What's up with the tax incentives Act 60, 20, 22?

Karla Barrera-Morstad | October 3, 2022

Introduction to the Act 20, Act 22 and Act 60 Incentives

In 2012, the Puerto Rican government introduced two acts, the Export Services Act (Act 20) and the Individual Investors Act (Act 22), as part of a set of economic incentives aimed at boosting the island's economy. The purpose of these acts was to attract high-net-worth individuals and businesses to Puerto Rico by offering them tax benefits.

Act 20 enabled eligible businesses to take advantage of tax exemptions such as a 4% corporate tax rate and 100% tax exemption on dividend distributions, as long as the business was based in Puerto Rico and its clients were located outside the island.

Act 22 aimed to promote investment in Puerto Rico by offering tax incentives to bona fide residents who invest on the island. The income generated by these investors, after meeting residency requirements, is exempt from taxes on dividends, interests, capital gains, and crypto assets.

On January 1, 2020, Act 20 and Act 22 were integrated into the Puerto Rico Incentives Code 60 (Act 60) with some changes to the qualification requirements of each program.

Due to Puerto Rico's unique relationship with the United States as an unincorporated territory with a commonwealth status, the government of Puerto Rico has the advantage of creating its own tax laws that are separate from U.S. federal or state laws. This independence has allowed Puerto Rico to stimulate economic growth through the Act 60 program.

There have been updates to both Act 20 and Act 22. Act 20 now requires eligible businesses with annual revenue of at least $3 million to directly employ at least one full-time Puerto Rican resident employee. Property and municipal taxes have been reduced, and blockchain-related services are now eligible businesses. Act 22 has added a requirement for grantees to purchase a real estate property in Puerto Rico as their primary residence and make an annual charitable donation. The tax exemption decree granted to eligible businesses and individuals is now valid for 15 years with the possibility of a 15-year extension.

Act 60: Tax Incentives for Resident Individual Investors in Puerto Rico

The Tax Incentives Code of Puerto Rico, Chapter 2 of Subtitle B, offers tax exemptions to nonresident individuals who become bona fide residents of the island. To be eligible, the individual must become a resident by December 31, 2035 and must not have lived in Puerto Rico between 2006 and 2012.

Tax Incentives:

100% exemption from tax on certain passive income (interest, dividends)
100% exemption from federal taxes on all income from Puerto Rico sources
5% income tax rate on capital gains from securities or assets
100% exemption from tax on the appreciation of securities or assets after becoming a resident

Conditions for Granting Tax Benefits:

Evidence of a bank account in Puerto Rico
Annual $10,000 donation to a Puerto Rico Treasury-authorized not-for-profit with $5,000 going towards a child poverty organization
Purchase of residential property from an unrelated person within two years

Moving to Puerto Rico and becoming a bona fide resident comes with numerous tax benefits. With the right financial planning, individuals can make the most of these incentives and reduce their overall tax burden. Let us assist you by connecting you with the best resources!

Act 60: Tax Incentives for Export services and commerce

Chapter 3 of Act 60 aims to stimulate the export of services and commerce by providing fantastic resources and opportunities for U.S. companies. The goal is to create a trade and service center for the world. Services must be provided in Puerto Rico, but they must not have any connection with the customer's trade, business, or other activities in Puerto Rico.

Tax Incentives. Under Act 60, businesses that provide export services and commerce are eligible for the following tax incentives:

Fixed Income tax rate of 4%
100% income tax exemption for distributions from earnings and profits
75% property tax exemption for real property used in the Export Business
75% property tax exemption for personal property used in the Export Services business
50% exemption from municipal taxes

Conditions for Granting Tax Benefits:

To become eligible for these tax incentives, a business needs to apply for a tax concession via a tax exemption decree from the Office of Incentives for Businesses of the Government of Puerto Rico. The decree will be in effect for 15 years, with the possibility of a 15-year extension.

Eligible Export Services and Commerce activities include many industries for example, advertising and public relations, consulting services, creative industries, investment banking and other financial services, trading services and any other service approved by the Secretary of the Department of Economic Development and Commerce of Puerto Rico.

For more information to research on your own, visit our colleague's Act 60 Page: https://l60pr.com/en/capitulos-l60/ (click for English option).

If you would like to learn more, or talk to an accounting or legal expert on the topic, feel free to reach out to Island&Key.