If you operate a successful and portable business, you might consider relocating to Puerto Rico for the tax benefits under Act 60. This article will consider Puerto Rico’s Act 60 and how it might benefit you, the US entrepreneur operating a business that can be relocated.
The three criteria for Puerto Rico’s Act 60 are:
- You are a US person. That means a US citizen, green card holder, or another legal resident of the United States who pays US tax on their business income. It’s possible to immigrate to the US under an EB-5 visa (for example) and set up a business in Puerto Rico, but that’s beyond the scope of this article.
- Your business is successful. In the case of Puerto Rico’s Act 60, a successful business is one that nets more than $300,000 to $500,000. I will look at this in detail below.
- You operate a qualifying portable business. A portable business is an operation that can be moved from the United States to Puerto Rico. Thus, it is typically one that is not dependent upon a large number of employees in the US. A qualifying business is basically one that provides services from Puerto Rico to persons and/or companies outside of Puerto Rico. I will also consider this in detail below.
Puerto Rico’s Act 60: A Successful Business
There is nothing in the law that defines what a successful business is. So, the purpose of this section is to suggest when it’s tax-efficient to use Puerto Rico’s Act 60. As your income increases, the tax savings increases significantly. Here’s why:
When you move a business to Puerto Rico and use Act 60, you must pay yourself a base salary which is taxed at ordinary rates. A base salary is usually $50,000 to $100,000 depending on your gross income.
After your salary, the net profits of your business are taxed at 4%. That’s to say, the tax benefits of Puerto Rico’s Act 60 apply to your net profits after you take a reasonable salary.
So, if you net $100,000, and you pay ordinary tax on $50,000, the 4% rate applies to the remaining $50,000 only. Plus, you might have trouble justifying a salary of only $50,000.
If you were to move this same business outside of the United States, and into a foreign country, you could use the Foreign Earned Income Exclusion (FEIE) to eliminate 100% of your US tax. For the tax year 2021, the FEIE is $108,700, so a qualifying entrepreneur making less than this in 2021 pays zero tax to the United States.
Likewise, if a husband and wife operate a business, live abroad, and both qualify for the FEIE, they can earn over $200,000 tax-free. So, the FEIE is the best option for anyone making $100,000 single or $200,000 married. It might be close, but a single person making $200,000 a year may pay more tax in Puerto Rico than they would abroad… and their operating expenses would certainly be higher than in a low-cost country.
A single person making $500,000 or above clearly pays less tax in Puerto Rico. Between $200,000 to $500,000 can depend on your circumstances. Here’s the calculation on $500,000 in net income assuming a US rate of 35% and an ordinary rate of 30% in Puerto Rico. This calculation does not account for any state tax, which is also eliminated in moving to Puerto Rico.
Puerto Rico’s Act 60: 30% tax on first $100,000 = $30,000 and 4% of $400,000 = $16,000, for a total tax of $46,000.
Foreign Earned Income Exclusion: 0% tax on first $100,000 and 35% tax on $400,000 = $140,000. This assumes you’re using an offshore company and thus not subject to Self Employment Tax in the United States.
Therefore, I recommend business owners taking home $100,000 to $200,000 will benefit from living abroad. Then, when you grow the business to $300,000 to $500,000, they should move to Puerto Rico under Act 60.
The exception to this is someone with significant capital gains. You pay 0% tax on capital gains on assets acquired AFTER you move to Puerto Rico. No, you can’t have bought crypto back in the day, move to Puerto Rico for a year, and take the tax break.
But, if you’re day trading or otherwise have capital gains on recently acquired assets, Puerto Rico’s Act 60 might be a benefit to you no matter your net business income.
Editors Note: The current tax deal in Puerto Rico is Act 60. Prior to 2019, it was referred to Act 20 for businesses and Act 22 for individuals and capital gains. So, when you research this matter in 2021 and 2022, look for articles on Act 60.
For more on this topic, see: Foreign Earned Income Exclusion or Puerto Rico Tax Deal?
Act 60: Qualifying Business
The basic idea behind Puerto Rico’s Act 60 is to bring high net worth individuals and quality jobs to the island. These businesses should not compete with existing businesses, thus a qualifying business is one that provides services to people and companies outside of Puerto Rico.
According to Act 60, the following services qualify for the tax exemption:
- Advertising and Internet Marketing, which is the most popular of the export services
- Call Centers, which has not really taken off, but call center management where you have your employees in a low-cost country is popular. See Where to Hire Employees
- Consulting, which is the broadest of the available categories
- Business Management and Corporate Headquarters
- Creative Industries (design, art, music, publications, development of apps and video games, creative education)
- Software Development
- Distribution of Software,
- Income from Licensing or Subscription Services.
- Education Services and Training Performed Online
- Electronic Data Processing Centers
- Engineering, Architecture, Project Management
- Hospital and Laboratory Services, including Telemedicine
- Investment Banking and other Financial Services (including advisory and broker-dealer operations performed from Puerto Rico)
- Marketing Centers
- Professional Services (law and accounting)
- Research and Development
- Shared Service Centers
- Assembly, Bottling, and Packaging of Products for Export
- Commercial and Mercantile Distribution of Products Manufactured in P.R.
- Commissions on the Sale of Products to Customers outside P.R.
- Purchase of Products for Resale to Customers outside P.R.
- Sale of Intangible Products to Customers outside P.R.
- Storage and Distribution CentersVoice and Data Telecommunications
Act 60 also includes a section for manufacturing. Among the eligible Export Commerce activities are the following:
In addition, Puerto Rico offers a free trade zone for import and export. For more on this, see Free Trade Zone #61
Finally, Puerto Rico offers an international banking license with a 4% rate under Act 273. For more on this see Start a Bank in Puerto Rico in 10 Steps. Considering the tax rate, and the fact that there is no tax or withholding tax on dividends, Act 273 is basically Act 60 for banks.
Act 60: How is this Legal?
I’m often asked, how is Act 60 legal? I’ve always heard that US citizens are taxed on their worldwide income no matter where they live.
Yes, that’s true…and the only exception to this in the entire world are the US territories. And, Puerto Rico is the only territory with a significant tax deal, so Act 60 is literally the only option for Americans looking to save on their taxes when the FEIE is not sufficient.
Section 933 of the US tax code states that income earned by bonafide residents of Puerto Rico, which is earned in Puerto Rico, is exempted from US tax. Money is earned in Puerto Rico if it is generated by the work you perform on the island.
Thus, Puerto Rico is free to make whatever tax laws it likes. The territory can offer new residents a 4% rate on export services and a 0% rate on capital gains on assets acquired after you become a bonafide resident.
A bonafide resident is someone that moves out of the United States and to Puerto Rico for the foreseeable future. You should spend at least 183 days a year on the island and make it your home base. You should also purchase a home, which will be your primary residence, within two years of moving to Puerto Rico.
Act 60: Requirements to Maintain the Tax Decree
There are three primary requirements to maintain your Act 60 tax decree once it’s granted. These are:
- Make an annual donation of $10,000 to a local nonprofit or charity. This is usually a 501(c)(3) charity and can’t be one that you own or control. Note that the donation must be to a nonprofit in Puerto Rico. At least 50% of this donation must go to a charity that works to stop child poverty.
- You need to buy a home within 2 years of receiving your tax decree. This home must be your primary residence and must be in your name or in the name of you and your spouse. The purpose here is that you really must commit to Puerto Rico and make it your primary home within 2 years of getting your tax deal.
- File an annual report and pay a fee of $5,000 per year.
I hope you’ve found this article helpful. For more information on filing for Puerto Rico’s Act 60, please contact me at email@example.com. I will be happy to work with you to negotiate your tax deal and compare the savings to the FEIE.