Competitive Incentive for Export Services

With an ever-growing array of service industries, Puerto Rico has created an aggressive incentive program to connect with the global economy. The island's government approved Act 20-2012 for Export Services to establish Puerto Rico as a global service hub to attract outside service entities to relocate to the island via tax incentives to stimulate economic growth and social improvements.

Incentives for Export Services (Act 20-2012)

• 4% fixed income tax rate on income related to the export of services
• 100% tax exemption on income tax rate from dividends or profit distributions
• 90% tax exemption on personal and real property taxes
• 60% tax exemption on municipal license taxes
• 20-year tax decree, renewable for an additional 10-year period

It is important to point out that Puerto Rico operates as a Foreign Tax Structure, where federal income taxes don’t apply. It works under a Controlled Foreign Corporation (CFCs) tax treatment, in which federal income taxes differ until repatriation of profits.

Act 20 applies to any entity with a bona fide establishment in Puerto Rico that is engaged in an eligible service for export. Eligible services include but are not limited to investment banking and other financial services, research and development, advertising and public relations, consulting, electronic programming development, call centers, professional services, and centralized management services. An eligible service must also qualify as an export service. An eligible service offered by a foreign entity or non-resident individual that does not relate to business activities within Puerto Rico qualifies as an export service.

An eligible service provider is required to obtain a Tax Exemption Decree that will endure for a term of 20 years and may be renewed for an additional 10 years. The Tax Exemption Decree constitutes a contract between the service provider and the Government of Puerto Rico and is immune to any future legislation.

Requirements
Please note that recently Act 20 was amended, and any new business applying for the act must comply with a minimum of five (5) full-time employees (FTE) for the period of the grant for which the company should be in compliance before the end of the 6th month after starting its operation. FTE are employees who work 2,080 hours a year, including paid-time-off. Should the company have part-time employees, for the employee to be counted for the requirement, he/she must work at least 1,040 hours or more (or 50% of the time or more). In any case, the company must contract a minimum of 10,400 hours if it has a combination of FTE and part-time employees. In other words, an equivalent of 5 FTE must always be satisfied, and no employee may work less than 50% of the time.

The tax incentive application fee is $750.00 USD. Once the tax decree has been granted to the business, annual reports must be filed 30 days after the filing of the Puerto Rico Corporate Income Tax Return is filed.

Puerto Rico also offers other complementary incentives for Manufacturing, Tourism, Financial Services, Film, among others sectors. Every tax incentive granted constitutes a contract with the government of Puerto Rico that is legally guaranteed and protected by United States law, thus providing a favorable environment to forge alliances and drive investment.

Contact us to coordinate a free consultation and learn more about these incentives.