Tax Minimization: Puerto Rico’s One-Two Punch


Acknowledging the importance of the service industry in fostering economic growth, in 2012 Puerto Rico enacted a broader tax incentives program for companies that render services to clients located abroad.  The statutory basis of this program was the Export Service Development Act, also known as Act 20.  Concurrently, Puerto Rico approved Act No. 22-2012 (Act 22) affording certain income tax incentives described below for individuals who move to Puerto Rico.  These exemption regimes are now part of the Puerto Rico Tax Incentive Code, commonly known as Act 60, enacted in 2019.


Export Services and Commerce


Pursuant Act 60, any person with a bona fide office or establishment located in Puerto Rico that conducts Export Services or Export Commerce would benefit from:


1. A 4% fixed income rate on “export service income” or “export commerce income” in lieu of any other income tax.


2. A 100% exemption from Puerto Rico income tax on dividend distributions made out of export service income and export commerce income. Subsequent dividend distributions out of these income classes are 100% exempt from further Puerto Rico income taxes.


3. A 50% exemption from gross receipts taxes imposed by municipalities.


4. A 75% exemption from real and personal property taxes.


The initial exemption period is 15 years, but Act 60 provides for one extension period of 15 years.  


An exempt business that is a new small or medium business (i.e., average volume of business of $3 million or less) or operates in the municipality of Vieques or Culebras can benefit from a 2% fixed income tax rate and 100% exemption from property taxes for the first 5 years.


Export Services are certain qualifying services rendered, in or outside Puerto Rico, for the benefit of (1) individuals that are not residents of Puerto Rico; (2) foreign entities (i.e., not organized under the laws of Puerto Rico); (3) trusts whose grantors, beneficiaries and trustees are not residents of Puerto Rico; and (4) non-resident estates; a  person engaged in business in Puerto Rico if  the services are rendered for the benefit of such person’s client who is described in any or the foregoing categories. The services performed for these persons cannot have a nexus with Puerto Rico.


Some of  qualifying services are: (a) research and development; (b) advertising and public relations; (c) consulting on science, technology, environment, economy, management, marketing, human resources, computers, and audits; (d) advising on matters related to any trade or business; (e) engineering and architecture services, project management, and blueprint production; (f) professional services such as legal, tax and accounting; (g) headquarter services; (h) data processing centers; (i) software development; (j) call centers; (k) shared services centers (accounting, finance, tax, audit, human resources and marketing, among other services); (l) distribution in physical form, in the internet, by cloud computing or as part of a blockchain and the income derived from the licensing, subscription of the program or service charges; (m) investment banking and other financial services: asset management, private equity management, hedge funds management, pool of capital management, and trust management; and other services so designated by the relevant authorities through regulations. 


To be eligible for exemptions as an Export Commerce business a person must conduct trading or exporting of products (trading companies), through a bona fide office or establishment in Puerto Rico, and at least 80% of its gross income must be derived from activities eligible as export commerce from any of the following activities among others:


  1. Sales to Foreign Persons (i.e., non-PR resident individuals and non-PR entities) for use, consumption or disposition outside Puerto Rico of products purchased by the business.


  1. Commissions derived from sales of products for use, consumption or disposition outside Puerto Rico.


  1. Sales and distribution to Foreign Persons of intangible products, such as patents, copyrights, digital content and trademarks, among others.


4.    Warehousing, transportation and distribution of products owned by other persons (hub centers).


To be entitled to the tax incentives, a person must apply for and secure a tax exemption grant. This grant is in the nature of a contract among the grantee, its shareholders, owners or partners, and the Government of Puerto Rico.   One full-time direct employee is required for Export Services businesses and Export Commerce businesses that have an annual business volume greater than $3,000,000.


Resident Individual Investors


An individual who relocates to Puerto Rico can also benefit from certain tax exemptions if she or he (i) is domiciled in Puerto Rico, (ii) was not domiciled in Puerto Rico between January 17, 2006 and January 17, 2012, and (iii) becomes domiciled in Puerto Rico before January 31, 2035 (Resident Investor). For these purposes, an individual who is present in Puerto Rico for more than 183 days during a calendar year is presumed to be domiciled in Puerto Rico.


A Resident Investor is afforded 100% exemption from Puerto Rico income taxes, including the alternative minimum applicable to individuals, on:


1.    Interest and dividends from all sources earned after becoming domiciled in Puerto Rico and before January 1, 2036, including but not limited to, interest and dividends received from local Registered Investment Companies (mutual funds). 


2.    Interest, finance charges, dividends and partnerships profits received from international banking entities licensed under the International Banking Center Act of Puerto Rico after becoming domiciled and before January 1, 2036.


3.    Net capital gains related to the appreciation of securities and other assets accruing after becoming domiciled in Puerto Rico and recognized before January 1, 2036.


A 5% tax rate would apply to the net long-term capital gain realized in connection with the appreciation of “securities” and “other assets” held before becoming domiciled in Puerto Rico and recognized after 10 years of establishing such domicile, but before January 1, 2036.


Act 60 defines securities as any note, bond, promissory note, evidence of indebtedness, options, futures, forwards, shares of stock and any other similar investment or with characteristics similar to the foregoing, including derivative instruments. The definition of other assets includes commodities, currencies, and any other digital asset or blockchain technology.


An Eligible Resident must apply for and obtain a tax exemption grant. The grant is in the nature of the contract between the grantee and the Government of Puerto Rico. A Resident Investor must comply with the following requirements:


  1. A $10,000 annual contribution to non-profit organizations recognized as exempt organizations under Section 1101.01 the PR Internal Revenue Code of 2011, as amended; and


  1. Purchasing a residential property in Puerto Rico not later than two years from obtaining the tax grant, and maintaining exclusive and complete ownership by herself/himself, or together with the spouse, over such property as the residence during the exemption period of the tax grant. 



Last reviewed: January 2021

Return to Blog Index