Puerto Rico Acts 20 and 22 May Provide Significant Tax Savings to US Citizens and Resident Aliens

Introduction

Both Act 20 and Act 22 were enacted in 2012 (Act 20-2012 and Act 22-2012) as part of the Government of Puerto Rico’s efforts to attract foreign investments and investors to Puerto Rico. While Act 20 virtually most export services operations from Puerto Rico, Act 22 was primarily enacted to lure US citizens and resident aliens living in the United States to make Puerto Rico their home.

Act 20 Tax Incentives

Any person interested in obtaining tax incentives under Act 20-2012, must file an application with the Office of Industrial Tax Exemption (OITE), which after reviewing the application and related documentation, would issue a tax exemption decree for a 20-year period. Act 20-2012 tax incentives apply only to legal entities that that provides services to markets outside of Puerto Rico (“Export Services”) and which have no nexus with Puerto Rico (the “No-Nexus Requirement”). We further note that Act 20-2012 does not impose a minimum employment requirement.

Export Services include:

• research & development (R&D), advertising and public relations;

• scientific, management, information technology and marketing consulting, and business consulting;

• project management, professional services (e.g., legal, accounting);

• centralized management services, shared service centers, call centers;

• data processing, software development, telecom;

• 3-rd party product storage and distribution centers;

• educational and training services, hospital & lab services (e.g., medical tourism);

• investment banking and other financial services (e.g., asset management);

• trading companies, and

• any other service that Secretary of Economic Development and Commerce, in consultation with the Secretary of the PR Treasury Department, designates as an Export Service.   

Export Services fail to meet the No-Nexus Requirement where such services are associated with:

• business or profitable activities which have been or will be carried out in Puerto Rico

• the sale of any property for use, consumption, or disposal in Puerto Rico;

• advice regarding the laws and regulations of Puerto Rico, procedures and administrative orders of the Government of Puerto Rico, its agencies, public corporations, instrumentalities, and/or municipalities, as well as the precedents of the Courts of Puerto Rico;

• lobbying with respect to the laws of Puerto Rico, regulations, and other administrative orders; and

• any other activity that the Secretary of Economic Development and Commerce, in consultation with the Secretary of the PR Treasury Department, determines, through regulations, orders, administrative determination, or circular letter, as having nexus with Puerto Rico.

The Act 20-2012 tax exemption decree provides a:

• 4% fixed income tax rate on net income earned from Export Services;

• 100% exemption on distributions to shareholders;

• 60% exemption on municipal license tax (90% if located in development zones of Vieques or Culebra); and

• 100% exemption during first five years after beginning operations on real and personal property taxes on property used by businesses that provide (i) call center services, (ii) shared-service center services, (iii) centralized management services, and (iv) creative services; exemption reduced to 90% after five-year period.

Sunset provision: The deadline for applying for tax incentives under Act 20-2012 is December 31, 2020.

Act 22 Tax Incentives

Any individual interested in obtaining tax incentives under Act 22-2012, also must file an application with the OITE, which after reviewing the application and related documentation, would issue a tax exemption decree valid through December 31, 2035 to individual resident investors (“IRIs”). Under Act 22-2012, to qualify as an IRI, the individual could not have been a resident of Puerto Rico from January 17, 2006 through January 16, 2012, inclusive.

The Act 22-2012 tax exemption decree provides IRIs with (i) a 100% income tax exemption (including alternative minimum tax (“AMT”)) on interest and dividends income from whatever source derived, and (ii) a 100%  exemption on short and long term capital gains accrued after becoming a PR resident and realized before January 1, 2036.

In this sense, capital gains accrued before becoming a PR resident (“Pre-PR Residency Gain”) with respect to securities that such individual owned prior to becoming a PR resident (the “Pre-PR Residency Securities”) and realized within 10 years from such date are subject to capital gains tax under the PR Internal Revenue Code of 2011, as amended, which currently is 15% for regular tax and as high as 24% for alternative minimum tax purposes. Alternatively, if the the Pre-PR Residency Gain with respect to the Pre-PR Residency Securities is realized at least 10 years after becoming a PR resident, but before January 1, 2036, such gain would be subject only to a special 5% capital gains tax.

Additional rules apply for US federal income tax purposes to Section 933 bona fide residents of Puerto Rico with respect to Pre-PR Residency Securities and (ii) other types of assets held prior to and disposed of within 10 years after becoming PR bona fide residents.

Let’s talk

We at JFC Legal LLC have considerable experience in navigating the US federal and Puerto Rico tax complexities that arise for individuals and business relocating to Puerto Rico under Act 20-2012 and Act 22-2012. You may reach Juan Feliciano via email at jcfeliciano@jfclegal.com or via phone at +1 (787) 463-6181. We look forward to connecting with you.

The information provided herein does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.  Information on this website may not constitute the most up-to-date legal or other information.