Article 1000.01-4
The purpose of this Regulation is to establish the rules and regulations that will govern the process of applications, filing of compliance reports, collection of fees or transaction or service charges for the processing of applications for tax exemption decrees or tax benefits, pursuant to the subtitles or chapters of Act No. 60-2019, as amended, known as the "Puerto Rico Incentive Code," and any other procedures related to applications for tax exemption decrees or tax benefits granted.
Chapter 2 of Act 60
Chapter 2 of Puerto Rico's tax laws provides a 100% tax exemption on interest, dividends, and certain capital gains for individuals who become bona fide residents. To qualify, individuals must establish residency in Puerto Rico by December 31, 2035, and should not have been residents between January 17, 2006, and January 17, 2012. This tax incentive aims to attract investors and stimulate economic growth. However, it's important to stay updated with the latest regulations and consult with tax professionals or the Puerto Rico Department of Treasury for accurate and current information regarding eligibility and the specific requirements for enjoying these tax benefits.
Section 933 of the U.S. Internal Revenue Code, known as the "Section 933 Exclusion," provides a significant tax benefit for individuals who are bona fide residents of Puerto Rico. According to this provision, income derived from sources within Puerto Rico is not included in gross income and is exempt from federal income taxation under the U.S. Code. To qualify as a bona fide resident of Puerto Rico, individuals must meet a physical presence test, maintain their tax home in Puerto Rico, and demonstrate a closer connection to Puerto Rico than to the United States or any foreign country.
Under Chapter 2 of Act 60, Individual Investors can enjoy a 100% tax exemption from Puerto Rico income taxes specifically on interest and dividend income during the exemption period. Additionally, thanks to the Section 933 Exclusion, interest and dividends received by Individual Investors that qualify as Puerto Rico source income are not subject to federal income tax under the U.S. Code. However, it's important to note that Individual Investors who are U.S. citizens or resident aliens may still be subject to U.S. federal income tax on interest and dividends that do not qualify as Puerto Rico source income.
Moreover, there are circumstances where gains from the sale of marketable securities, commodities, currency, and digital assets based on blockchain technology, referred to as "Assets," acquired after an individual becomes a bona fide resident of Puerto Rico, may be exempt from federal income tax if sold during the period of residency in Puerto Rico. Special rules apply for non-marketable Assets, as well as for marketable Assets acquired prior to establishing residency in Puerto Rico.
The tax incentives granted to Individual Investors under Chapter 2 of Act 60 will expire on December 31, 2035.
To qualify for the benefits as an Individual Investor in Puerto Rico, certain requirements must be met:
Annual Donation: Individual Investors must make a yearly donation of at least $10,000 to local nonprofit entities that are independent of the investor's control. These nonprofit entities must be certified under the Puerto Rico Internal Revenue Code. Additionally, half of the donation amount must be directed towards organizations dedicated to eradicating child poverty.
Real Property Purchase: Within two years of receiving the grant, Individual Investors are required to purchase real property in Puerto Rico, which will serve as their primary residence. The property must be owned solely by the Individual Investor or jointly with their spouse.
Annual Report: Individual Investors must file an Annual Report with the Government of Puerto Rico, accompanied by a filing fee of $5,000.
To avail the benefits as an Individual Investor, it is necessary to request and obtain a grant of tax exemption. Act 60 specifies that this grant will be treated as a contractual agreement between the individual and the Government of Puerto Rico. As a result, it cannot be unilaterally modified and should not be affected by any amendments made to Act 60 subsequent to the issuance of the grant. This provision aims to provide stability and assurance to Individual Investors regarding the terms of their tax exemption.
Chapter 3 of Act 60
Puerto Rico has implemented a robust strategy to transform itself into an international export service and commerce hub. This initiative involves reducing income taxes and granting exemptions from property taxes, municipal taxes, and taxes on dividend distributions for income and property used in exempt operations. By capitalizing on this framework, investors can seize the opportunity to conduct business in Puerto Rico for customers outside the island while benefiting from remarkably low taxes, provided their operations are appropriately structured. This initiative aims to drive economic development, attract foreign investment, and position Puerto Rico as a thriving center for global commerce.
Chapter 3 of the applicable law pertains to businesses that have a genuine office or establishment in Puerto Rico and engage in eligible services as either an export service provider or an export commerce business.
The list of eligible Export Service activities includes
Eligible Export Services are those provided to foreign individuals or entities located outside of Puerto Rico. To qualify for the exemption, these services must not have any connection with Puerto Rico. Services related to commercial or for-profit activities conducted in Puerto Rico, as well as providing advice on Puerto Rico's laws, regulations, procedures, and administrative orders, are considered to have a connection with Puerto Rico. In the case of export commerce activities, the entity must generate at least 80% of its gross income from this specific activity.
Exempt businesses with business volumes over $3 million are taxed at a 4% rate on net income from their exempt operation. For businesses with volumes of $3 million or less, the rate is 2% for five years, increasing to 4% thereafter. Engaging in a "Novel Pioneer Activity" can further reduce the income tax rate to 1%. However, Act 60 imposes a base period income limitation on tax benefits for businesses involved in the eligible activity in Puerto Rico before applying for the tax exemption. These measures aim to provide fair and incentivized taxation while encouraging innovative business activities in Puerto Rico.
Dividends or profits distributed from the exempt operation are entirely exempt from Puerto Rico income tax.
Exempt businesses that have a business volume exceeding $3 million are eligible for a 75% exemption from personal and real property taxes. In contrast, businesses with a business volume of $3 million or less enjoy a 100% property tax exemption for the first five years, followed by a 75% exemption thereafter. These property tax exemptions provide significant benefits for businesses, reducing their tax burdens and allowing them to allocate more resources towards growth and development. By incentivizing investment and supporting business operations, these exemptions contribute to the overall economic growth and development of Puerto Rico.
Exempt businesses with a business volume over $3 million receive a 50% municipal license tax exemption. For businesses with a volume of $3 million or less, the exemption is 100% for the initial five years and 50% thereafter.
Businesses with an annual business volume exceeding $3 million must fulfill an employment requirement of having at least one full-time employee who is a resident of Puerto Rico, including the possibility of the owner/employee. Conversely, businesses with annual business volumes of $3 million or less are not subject to any employment requirement. This provision encourages larger businesses to contribute to the local workforce by hiring at least one full-time employee who resides in Puerto Rico. By doing so, it aims to support job creation and economic opportunities within the region while providing flexibility for smaller businesses.
The tax exemption period for Chapter 3 of Act 60 for Export Services & Commerce is initially set for 15 years, with the possibility of extending it for an additional 15 years. To avail the benefits, businesses must apply for and receive a grant of tax exemption, which is considered a contractual agreement between the business and the Government of Puerto Rico. This ensures that the terms of the grant cannot be unilaterally modified and should remain unaffected by any amendments made to Act 60 after the grant is issued. This stability and protection provide businesses with certainty and confidence in their tax benefits, promoting long-term investment and growth in Puerto Rico.