies to this act, which is why anybody considering this approach should read the law itself and consider whether it is appropriate for their situation.
Best for Doctors: Act 14
Doctors who seek to start or maintain a practice in Puerto Rico can benefit from the full support of the government of Puerto Rico. Citizens who take advantage of this act can enjoy a 4% tax rate on their income, and enjoy significant tax savings over their life. All should factor into the calculation that medical salaries are typically lower in the island than they are in the mainland.
These are really the top tax incentives at the moment offered by Puerto Rico. Laws in the territory are always in constant flux, and new incentives are usually part of a new administration. Thankfully many of these incentives come with legally binding decrees that guarantee the grantee preferential rates for 15-20 years. Evaluate all the options above, along with doing your own research, and consult with your tax professional whether a move to Puerto Rico is the right move for you and your business.
Disclaimer: PuertoRico4business.com is not a licensed tax advisor, and the opinions stated above have not been reviewed by one. Reader assumes all risk when making tax decisions.