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Common Reporting Standards (CRS) and Puerto Rico's Special Status
Christian Reeves

Common Reporting Standards (CRS) and Puerto Rico’s Special Status

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Introduction to Common Reporting Standards (CRS)

The Common Reporting Standard (CRS) is an information standard for the automatic exchange of information (AEOI) regarding bank accounts on a global level, between tax authorities. The aim of the CRS is to combat tax evasion. It was developed by the Organization for Economic Cooperation and Development (OECD) and was first agreed upon in 2014.

Under the CRS, tax authorities in participating countries receive information from their financial institutions and automatically exchange that information with tax authorities in other CRS participating jurisdictions. The data pertains to accounts held by taxpayers, including individuals, businesses, and trusts.

The details collected and exchanged include:

  • Name, address, and tax identification number (TIN) of the account holder.
  • Account number.
  • Account balance or value at the end of the year.
  • Gross amount of interest, dividends, and other income generated.

Puerto Rico’s Exclusion from CRS

Puerto Rico, an unincorporated territory of the United States, is not a separate sovereign jurisdiction for purposes of international treaties and agreements. Instead, it is often covered by the United States in its international agreements. As a result, Puerto Rico itself does not independently sign onto the CRS.

However, the U.S. has not adopted the CRS either. Instead, the U.S. has its own standard for international tax compliance and information sharing, known as the Foreign Account Tax Compliance Act (FATCA). While FATCA has similar objectives to the CRS, it operates differently. FATCA specifically targets non-compliance by U.S. taxpayers using foreign accounts. In essence, it requires foreign financial institutions to report to the U.S. Internal Revenue Service (IRS) about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

Why International Banks in Puerto Rico Don’t Need to Report under CRS

Given that Puerto Rico falls under the U.S. umbrella for international agreements and that the U.S. has not adopted the CRS, international banks in Puerto Rico aren’t required to report under the CRS. Instead, they are subject to FATCA regulations when it pertains to U.S. persons. However, accounts held by non-U.S. persons are not subject to FATCA or CRS reporting if the bank in Puerto Rico has no other presence in a CRS-participating jurisdiction.

Benefits of Added Privacy and Protection

  • Competitive Advantage: The added layer of privacy can provide an edge for banks in Puerto Rico when attracting international clients, particularly those who are wary of the CRS’s extensive reporting requirements.
  • Less Regulatory Burden: Without the obligation to comply with CRS reporting standards, banks can save on operational costs related to data collection, management, and reporting.
  • Enhanced Client Trust: Certain clients may appreciate the added confidentiality and may perceive banks in Puerto Rico as more protective of their financial information.
  • Diversification: As more countries adopt CRS, individuals and entities seeking diversification of their banking relationships might look to Puerto Rico as an alternative.
  • Attractiveness for Certain Business Structures: Businesses and trusts that have no tax liability in their home country might find Puerto Rico appealing due to the reduced reporting requirements.

In conclusion, while the primary purpose of the CRS is to combat tax evasion, its broad scope has implications for financial privacy. Puerto Rico’s unique status provides a nuanced position in the global financial landscape. International banks operating there, serving non-U.S. persons, can offer a level of confidentiality that is becoming rare in the age of automatic information exchange.

Notes on Asia and CRS

Taiwan was the last country in Asia to adopt CRS. Taiwan signed on to the Common Reporting Standard (CRS). The CRS is an international standard for the automatic exchange of financial account information between tax authorities. It was developed by the Organisation for Economic Co-operation and Development (OECD) in 2014.

Taiwan committed to implementing the CRS in 2017, and it became effective on January 1, 2019. The first exchange of information under the CRS took place in September 2020, with Taiwan exchanging information with Japan and Australia.

Taiwan is also a signatory to the Multilateral Competent Authority Agreement (MCAA), which is a multilateral agreement that facilitates the automatic exchange of information under the CRS. The MCAA has been signed by 109 jurisdictions, including Taiwan.

China has also signed on to the Common Reporting Standard (CRS). The CRS is an international standard for the automatic exchange of financial account information between tax authorities. China signed the CRS in December 2015, and the first automatic exchange of information under the CRS took place in September 2018.

As a signatory to the CRS, China is required to collect certain information from financial institutions about their account holders, including their name, address, tax identification number, and account balance. This information is then exchanged with the tax authorities of other CRS signatory countries on an annual basis.

The CRS is designed to help tax authorities crack down on tax evasion and money laundering. By exchanging information about financial accounts, tax authorities can more easily identify individuals and businesses that are hiding income or assets from the authorities.

The CRS has been widely adopted by countries around the world. As of March 2023, there are 109 CRS signatories, including all European Union countries, China, India, Hong Kong, and Russia.

The United States is the only major economy that has not signed on to CRS. However, the US does have a similar law called the Foreign Account Tax Compliance Act (FATCA). FATCA is more restrictive than the CRS, and it requires financial institutions in all countries to report information about US account holders to the US Treasury Department. FATCA only applies to US persons with accounts outside of the United States. 

  – A US person is a US citizen no matter where he or she lives. It also includes green card holders, legal residents, and anyone spending at least 183 days in the United States. 

As of August 2023, there are 58 countries that have not signed on to the Common Reporting Standards (CRS). These countries are:

Afghanistan, Algeria ,Angola ,Bangladesh, Belarus ,Benin, Bhutan, Bolivia, Burundi, Central African Republic, Comoros, Congo, Cuba, East Timor, Equatorial Guinea, Eritrea, Eswatini, Ethiopia, Fiji, Georgia, Gambia, Guinea-Bissau ,Honduras, Iran, Iraq, Jordan, Kiribati, Kyrgyzstan, Laos, Libya, Malawi, Mali, Mozambique, Myanmar, Namibia, Nepal, Nicaragua, North Korea, Palau, São Tomé and Príncipe, Sierra Leone, Solomon Islands, Somalia, South Sudan, Sri Lanka, Sudan, Suriname, Syria, Tajikistan, Tonga, Turkmenistan, Tuvalu, Uzbekistan, Vatican City State, Venezuela, Vietnam, Yemen, Zambia, and Zimbabwe.

Christian Reeves

Why Puerto Rico Banks are in the Pandora Papers

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In this post, I’ll look at why international banks in Puerto Rico are in the Pandora Papers. While the left-leaning journalists try to spin these banks as somehow sinister, the truth is much more mundane. Here’s what you need to know about why Puerto Rico banks are in the Pandora Papers.

The Pandora Papers dwarf the Panama Papers and include more than 11.9 million records for a total of 2.97 terabytes of data. These records were stolen from 14 different incorporation firms, with the largest being Trident Trust. These files provided information on people from 200 countries, including more than 330 politicians and 130 Forbes billionaires, and several celebrities. 

The Pandora Papers included information on only a few international banks in Puerto Rico. Though, I can tell you that most of the banks in Puerto Rico were structured using an offshore holding company. They may also have an offshore broker-dealer, EMI license, or some other international processing company or payment rail. So, basically, all international banks in Puerto Rico could have been in the Pandora Papers.

There are a few reasons why banks in Puerto Rico must use offshore companies when setting up. The first is for the payment of dividends to non-US shareholders. The second is because many of these banks offer cross-border payments or non-USD accounts, so need access to foreign payment rails.

 

Puerto Rico Banks in Pandora Papers – Holding Companies

International banks in Puerto Rico with IBE licenses pay 0% tax and those with IFE licenses pay 4% in tax. There is no withholding tax on dividends paid to non-US persons or offshore holding companies. Dividends paid to US persons are taxable in the United States. 

  • IBE licenses were issued between 1989 and 2012 and the first IFE licenses were issued in 2013. The IFE law replaced the IBE law, increasing the tax rate to 4%.

IFEs and IBEs in Puerto Rico with non-US shareholders, or those that want to court foreign shareholders, require an offshore corporation. The international bank pays 4% tax on its net profits and pays out a tax-free dividend to the offshore holding company. Those dividends are held at the holding company or paid out to the shareholders per their wishes and in a tax-efficient manner.

There is no tax benefit to US shareholders in using an offshore holding company. US persons pay tax on dividends when they are distributed. Therefore, US shareholders prefer profits to be retained in the bank tax-deferred while foreign shareholders prefer that dividends are paid out as soon as possible. 

Of course, dividend payments are governed by the capital requirements and operational requirements of the IFE or IBE. For more on this topic, see: Puerto Rico Bank Capital Requirements.

For more on the topic of tax planning for an international bank in Puerto Rico for US shareholders, see: Puerto Rico Tax Incentives for Bank Owners.

 

Puerto Rico Banks in Pandora Papers – Payment Rails

Most international banks in Puerto Rico focus on international customers. Others focus on US clients with international transactions. For this reason, IFEs and IBEs need access to international payment rails. Most banks in Puerto Rico offer FX services along with accounts in USD, GBP, CHF, and other currencies. 

Also, many of these Fintech banks are looking to provide cost-effective cross-border payment services. This requires multiple correspondent accounts and other licensed or unlicensed structures which are typically held in an offshore company. 

For more information on setting up a bank in Puerto Rico, see: Start a Bank in Puerto Rico in 10 Steps

For information on purchasing a bank in Puerto Rico, see: Process to Purchase a Bank in Puerto Rico

 

Puerto Rico Banks in Pandora Papers – Broker-Dealer License

Again, banks in Puerto Rico typically focus on international clients. IFEs and IBEs provide banking and custody services to people from China, Latin American, and around the world. For more on custody services, see: International Banks in Puerto Rico May Provide Global Custody Services

Also, banks in the United States and Puerto Rico are prohibited from providing brokerage services. They are allowed to provide custody services, but can’t execute the trades. For this reason, banks in Puerto Rico will set up a separate broker-dealer in a jurisdiction such as the British Virgin Islands. 

Why don’t they set up the BD in the United States? First, the costs of operation are much higher in the US. Second, most clients are not US persons, so a US BD is not going to accept them as clients and will not be an efficient option.

For more on how to structure an international bank in Puerto Rico, see: How to Set up an Offshore Bank in 2022.

 

Puerto Rico Banks in Pandora Papers – Client Companies

The article below, which inspired this post, identified various non-US persons with offshore companies and accounts at various international banks in Puerto Rico. In fact, many non-US persons form offshore companies in order to open business accounts at banks in Puerto Rico.

While US persons are taxed on our worldwide income, most other persons and companies are not. There are many legitimate tax and business reasons a non-US person would form an offshore company and open an account in Puerto Rico. Also, there are several legitimate business reasons US persons might do the same.

For example, if a US person wants to invest in a foreign or offshore fund, they’ll need an offshore structure. Also, if a US person is selling into foreign countries, they will need an offshore company to facilitate that business. This would include using the bank in Puerto Rico for their cross-border payments for salaries, purchases, shipping, etc.

 

Why Target Puerto Rico Banks in the Pandora Papers?


So, why are banks in Puerto Rico the target of journalists writing on the Pandora Papers? Because they can get great headlines that make it appear that these banks are doing something nefarious. In fact, international banks in Puerto Rico are required to use offshore structures, but none of these “investigators” bother to mention that. Anyone associated with the offshore industry is guilty until proven innocent. 

The bottom line is that these Pandora Paper articles get clicks for the author. It doesn’t matter if the use of an offshore structure is 100% legitimate. It’s easy to cast anything with the word “offshore” in the name in a disparaging light. 

When you read these articles about Puerto Rico banks in the Pandora Papers, keep in mind that these are the most regulated international banks in the world. Yes, the regulator in Puerto Rico has just a few employees but uses a network of external auditors and banking experts (see the article below). 

Next, many banks in Puerto Rico are regulated by the US Federal Reserve Bank. This is the toughest regulator there is, and these Puerto Rico banks follow all the same reporting and compliance requirements of the largest national banks. 

Finally, all shareholders, investors, officers, directors, and key personnel of these banks go through stringent due diligence. They must provide three years of audited financial statements and complete a very rigorous background check which costs $6,500 to $15,000 per person depending on their nationality and other factors.

And the same is true for any corporation that’s a shareholder of the bank. These offshore corporations must either be newly formed or provide 3 years of US GAAP compliant audited financial statements. Any offshore company that appears in the Pandora papers has been fully vetted by regulators and a third-party due diligence provider such as Kroll or Berkeley Research.

When the Pandora Papers attack a shareholder of a bank in Puerto Rico because he was accused of wrongdoing in years past, you can be assured that this claim was thoroughly checked out by regulators and various investigative agencies. If he was allowed to become a shareholder, he was clean (see the article below). 

As someone in this industry since 2003, I can tell you that no high net-worth person actively involved in a business is without his or her detractors. As the expression goes, you haven’t made it until someone sues you (until you have enough money for someone to bother trying to take it from you). 

I’ve seen dozens of background reports, some over 100 pages long. I can tell you from experience that every successful person has a history of litigation and has some battle scars. 

In fact, I’ve only seen one perfectly clean background report. And, as it turned out, that was an American who was fronting for some foreign investors. He was quickly found out and the bank purchase didn’t get past first base… but, my point is, if the report is perfectly clean, that’s when you need to be suspicious.

For more on how to structure an international bank in Puerto Rico, see: How to Set up an Offshore Bank in 2022.

 

Conclusion

I hope you’ve found this article on why Puerto Rico banks are in the Pandora Papers to be helpful. If you’re interested in forming an IFE in Puerto Rico or purchasing an existing bank in the territory, please contact me at info@premieroffshore.com. I will personally prepare your business plan and handle your license application.

 

Translation of Article on Puerto Rico Banks in the Pandora Papers

The following is a translation of the Spanish language article that inspired this post. For the original version, click here.  

Note that this is an unofficial translation. Any grammatical issues, run-on sentences, poor or unclear writing, typos, or any other errors are mine. Any translations that I’m unsure of are in [brackets], as are my comments.

I’ve also deleted the names of the banks in the article and replaced them with XXXX. I don’t see any reason they need to be named here.

 

 

SMALL INTERNATIONAL BANKS FROM PUERTO RICO IN THE PANDORA PAPERS

The international research in the Pandora Papers allows access to documents that show how some of these entities facilitate the opaque businesses of foreign millionaires, known as offshore companies.

 

From an office in San Juan, XXXX International Bank provides “Swiss expertise” to its clients. It offers banking services to foreigners who are not residents of Puerto Rico: receive deposits, open offshore bank accounts, and carry out transactions in any type of currency.

Their website highlights that they are discreet. It also says that they comply with the law and are committed to a culture of compliance. That is, they verify the identity of their clients and question the origin of the money, “when appropriate.”

The owner of XXXX International Holding LLC – the bank’s parent company – is XXXX, a French banker who lives in Miami. His LinkedIn mentions that he chairs the Board of Directors of International Rollet Capital and ExPAM Capital, founded a bank in Dubai called La Trésorerie, and worked at Goldman Sachs. He doesn’t mention XXXX.

XXXX’s contact person in Puerto Rico is Rafael Blanco Latorre, former commissioner of the Office of the Commissioner of Financial Institutions (OCIF) from 2012 to 2016. Blanco Latorre told the Center for Investigative Journalism (CPI) that he is an external legal consultant and that he chairs the Board of Directors of one of the International Financial Institutions (IFE), although he did not want to mention the name. In October 2016, two months before ending his duties as commissioner, he signed the license that allows XXXX to operate in Puerto Rico.

Blanco Latorre refused to give an interview about his management as a civil servant in the OCIF and about the role he exercises in one of the entities that he supervised while he was in the Government, referring to the fact that he is now a private citizen.

In 2012, under the government of Luis Fortuño, Puerto Rico [created the law which allowed the] island to become an international financial center. The Government offered tax exemptions of up to 45 years to anyone who set up a bank, insurer, subsidiary, or boutique firm dedicated to exporting financial services Act 20 [now referred to as Act 60]. The story is [standard]: capital would arrive, create thousands of jobs and generate economic development.

Since then, small banks have arrived in Puerto Rico that, by establishing themselves here, can open accounts directly with the Federal Reserve. This gives them direct access to the US market and facilitates transactions in US dollars. The owners of these entities are mostly foreigners and the law prohibits [IFEs and IBEs] from offering services to residents of Puerto Rico

 

Almost ten years later, the balance of this incentive has had a “modest” economic impact, less than 1,000 direct jobs according to OCIF, attracting the attention of federal and international authorities for money laundering and tax evasion cases, and a reputation as a [tax] paradise. These entities, whose owners often remain behind the scenes, can serve to hide assets from tax authorities or, in the worst case, money laundering and other illegal transactions.

Some of the directors, owners, and clients of these banks and international financial entities established in Puerto Rico appear in documents examined by the CPI are part of the Pandora Papers, a new delivery of 11.9 million documents from offshore companies obtained by the Consortium Investigative Journalists International (ICIJ). The leaked documents – most dated between 1996 and 2020 – come from 14 firms dedicated to incorporating and managing this type of business in tax havens. These include the Alemán, Cordero, Galindo & Lee (Alcogal) law firm, and the Overseas Management Corp. (OMC) law firm, both from Panama. In reaction to the ICIJ investigation, both companies stated that they are committed to compliance and that they act in accordance with laws and regulations.

The Pandora Papers reveal the financial secrets of 35 heads and former heads of state, more than 330 officials in more than 91 countries and territories, as well as fugitives, con artists, and murderers from around the world. It is the largest journalistic collaboration in history, with a team of more than 600 journalists from 150 media, led by ICIJ and including the CPI.

The leaked documents show how offshore entities have used some of these banking institutions to open accounts or transfer money.

Are these banks used in Puerto Rico to facilitate transactions between offshores, tax evasion or money laundering? The CPI asked Natalia Zequeira, Commissioner of Financial Institutions since January of this year.

“Doing business with‘ offshore ’companies is not illegal in itself. The vast majority of these companies are formed for legitimate purposes, among others, to hold shares or assets of other commercial entities, as well as to facilitate the transfers of assets and currencies ”, answered the lawyer.

She added that all financial entities in Puerto Rico are subject to different laws and regulations that include the obligation to report any suspicious transaction or activity that they identify. Failure to do so exposes the entity to sanctions and other penalties, Zequeira said.

 

Banks on Pandora Papers

In the case of XXXX, the CPI identified in the Pandora Papers Alcogal law firm documents related to the opening of accounts in this bank for the benefit of at least three offshore companies. XXXX did not respond to questions about their clients.

Another that appears in the Pandora Papers is XXXX, owned by Marcelino Bellosta Varady and Alejandra Bellosta Perea, according to a document presented to the Puerto Rico State Department.

Venezuelan businessman Carlos Marcelino José Bellosta Pallarés – Marcelino’s father – appears as a beneficiary of several offshore entities registered in the British Virgin Islands (BVI). At least three of them have bank accounts at XXXX, the leaked documents reveal.

According to the incorporator’s forms for registering companies, more than a dozen offshore entities, mostly from BVI, have bank accounts with XXXX.

XXXX assured the CPI that it is regulated by the OCIF and that it complies with all the laws and regulations that apply against money laundering and terrorism, among others. He said that he is continually working to improve his internal controls and that he has a bank officer who is dedicated exclusively to the compliance area.

XXXX did not answer questions from the CPI about the services it provides to the Venezuelan Bellosta family.

Marcelino has two brothers, Carlos José and Juan Manuel. Carlos José has had a decree of Act 22 since 2017 [now referred to as Act 60] and is listed as an official of Venequip Puerto Rico LLC, a supplier of equipment related to the energy industry. Juan Manuel manages several companies in Puerto Rico, including CH4 Systems, a technology provider with a decree of Act 20 since 2016 [now referred to as Act 60].

All these companies are registered at the same address as XXXX: Galería San Patricio B5 Calle Tabonuco, Suite 207-A, Guaynabo.

The Pandora Papers also mention Venezuelan Joan Manuel Fereira Rosillo, a businessman who received $2.2 million from the Brazilian company Odebrecht through his company Rote Energie, according to the multinational investigation into corruption Lava Jato.

According to a bank document on file with OMC, Fereira Rosillo maintains an account with XXXX Bank, a Puerto Rican IFE. [note that this is the third bank in Puerto Rico referenced in this article and not the same bank referenced above]

Agustín García Castilla serves as president of XXXX Bank, according to the bank’s website. García Castilla coincides with Fereira Rosillo in different companies in Florida and Panama, including one called XXXX Asset Holdings.

The CPI asked XXXX Bank if, according to the documents, it provides services to Fereira and if it owns the institution, but received no response. Fereira Rosillo, who also worked for the oil company PDVSA, is also listed with offshore companies in Aruba and the BVI.

[The section below refers to South Bank, which was closed by regulators in 2019. For more on this, click here (Spanish language only). For a list of current IFEs, click here. For a list of current IBEs, click here.] 

Another bank featured in the leak is South Bank International. According to a reference letter prepared by the Alcogal law firm, one of South Bank’s clients was Tag Bank S.A., an investment bank registered in Panama. This entity is in the process of voluntary liquidation according to its website. Last August, the Brazilian Eduardo Plass, president of TAG Bank, was accused and arrested in Brazil for tax evasion, in relation to Lava Jato.

In 2019, the FBI raided the offices of South Bank International in Guaynabo after a federal judge found probable cause for fraud and money laundering crimes. The OCIF canceled his license that same year, after the intervention.

 

The offshore dilemma

Owning offshore assets or using paper entities to do cross-border business is not illegal.

“There is a distinction to be made between reducing the payment of taxes and avoiding taxes. Reducing the payment of taxes is a goal of everyone who pays taxes. There are thousands of ways to reduce taxes legally. What should not be done is to evade taxes, “said Eduardo Colón, president of the Association of International Banks of Puerto Rico.

But many use this system to manage, move and often hide their fortunes, proof that not all people play by the same rules when complying with their tax liability. Governments lose more than $800 billion a year due to offshore business, according to the International Monetary Fund. They are also used for crimes such as tax evasion and money laundering, and it is a mechanism generally used by the rich and powerful.

Colón recalled the Panama Papers, the ICIJ investigation published in 2016 that exposed the complex and dark offshore financial system.

“One of the important things about world-class financial centers is that they have a strong structure from a regulatory point of view and are well regulated because if not, they can collapse very easily, as happened with Panama and the Panama Papers”, Colón told the CPI.

In Puerto Rico, international banks and financial entities are subject to US federal laws and regulations such as the Bank Secrecy Act, the USA Patriot Act, and the Know Your Customer rule, an international standard for obtaining detailed information about customers. Regulations of the Office of Foreign Assets Control (OFAC) also apply.

But what different offshore forums and some of the banks themselves promote is the Common Reporting Standard, or CRS, of the Organization for Economic Cooperation and Development, which requires participating countries to share tax information from their clients.

This also makes Puerto Rico an attractive option for those seeking privacy in their businesses.

 

Trouble with the law

In February 2019, the European Commission added Puerto Rico to a list of countries highly prone to tax crimes, but it was later removed at the request of the US Treasury Department.

The CPI identified half a dozen cases of international banks whose shareholders, directors or clients have faced problems with the law or have been singled out in journalistic investigations for irregularities in their businesses.

Uruguayan bankers Marcelo Gutiérrez and Juan Ignacio Cabrera established the XXXX in Puerto Rico in 2015. They obtained an account with the FED, which facilitated transactions in US dollars. Three years later, in 2018, Gutiérrez was accused by the Florida Federal Prosecutor’s Office along with a group of businessmen of laundering $1.2 billion from PDVSA through a bank in Puerto Rico.

Later, a group of Chinese investors acquired XXXX Bank in 2018 and changed their name to XXXX International Bank. The new owners of the IFE said in 2019 that they have nothing to do with XXXX’s operations or with Gutiérrez or Venezuela.

In 2019, the Federal Reserve System (FED) stopped the opening of accounts from these Puerto Rican banks due to their use as intermediaries for Venezuelan businessmen connected to the Government of that country. That same year, the offices of two international banks – XXXX and South Bank – were raided by the FBI as part of investigations related to money laundering.

Regarding the latter, Colón said that there are few cases like these on the island, that crimes occur even in the largest banks and it means that the sector works as it should.

He also recognized that “the worst thing that can happen to a financial center is that one or more of those that are operating, are operating on the fringes or outside the law and that is found.”

The Commissioner for Financial Institutions, Natalia Zequeira, said that the FED has already lifted the restriction on international banks, which are in the process of complying with a new guide from the federal agency.

In an interview with the CPI, she revealed that the OCIF currently audits 100% of the entities with Venezuelan capital in Puerto Rico.

Since she came to the office in January of this year, she said that she seeks a “culture of compliance.”

“I want people who know the system, not people who take their license and start playing at the bank here. I am not saying that it has happened, but simply that under this administration, there is no space for that, ” said Zequeira.

For her, Puerto Rico is not a tax haven either. But she acknowledges that initially there was a trend of small banks and financial entities with few assets or no banking experience.

“Before it was seen a lot that there was a person who maybe had a banking history in another jurisdiction, decided to set up a bank from scratch and what he had was a parent company with very few assets or an affiliate that were other personal assets of that individual. And little by little it became a bank for their family and friends, to have an account in dollars, because perhaps in an American bank they did not know how to open the account in dollars, or they could not because they did not have a passport or a Social Security number, among other things. Well, there was a [need or demand] for that type of institution, ” she said.

This type of entity is no longer endorsed, according to the commissioner. 

[In addition, the capital requirements have been greatly increased, pushing out small and undercapitalized banks. See: Puerto Rico Bank Capital Requirements.]

 

They ask to increase the tax rate

There are two corporate models for establishing these banks. Although they provide the same banking services and work the same when handling deposits, international banking entities (IBE) and international financial entities (IFE) are different in some areas. IBEs are 100% tax-exempt, while IFEs only pay 4% in income taxes and 0% in CRIM and other municipal taxes.

[The IBE law was in place from 1989 to 2012 and the IFE law replaced the IBE law in 2012. The first IFE banks became operational in 2013.]

 

 

Regarding the public policy of encouraging these international banks, the study commissioned by the Government of Puerto Rico recommends increasing the tax rate of these entities from 4% to 10%. Also the minimum number of jobs required by law, from four new jobs to 10.

James Hickman has had an IFE since 2017 called XXXX Bank. A “safe, transparent, and responsible” entity, according to his website. The former US military and investor also has a decree of Law 22 [now Act 60]. He shares his time between Puerto Rico and Chile, where he has an agricultural company of blueberries and walnuts. He writes under the pseudonym Simon Black and his articles talk about obtaining passports in tax havens and “optimizing” the payment of contributions. He also discussed how to move to Puerto Rico and receive tax benefits as he did.

In a podcast, Hickman cautions that this type of business is not for everyone. The person concerned must have “a substantial level of wealth,” he says. Having a bank on the island requires more than half a million dollars in capital to operate. Still, Puerto Rico is one of the cheapest and most attractive jurisdictions to do so. 

[$5 million is more realistic in 2021 and going forward].

At one point, Hickman recalls that a federal agency asked for changes to its corporate structure to be in compliance. But still, having a bank in Puerto Rico has been beneficial for him and his business, he says.

“I was actually pleasantly surprised at the amount of business that started coming to me just because people found out that I had a bank. People were saying, ‘Oh, now James has a bank. We’re going to call him and see if he wants to do this business, ‘” he said.

According to a document in the Puerto Rico Registry of Corporations, the XXXX Bank Board of Directors includes Gligor Tashkovich, former Minister of Foreign Investments of Macedonia. In 2020, in a lawsuit filed by the New York City Attorney’s Office against a supplier of anti-COVID masks, Tashkovich was named in a fraudulent sale to New York City. His attorney told The New York Times that his client did not participate in any fraudulent scheme and that he cooperated with authorities.

Carmen Szendrey, chief executive of XXXX Bank, told the CPI that the bank is subject to independent audits and that it invests money to ensure that “our institution does not serve as an instrument for criminal entities.”

On Tashkovich, she indicated that he is a “valued member of our Board” and that he has never been charged with any crime.

The executive did not answer whether Hickman continues to own the institution.

 

Eight OCIF employees to supervise 85 banks

OCIF’s 70 employees sit on the sixth floor of the Centro Europa building. The glossy dark wood furniture, the gold frames with black and white photos, the wine-colored cushioned chairs, take the mind back to the 80s. The most technological thing that there is at first glance is the machine that takes the temperature in times of COVID. From here the banks are audited.

“This year we requested an additional $1.2 million [of the operational budget] they granted us. That additional $1.2 million was divided into two priority projects that the Office has. One of them is a new system for the registry of securities because the operating systems of this office are from the 90s,” said Zequeira.

The second project he is proposing to do with the $1.2 million is to recruit more examiners. Currently, only eight OCIF employees are in charge of supervising the 85 financial institutions in Puerto Rico.

“While my examiners are with the FDIC seeing First Bank or Banco Popular with the Federal Reserve, at the same time they are running parallel on four or five exams to international institutions,” said Zequeira.

These people’s pay also stayed in the 1990s. Each examiner earns $24,000 annually and is required to have a bachelor’s degree in accounting or finance. It is not difficult to conclude that it’s an uphill battle for OCIF to ensure that all of these entities comply with the standards and the law.

The agency has never revoked a license after it was issued. Prior to 2017, there is no evidence of a single sanction issued against any IFE in Puerto Rico. Since then, OCIF has imposed 63 fines totaling $439,400. 

[What? This article notes that South Bank’s license was revoked in 2019. I’m aware of two other licenses that were revoked and the chart above shows canceled licenses by year. Also, when a bank is in trouble, regulators will force them to sell and only cancel the license as a last resort. For a list of current IFEs, click here. For a list of current IBEs, click here.]

 

Financial and banking entities of all colors

The main banks with a historical presence on the Island have had IBE subsidiaries, including Banco Popular, Firstbank, Citi, Oriental, and UBS. But in addition to these financial institutions, there are other lesser-known faces in this industry. The multinationals General Electric (1996-present), GlaxoSmithKline (1998-2008), and Wyeth (2004-2010) have had IBEs in Puerto Rico, according to OCIF data. General Electric is the only one that still has an active IBE. OCIF indicated that it provides financing services for the purchase of household goods from people outside of Puerto Rico.

In the case of IFEs, the law allows them to do much more than an international bank. The list of activities allowed under IFE is extensive and flexible: investment management, financial advisory, real estate, metal buying, and selling, usurious loans [what??], insurance, and cryptocurrencies.

The first two IFEs established in Puerto Rico – PR Asset Portfolio 2013-1 International, LLC and PR Asset Portfolio Servicing International, LLC – are dedicated to the sale of delinquent loans in the real estate sector. Both belong to the same company, Caribbean Property Group (CPG), one of the main investors in Dorado Beach Ritz Reserve and Paseo Caribe. It also has three hotels and a corporate complex in Costa Rica.

Other IFEs in the same line of business include Blackheath, a subsidiary of the Blackstone Group, who owned the Ritz Carlton hotel in Isla Verde, VRM, owned by businessman Rafael Rojo Montilla, and Blue Water, registered under Jim Taubenfeld, owner of Me Salvé.

Between 2013 and 2018, OCIF issued 58 IFE licenses. And in just two years, 2017 and 2018, it approved 24 applications. Then the volume fell dramatically: in the last two years, only four licenses have been granted.

“I have seen a change in OCIF and the first specific change is the rigor they apply to applications for an IFE. At one point, many licenses were approved in a short period of time, ”said Colón.

Zequeira attributed the decrease to recent changes in tax rates that came into effect under the new 2019 Incentive Code and that apply prospectively.

In nearly 10 years, OCIF has only denied eight IFE requests, according to data provided by the agency. [Because they give unworthy applicants the choice to withdraw their application.]

There are also those who, despite obtaining their license, gave up on the idea.

In February 2014, Venezuelan David Brillembourg Capriles registered an international bank in Puerto Rico under the name Brilla Bank International LLC. It never complied with the annual reporting requirement and the State Department canceled the entity in December 2018. IFE’s license was canceled in 2016.

Brilla Bank also obtained a license on the island of Dominica, but it was revoked in 2017.

Asked by the CPI, Brillembourg Capriles said that he intended to open an investment bank in Puerto Rico, but that he never operated. Since 2018, he has a decree of Law 22 that exempts foreigners residing on the Island from contributions. He is also the developer of Loopland, a tourist-residential project for millennials in the old Roosevelt Roads naval base in Fajardo.

The Pandora Papers place the businessman as director of STG SA, a public limited company in Panama. Although the entity remains in force and appoints him as president, Brillembourg Capriles assured that he has not maintained any business in Panama for more than 10 years.

Brillembourg Capriles is also listed with offshore companies in Barbados, according to the Paradise Papers investigation. In 2017, he was sued by Luis Benshimol, who alleged that he created an “elaborate shell game” by using money from a hotel sale for his personal benefit. Brillembourg Capriles denied the complaint and the claim was dismissed for lack of jurisdiction.

Christian Reeves

Foreign Earned Income Exclusion or Puerto Rico Tax Deal?

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In this post, I will consider whether to live abroad and take the foreign earned income exclusion to save on US taxes or to live in the US territory of Puerto Rico. Both Puerto Rico and the foreign earned income exclusion are great tools for reducing your US tax bill. But, which one is right for you?

I should also mention that the foreign earned income exclusion and the tax deals available in Puerto Rico are the best and (basically) the only ways Americans can save on their taxes. Year after year, our tools are taken from us and we end up paying more and more simply because we have a blue passport. 

The foreign earned income exclusion allows you to exclude up to $108,700 in ordinary or business income in 2021. If a husband and wife both work abroad, and both qualify for the exclusion, they can earn a combined $217,400 tax-free. 

Any amount that you earn in excess of the FEIE will be taxable at your ordinary rate. I will assume that to be 30% for ease of calculation. I also note that you are taxed at the highest tax bracket. For example, if you earn $208,700 in 2021, you pay tax on only $100,000 but using the tax brackets as if you had earned the full $208,700. 

I should point out that we expats are no longer able to hold income in excess of the FEIE in our offshore corporations tax-deferred. That benefit went out with the Trump tax cuts and is not coming back. 

Puerto Rico basically has the opposite tax deal compared to the foreign earned income exclusion. You pay ordinary tax to Puerto Rico on your base salary, whatever that is, and then you pay 4% on all income over this amount. 

Most determine their base salary to be $100,000, which is taxed at 30% (again, for ease of calculation). Then, all qualifying business income over this amount is taxed at only 4%.

  • Note that you also pay 0% tax on capital gains on assets purchased after you move to Puerto Rico. This article is focused on business income. 

So, someone earning $100,000 a year would pay zero tax using the foreign earned income exclusion and $30,000 in tax using the Puerto Rico tax deals.

If that same person made $500,000 from a qualifying business, they would pay $120,000 (30% of $400,000) using the foreign earned income exclusion and $46,000 ($30,000 on the first $100,000 and $16,000 on the remaining $400,000) using the Puerto Rico tax deal. As your income goes up, so does the value of Puerto Rico’s tax program.

To qualify for the FEIE, most need to spend 330 days a year outside of the United States, especially during their first year abroad. To qualify for the Puerto Rico tax deal, you need to move to Puerto Rico, make that your home base, and spend at least 183 days a year on the island. 

Many find the Puerto Rico requirements easier to manage. However, in both cases, you need to be willing to move and spend a considerable amount of time in your new home base. The key to success, and being audit-proof, is committing to the expat lifestyle.

Note that the Puerto Rico tax deal does not only eliminate your State tax. It eliminates both your Federal and State tax. While moving from California to Texas has become popular, how about moving to Puerto Rico and going from a 45% rate (CA and Federal) to a 4% rate?

The Puerto Rico tax deal is focused on those who move a business to the island. The purpose of the program is to bring high-net-worth individuals and quality jobs to the territory. In contrast, the FEIE applies to business income as well as a salary you earn from an employer. 

The problem with the FEIE is that you might still get stuck paying 15% self-employment tax. If you operate a business, and file using a Schedule C, you must pay self-employment tax to the IRS. 

You can eliminate this tax by setting up an offshore corporation. Income goes into the foreign corporation and you draw out a salary. This salary will not be subject to self-employment or payroll taxes. 

So, which is right for you? The FEIE or Puerto Rico’s tax deal? In years gone by, this was a challenging question. When we could hold income in excess of the FEIE tax-deferred in an offshore corporation, the calculation was complex.

Today, it’s simple. If you’re single and make $100,000, then it’s the FEIE for you. If you’re married, and both work in the business, then this increases to $200,000 and you should stick with the foreign earned income exclusion.

Because your expenses will be higher in Puerto Rico, there is some room for debate regarding a single person making $200,000. However, if you are making $300,000, then Puerto Rico should be an easy decision.

Likewise, if you expect your business to net $500,000, then why bother with the FEIE? Get yourself to Puerto Rico immediately. If you will have capital gains on assets purchased after the move, Puerto Rico will look even better.

I hope this article comparing the foreign earned income and the Puerto Rico tax deal have been helpful. For assistance setting up an offshore corporation, or with moving to Puerto Rico, please contact me at info@premieroffshore.com.

Puerto Rico’s Act 20 and Act 22 Residents and Hurricane Maria
Christian Reeves

Puerto Rico’s Act 20 and Act 22 Residents and Hurricane Maria

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The entire island of Puerto Rico has been declared a disaster zone by FEMA and power may be out for months. A major dam is failing, which will further reduce available drinking water. How will Hurricane Maria affect those in the Puerto Rico on Act 20 and Act 22? How will this affect your 183 day clock?

Hurricane Maria and its effect on Act 20 and Act 22 residents of the island is unique. A natural disaster which makes an entire state or territory inhospitable has never occurred in US history. Yes, large swaths of Texas, New Orleans and Florida have seen nature’s wrath, but never has an entire state been destroyed. Never has an entire state been without power for months. Never has entire state been without drinking water.

  • The best picture’s I’ve found of Hurricane Maria’s destructive power are here.

And this is a major issues for those of us in Puerto Rico on one of the various tax incentive programs that requires we spend a minimum amount of time on the island. For you to be a resident of Puerto Rico under Act 20 and Act 22, you must make Puerto Rico your home base and should spend at least 183 days a year in the territory.

You can spend 30 days a year traveling abroad and count those toward your 183 resident days. So, that gets you to 153 days in Puerto Rico, 30 days abroad, and 182 days in the United States. The fewer days you spend in the US the better.

Keep in mind that Act 20 income is earnings and profits generated from work performed in Puerto Rico. Money made from work performed in the United States is US source and taxable by the IRS. Likewise, money earned abroad by a US citizen is usually US source and taxable in the United States.

Puerto Rico’s tax incentives are also relatively new. They were enacted in 2012, became popular in 2014, and really took flight from 2015 to the present. This means the IRS has not issued guidance on these topics and very few audits have been conducted.

The residency requirements for Act 20 and Act 22 are both untested and unique. You must spend 183 days a year, less 30 abroad, in Puerto Rico. That means you can’t spend more than 182 days in the United States.

This Federal tax issue doesn’t come up when we look at moving from one state to another. The 183 day test generally applies to which state gets to tax your profits. No matter where you live in the United States, Federal tax laws apply.

But, income earned in Puerto Rico is excluded from Federal tax under IRC Section 933. So, Act 20 and Act 22 in Puerto Rico are taking rules generally applied to multistate returns and using them to avoid Federal income tax… again, a set of facts and circumstances unique to Puerto Rico’s tax incentive programs. For more on this, see: Changes to Puerto Rico’s Act 20 and Act 22.

The problem is that Hurricane Maria has made it impossible to work from Puerto Rico. This natural disaster has also made it very difficult and possibly unsafe to live on the island for the remainder of the year to reach that magic number of 183 days.

The entire island has been declared a disaster area by FEMA. If you return to the United States, those days will count as US days. If you travel abroad for more than 30 days, those days might also count for US days.

The bottom line is that only days in Puerto Rico are guaranteed count toward your 153 minimum (assuming 30 days abroad on business). Any other allocation of days is a gamble.

If you’re out of Puerto Rico and out of the United States for a prolonged period, you’ll switch from being taxed by Puerto Rico under Act 20 and Act 22 to being taxed by the IRS under international laws (such as the Foreign Earned Income Exclusion).

If the IRS doesn’t agree with your claim of residency in Puerto Rico, the entire tax incentive value of Act 20, Act 22, or Act 273 will be lost. Considering that Puerto Rico is unique as a territory, and that the IRS has not issued direct guidance on these topics, we’re left to speculate on how the IRS will rule.

Unfortunately, we don’t see any good news when we review state rulings on the 183 day test or when we look at the history of the Foreign Earned Income Exclusion. Neither of these are controlling on Puerto Rico, but are a good indication of what could happen.

Let’s consider state rulings first.

Let’s say you’re moving from high tax California to tax free Nevada. To become a resident of Nevada, you should break as many ties to California as possible, create as many ties to Nevada as you can, and spend a minimum of 183 days in Nevada.

Any day spent in CA, for work or pleasure, will count as a California day. The ONLY exceptions to this rule are:  

  1. Being in California will not count against your days in another state if your presence is solely for the purpose of boarding a plane, ship, train or bus while merely passing through California for travel, and
  2. Being hospitalized in California does not constitute a day spent in California (outpatient days are treated as California days).

There is no precedent for any hurricane or natural disaster relief. Being in California due to a mandatory evacuation from a home in Nevada or elsewhere still counts as a California day.

When we apply this to Puerto Rico Act 20 and Act 22 persons, any day spent in the United States is a US day unless you’re connecting through on a flight or hospitalized. Not much help there.

When we look at international and FEIE guidance, things don’t get any better.

To qualify for the FEIE, you must be a legal resident of a foreign country with a residency visa and not spend more than 183 days a year in the United States or be out of the United States for 330 out of 365 days during any 12 month period.

The IRS has a procedure to allow you to prorate the FEIE if you’re forced out of a country because of war, civil unrest, or similar adverse conditions in that foreign country. Only countries on the list published by the IRS each year qualify. For tax year 2015, the list was published in Revenue Procedure 2016-21.

See the top of page 3 of this Rev Pro. The ONLY country exempted in 2015 was Burundi. Only the civil unrest in this African nation rose to the level required by the IRS. The many natural disasters and wars in 2015 didn’t even get a mention.

So, what’s a hardworking citizen attempting to qualify for Act 20 and Act 22 to do?

I’m telling client to:

  1. Spend as little time in the United States as possible, but never more than 183 days in the year.
  2. Break as many ties to your home state as possible and create as many new ties to Puerto Rico as possible. Pay more attention to these issues because of the new audit risks you’ll have.
  3. Spend as much time as is safe in Puerto Rico for the remainder of this year and 2018.
  4. Spend the rest of your time abroad.
  5. Build up an argument that you have moved to Puerto Rico for the foreseeable future and do not intend to return to the United States.
  6. Plan on spending extra time in Puerto Rico during 2018.
  7. Prepare for an audit by focusing on the “domicile test.”

Generally, an individual is a resident of a particular state if he or she is domiciled in that state (the substantive test) or is a statutory resident (the objective test).The 183 day test is the statutory or objective test and the test based on intent is the domicile or substantive test.

The statutory test is simple math. You’re either in Puerto Rico for 183 days or your not. The domicile test is based on your intent and includes a number of factors. As such, the domicile test is harder to prove but gives you more room to maneuver… more room to negotiate with the IRS when you’re incapable of meeting the 183 day test.

We always recommend our Act 20 and Act 22 clients use the statutory test. There’s often millions of dollars at stake and you should be willing to put in the time for that kind of a tax break.

However, if you’re unable to use the statutory test, you can use the domicile test. In this test, your intention is key to proving or arguing domicile.

To build your case, focus on proving your intent. Auditors will look at five factors to show intent. These are:  (i) the size, value, and function of your homes; (ii) active business connections in the state; (iii) time spent in the state; (iv) the location of “near and dear” items; and (v) the location of immediate family members.

While there are no guarantees, we’ll attempt to help our clients prepare for an audit by increasing their ties to Puerto Rico and proving their intent to become and remain a part of the community for the foreseeable future (indefinitely).

The purpose of these planning steps being to negotiate an increase in your foreign days should you be audited. If you’ve already spent too many days in the United States, and have used up your international days, we’ll need to convince an IRS agent to increase your number of allotted foreign days by allowing the domicile test.

For many of us living and working in Puerto Rico under the tax incentives, time is short. You need to act quickly to improve your probability of success should you be audited in the next three years.

In my opinion, and it’s just guess as to how the IRS will treat this situation, if you spend more than 183 days in the United States during 2017, you’ll lose the tax benefits of Puerto Rico. If you spend more than 30 days abroad, you have a puncher’s chance in an IRS audit.

That is to say, no matter what you do, don’t spend more than 183 days in the United States in 2017. If you can’t be in Puerto Rico, spend more than 30 days abroad. While there’s no guarantee the IRS will allow the domicile test in this situation, it’s your best option. Once you spend more than 183 days in the United States, the game is over.

I hope you’ve found this article helpful. For more information on Puerto Rico’s tax incentive programs, please take a read through A Detailed Analysis of Puerto Rico’s Tax Incentive Programs.

For more information on setting up a business in Puerto Rico under Act 20, see: Puerto Rico’s Act 20.

For information on changes to Act 20’s employment requirements, see: Puerto Rico Eliminates 5 Employee Requirement.

For more on moving to Puerto Rico and avoiding US capital gains taxes, see: 3 Ways to Stop Paying Capital Gains Tax.

To compare the Foreign Earned Income Exclusion and Puerto Rico’s Act 20, see: Puerto Rico Tax Deal vs Foreign Earned Income Exclusion.

You can reach me at info@premieroffshore.com or call (619) 483-1708. We’ll be happy to assist you to setup a new business in Puerto Rico

Puerto Rico Employee Requirements
Christian Reeves

Puerto Rico Employee Requirements

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This article is to clear up issues concerning employment and payroll under the tax incentive programs in Puerto Rico. These requirements for the tax incentive programs are to be used in determining how much salary you must take (taxed at ordinary rates) vs. how much corporate profits the entity can make (taxed at 4%).

Keep in mind that all employees of Puerto Rico Act 20 and 273 companies are required to take a “reasonable” salary. This salary is taxed at ordinary rates of about 35% in Puerto Rico. The 4% tax incentive rate is then applied to corporate net profits after all salaries are paid. For more on the various tax incentive programs, see: A Detailed Analysis of Puerto Rico’s Tax Incentive Programs.

It’s because of these salary requirements that I suggest small businesses, earning less than $300,000, are better off operating offshore. When you live abroad, qualify for the Foreign Earned Income Exclusion, and operate a business through an offshore corporation, you can earn up to $102,100 in salary tax free. If both a husband and wife are working in the business, they can earn a combined $200,000 tax free.

Puerto Rico’s tax incentive programs are basically the opposite of the FEIE. Your salary is taxed at ordinary rates and the profit after that salary is taxed at 4%.

If your business nets $100,000 or less offshore, you pay zero tax. If your business nets $200,000 offshore, and both spouses are working in the company, then you pay zero US tax..

Let’s say your business nets $200,000 in Puerto Rico. If you operate in Puerto Rico, you might pay yourself a salary of $100,000 (to compare apples to apples). That salary is taxed at 35%, or $35,000. Then the excess is taxed at 4%, for a total bill of $39,000. This is basically the same tax deal you have available offshore through the FEIE (you pay zero on the first $100,000 and ordinary rates on the second $100,000).

Puerto Rico’s tax incentives really begin to make a big difference as your net income increases. Let’s say you net $1 million. You pay yourself a salary of $100,000, taxed at ordinary rates, and then $900,000 is taxed at 4%. Your total tax bill is $71,000.

If that same business was operated offshore, with one employee, you would earn $100,000 tax free and pay ordinary rates on $900,000 at 35%. In this case, your net tax paid is $315,000. As your net profits increase, so do the benefits of Puerto Rico’s tax incentive program vs the FEIE.

Here’s a summary of the salary and payroll requirements under Puerto Rico’s tax incentive programs. Keep in mind that the $100,000 referenced above was simply an example… an easy way to compare Puerto Rico to the FEIE.

In 2015 the government determined that all companies under an Export Service Tax Incentive Program decree must pay a fair market salary to owner / operators. This only applies to top tier executives, and for regular level positions labor law changed in 2017, and employee requirements also changed entirely in Act 20 regs.

The following specifies how the government views top tier owners/shareholders who actively work for their tax exempt company in Puerto Rico.

Official-owner means any shareholder or partner who maintains at the end of the tax year a beneficial interest in an eligible service exporting company that:

  • dedicates no less than 80% of their time to the activity eligible under the export service laws and
  • is a resident of Puerto Rico during the taxable year

Any partner or shareholder, who is an employee of a company with a tax exemption decree under Act 20 / Act 273 / Act 399. All official-owners shall have a reasonable annual salary that clearly reflects their income from services rendered to the Eligible Services Company, in which they maintain a proprietary interest at the end of the taxable year.

For the purposes of the provisions of Section 1040.09 of code, a maximum limit of $ 350,000 of annual salary will be established. Therefore, in those cases in which an Official- Owners earns an annual salary of less than $350,000 for his services rendered to the company, in which he maintains a proprietary interest at the end of the contributory year, the Secretary, in his discretion will evaluate the reasonableness of said income, in comparison with the services rendered by the Official Owner, and may impose additional salaries up to a maximum of $350,000 per year in order to clearly reflect the income of Official-Owner.

The evaluation will be based on the facts and circumstances of each case considered but not limited to the economic reality of the company, the functions performed by the Official-Owner within the company’s organizational structure and the salary trend of the market in comparable positions.

Remember that the government of Puerto Rico views these tax incentive decrees is a way attracting capital. Many company owners are not reporting substantial income. So, this is just a way to assure that some form of tax is paid from even though it would be miniscule.

If you’re considering forming an Act 20 company in Puerto Rico, there’s a lot of opportunity through these tax incentive programs. This is truely tax planning while there’s blood in the streets. Due to mass loss of public service jobs in the last month ($ 500 million in budget cuts for government jobs). The peculiar political status of the island makes for a different type of professional.

The literacy rate in Puerto Rico is higher than all of the US (with Puerto Rico registering 93.3% and the US with 86% literacy rate).

Also, Act 20 just changed the employment requirements so the gate are open for a huge private sector overhaul! (See Changes to Act 20 Tax Incentive Program). To motivate job growth, this year the Puerto Rican government changed labor laws to benefits employers.

Below is a outline of the Labor reform in Puerto Rico. After that you will see the a full breakdown of labor laws in Puerto Rico.

The first big change was the initial probation period, which was changed from 3 months to 9 months. This is significant because employers now have a lot more leeway with hiring and firing employees. Facilitating longer probation periods, makes it difficult for employees to apply for bonuses, significant reductions of vacation time, sick days and so forth.

Here are the labor laws for Puerto Rico. They apply to all companies doing business on the island, both tax incentive companies such as Act 20 and standard corporations.

Article 1.2 establishes that employees hired prior to the validity of this Law (January 1, 2017) will continue to enjoy the same rights and benefits as previously had, as expressly provided in the Articles of this. This clause was inserted in the amendments of the Senate and seeks to address the claim of who applies this law.

Article 2.20, which establishes as public policy in favor of alternative procedures for the settlement of disputes related to disputes arising from the application of the law to be approved, such as mediation and arbitration provided by the Department of Labor and Resources Human Rights, including its Office of Mediation and Arbitration.

Article 3.1 of the project establishes and defines what will be overtime. As proposed, overtime will be the hours an employee works for his employer in excess of eight (8) hours during any period on a calendar day rather than twenty-four (24) consecutive hours.

The next article states that the employer may establish an alternating weekly work schedule by means of a written agreement between the employee and the employer (flexitime), which will allow the employee to complete a work week not exceeding forty (40) hours with schedules Daily that will not exceed ten (10) hours per day of work. However, if the employee works in excess of ten (10) hours per day of work, he will be compensated for hours in excess of a time and a half (NO MORE DOUBLE TIME PAY) of the agreed wage rate for the regular hours.

The accumulation of vacations and sick days will be staggered in the following order:

The minimum monthly accumulation for vacation leave will be half (1/2) day during the first year of service. After the first year of service, up to five (5) years of work service, it will accumulate at three quarters (3/4) of a day. Accumulation of (1) day after serving five (5) years of service until fifteen (15). After fifteen years of service, it will accumulate at the rate of one and a quarter (1 1/4) of a day. This last computation is the one that is used today uniformly for all the employee who works more than one hundred and fifteen (115) hours per month. Basically for the first year instead of 2 weeks vacation traditionally per year you accumulate only 6 days after 1 yrs  approx 9 day, and this only applies to those working 115 + hours per month.

The sick leave was amended and is now one (1) day per month.

Article 3.21 of the bill provides that, as regards Law 180-1998, all claims of this law shall be prescriptive within a term of one (1) year, thus amending the current term of three (3) years.

Regarding the proposed amendments to Act No. 80 of May 30, 1976, it establishes a probationary period of nine (9) and twelve (12) months in certain employees under the Fair Labor Standards Act.(NO MORE 3 MONTHS OF PROBATION)

As for the compensation of the unjustifiably dismissed employee, an allowance is established for three (3) months of salary and two (2) weeks for each year of service. However, the allowance will never exceed nine (9) months of salary without distinction of the years of service.

Article 4.12 of the draft amended article 11 of Law 80, in order to eliminate the text that established the presumption that in the case of a lawsuit for unjustified dismissal, the employer had the burden of proof. The bill provides that article 11 of Law 80 only establishes that in the cases arising from Law 80, “the court shall hold a conference no later than sixty (60) days after the response to the complaint or complaint is filed, Which parties will be required to appear or be represented by a person authorized to make decisions, including the transaction of the claim. During that hearing, the parties’ arguments will be examined, the essential disputes will be identified and the possibilities for an immediate settlement of the claim will be discussed. If the claim is not settled, the court will order the discovery to be pending and expedite the date marking to hold the conference in advance of the trial. “

Likewise, the “Puerto Rico Employment Security Act” (Act No. 74 of June 21, 1956) is hereby amended to allow for the gradual increase of unemployment benefits, so that effective July 1, 2019, The minimum weekly benefit increases to sixty (60) dollars and the maximum weekly benefit increases to two hundred forty (240) dollars.

As for the Christmas bonus, any employer employing more than twenty (20) employees for more than twenty-six (26) weeks within the twelve (12) months from October 1 of any year until September 30 of the subsequent calendar year, you must grant to each employee who has worked for at least 1,330 hours or more within that period, a bonus equivalent to two percent (2%) of the total salary earned up to the amount of six hundred dollars ($ 600.00).

Basically a new Act 20 company under Puerto Rico’s tax incentive program can hire up to 19 employees without paying the Christmas bonus.

We can assist you in get a tax exemption decree and draft employment contracts, help you plan an employment strategy to avail the benefits of the new labor laws.

Puerto Rico Tax Incentive Labor law:

Be it enacted by the Legislature of Puerto Rico:

Article 2. – (29 L.P.R.A. § 271)
Eight (8) hours of work constitute the daily legal working day in Puerto Rico, Forty (40) hours of work constitute the weekly working day.
[Amendments: Law 223 of July 23, 1974; Law 83-1995]

Article 3. – (29 L.P.R.A. § 272)
They are regular hours of work eight (8) hours during any working day and forty (40) hours during any working week.
[Amendments: Law 223 of July 23, 1974; Law 83-1995]

Article 4. – (29 L.P.R.A. § 273)

These are extra hours of work:

(a) The hours an employee works for his employer in excess of eight (8) hours during any calendar day. However, the employer may notify the employee of an alternate cycle of twenty-four (24) hours, provided the notice is in writing in a term not less than five (5) days prior to the start of the alternate cycle and there are at least eight (8) hours between consecutive shifts.

(b) The hours an employee works for his or her employer in excess of forty (40) during any one week of work.

(c) The hours an employee works for his employer during the days or hours in which an

establishment must remain closed to the public by legal provision. However, the hours
worked on Sundays, when by law provision if the establishment must remain closed to the public, will not be considered overtime for the mere reason of being worked during that period.

(d) The hours an employee works for his employer during the weekly rest day, as established by law.

(e) The hours that the employee works for his employer in excess of the maximum hours of work per day set in a collective bargaining agreement.
[Amendments: Law 223 of July 23, 1974; Law 1 of December 1, 1989; Law 143-2009; Law 4-2017]

Article 5. – (29 L.P.R.A. § 273a)

For purposes of computing overtime in excess of forty (40) hours, the workweek shall constitute a period of one hundred and sixty-eight (168) consecutive hours. It shall commence on the day and at the time the employer determines and notifies the employee in writing. In the absence of notice, the work week will begin at 12:01 am on the Monday of each week. Once the employer sets the beginning of the work week, any change will need to be notified to the employee at least five (5) calendar days in advance to be effective.
[Amendments: Law 83-1995; Law 7-2002; Law 4-2017]

Article 6. – (29 L.P.R.A. § 274)

The norms and requirements for the payment of overtime will be the following:

(a) An employer who employs or permits an employee to work during overtime shall be required to pay for each overtime a salary not less than one-and-a-half times the rate of pay agreed upon for regular hours. Provided that the employees entitled to higher benefits hired prior to the validity of the “Law of Transformation and Labor Flexibility” will preserve the same.

(b) An alternate weekly work schedule may be established by a written agreement between the employee and the employer, which will allow the employee to complete a work week not exceeding forty (40) hours with daily schedules not to exceed ten ( 10) hours per work day. However, if the employee works in excess of ten (10) hours per day of work, he will be compensated for the excess hours at a rate of time and a half of the agreed wage rate for the regular hours.

(c) Voluntary or approved weekly alternating work schedule agreements may be revoked by mutual agreement of the parties at any time. However, either party may unilaterally terminate the voluntary agreement after one (1) year of its adoption.

(d) Alternate weekly work itinerary agreements adopted pursuant to this Article may be continued by a third party acquiring the business, without it being necessary to establish a new contract.

(e) The employer may grant an employee request to replenish hours not worked in the week for personal reasons of the employee. The hours thus worked will not be considered overtime when they are worked in the same week of absence, do not exceed twelve (12) hours in a day, nor exceed forty (40) hours in the week.

[Amendments: Law 223 of July 23, 1974; Law 83-1995, Law 4-2017]

Article 7. – (29 L.P.R.A. § 275)

For the purpose of determining the compensation for overtime pay when no wage type has been agreed for the payment of regular hours, the daily, weekly, monthly or otherwise agreed wage shall be divided by the total number of hours during the same period.

[Amendments: Law 83-1995, Law 4-2017]

Article 8. – (29 L.P.R.A. § 276)

An employee may request in writing a change of schedule, the number of hours or the place where he / she should do his / her job. The employee’s written request will need to specify the requested change, the reason for the request, the effective date, and the duration of the change.

The employer shall be obliged to provide a reply within a period of twenty (20) calendar days counted from the receipt of said request. In the cases of an employer with more than fifteen (15) employees, the response will be in writing. If the employer meets with the employee within twenty (20) calendar days of receiving the change request, his / her response may be notified within fourteen (14) calendar days following such meeting.

In its response, the employer may grant or deny the employee’s request. A concession may be subject to conditions or requirements that the employer deems appropriate. A denial must contain the reasons for the decision and any alternative to the application submitted. The employer will treat with priority the requests by heads of families who have the sole custody or sole custody of their minor children. The provisions of this Article shall apply only to employees who regularly work thirty (30) hours or more per week and who have worked for the employer for at least one (1) year. In addition, they shall not apply to another application filed within six (6) months of receipt of the employer’s written decision or grant of change, whichever is greater.

Article 9. – (29 L.P.R.A. § 277)

The additional compensation established by this Law for overtime, except in the situations authorized in Article 6 of this Law, is hereby declared unenforceable. Any clause or provision under which the employee agrees to waive payment of the extra compensation for overtime fixed by this law. No judgment, award, award or other provision of a claim for compensation, right or benefit under any law, mandatory order, salary order, collective agreement or work contract, may be raised as a defense of res judicata by division cause of action, in order to defeat another claim, unless in the previous procedure had been expressly adjudicated, the same cause of action, for the same facts, between the same parties.

[Amendments: Law 83-1995; Law 4-2017]

Article 10. – (29 L.P.R.A. § 282)

Any employee who receives compensation lower than that fixed in this Act for regular hours and overtime work or for the period designated to take the food will be entitled to recover from the employer by civil action amounts not paid, plus an equal amount per concept of liquidation of damages, in addition to the costs, expenses and legal fees of the procedure. No employer may retaliate, terminate, suspend or otherwise affect the employment or employment conditions of any employee because he or she refuses to accept an alternate weekly work schedule authorized in Section 6 of this Act or for having filed a request for modification of the schedule, number of hours or place of work as provided in Article 8 of this Law. The employer who engages in such conduct may be civilly liable for an amount equal to the amount of damages that the act caused to the employee and if it is shown that the employer committed such conduct with malice or reckless indifference to the employee’s rights, a maximum maximum amount may be imposed as punitive damages equivalent to the actual damages caused. In order to determine the amount that should be imposed as punitive damages, the financial situation of the employer shall be taken into account, how reprehensible has been the conduct, duration and frequency of same, the amount of damage caused and the size of the company. In addition, it may be required that the worker be replaced in his employment and that he cease and desist from the act in question. Any employee who is affected in his tenure or employment condition as incurred by the employer in the conduct described in the preceding paragraph may file an appeal to the Court of First Instance. The Secretary of Labor and Human Resources of Puerto Rico may urge such action on behalf of and on behalf of the affected employee. In the ventilation of the resource the employer will have the weight of evidence to rebut the presumption that retaliation has been taken against the employee for not having accepted a flexible work schedule.

These claims may be processed in accordance with the ordinary procedure or the complaint procedure established in Act No. 2 of October 17, 1961 [32 L.P.R.A. secs. 3118 et seq.] As it has been or is subsequently amended. The judicial claim may be made by one or more employees for and on behalf of themselves or of them and other employees who are in similar circumstances; Provided, that after the claim is filed, the claim may be compromised between the parties, with the intervention of the Secretary of Labor and Human Resources or any of the attorneys of the Department of Labor and Human Resources, appointed by said Secretary and the approval of the court . The Secretary of Labor and Human Resources will determine administratively which judicial or extrajudicial transactions will require his personal intervention, fixing the criteria that will govern to that effect through regulation or administrative order. Any extrajudicial transaction will be void on the payment of the salary corresponding to the regular hours, overtime, the period indicated to take the food or on the payment of the sum equal to the amount established by this law for liquidation of damages; Provided, however, that any transaction that is verified before the Secretary of Labor and Human Resources or any of the attorneys or officials of the Department of Labor and Human Resources designated by said Secretary shall be valid for the purposes of this law. Any extrajudicial transaction that is carried out through the intervention of mediators of labor-management conflicts of the Department of Labor and Human Resources, subject to the norms or criteria established by the Secretary for such purposes, shall also be valid regulation or administrative order [Amendments: Law 25 of April 26, 1968; Law 47 of May 19, 1976; Law 8 of May 10, 1982; Law 83-1995; Law 4-2017]

Article 11 – (29 LPRA § 283)

Every employer shall notify in writing to its employees the number of hours of work required each day of the week, the hours of commencement and termination of work, and hour in which the period destined to take the food inside the regular commando begins and finishes. The schedule thus notified shall constitute prima facie evidence that such work hours in the establishment constitute the division of the working day. The employer who requires or permits an employee to work for a period of more than five (5) consecutive hours without providing a rest period to take food, will have to pay to the employee the time worked by means of extraordinary compensation, as provided in this Article. In those cases in which the total number of hours worked by the employee during the day does not exceed six (6) hours, the rest period for food can be ignored. The period to take the food should begin to be enjoyed not before the end of the second or after the beginning of the sixth hour of consecutive work. An employer may not employ an employee for a period of work exceeding ten (10) hours per day, without providing the employee with a second rest period for food, except that total hours worked does not exceed twelve (12) hours. In cases where the total number of hours worked does not exceed twelve (12) hours, the second rest period for food may be waived, provided that the first period of rest for food is taken by the employee. food occurring within or outside the employee’s regular hours may be reduced to a period of not less than thirty (30) minutes, provided a written stipulation is made between the employer and the employee. In the case of croupiers,nurses, nurses and security guards and those authorized by the Secretary of Labor and Human Resources, the period of rest for food may be reduced up to twenty (20) minutes when a written stipulation is made between the employer and the employee, without requiring approval of the Secretary. However, the other provisions of this Article shall apply.

The stipulations to reduce a period of rest to take food will be valid indefinitely and neither of the parties, without the consent of the other, can withdraw its consent to the stipulated until one (1) year after the stipulation is effective. Said provisions shall continue in force when a third party acquires the business of the employer. An employer who employs or permits an employee to work during the period of time for the taking of the food shall be obligated to pay for such period or fraction thereof a rate equal to one and a half hours of the rate agreed for regular hours, provided that employees entitled to payment of a rate higher than the time and a half prior to the validity of the “Labor Transformation and Flexibility Act”, will preserve the same.

[Amendments: Act 121 of June 27, 1976; Law 88 of June 22, 1962; Law 223 of July 23, 1974; Law 27 of 5 May 1976; Law 61 of June 3, 1983; Law 83-1995, Law 4-2017]

Article 12. – (29 L.P.R.A. § 284)

It shall be the duty of every employer to make, keep and keep the payroll of the persons employed by him, expressing the wages earned and the regular hours and overtime worked by each and other conditions and employment practices maintained by him . Payrolls shall be kept in accordance with the reasonable rules prescribed by the Secretary of Labor and Human Resources and shall be kept for the time they determine.

The Secretary of Labor and Human Resources, or any agent of his authorized, may examine in working hours the payroll of any employer in order to take data and reports for the statistics, studies, and investigations related to compliance with this Law.

[Amendments: Law 83-1995, Law 4-2017]

Article 13. – (29 L.P.R.A. § 285)

The provisions of this Law shall not apply to:

(a) administrators, executives and professionals, as defined by regulations of the Secretary of Labor and Human Resources;

(b) traveling agents, street vendors and external vendors, as defined by regulations of the Secretary of Labor and Human Resources;

(c) officers or organizers of workers’ unions when they act in such capacities;

(d) drivers and drivers of public and private motor vehicles working on a fee, fee or route basis;

(e) persons employed in domestic service who, however, shall be entitled to one day of rest for every six (6) consecutive days of work, in accordance with the provisions of Law 206-2016;

(f) Employees, occupations or industries exempt from the overtime provisions provided by the Fair Labor Standards Act, approved by the Congress of the United States of America on June 25, 1938, according to amended;

(g) persons employed by the Government of the United States of America, including each of its three branches and its instrumentalities or public corporations;

(h) persons employed by the Government of Puerto Rico, including each of its three branches and its instrumentalities or public corporations;

(i) persons employed by municipal governments and their agencies or instrumentalities;

(j) employees covered by a collective bargaining agreement negotiated by a workers’ organization, unless the collective agreement itself establishes that the provisions of this Law shall apply to the relationship between the parties. However, all overtime provisions provided by the Fair Labor Standards Act, approved by the Congress of the United States of America on June 25, 1938, shall apply.

amended;

(k) persons exempted by provision of a special law. [Amendments: Act 27 of May 5, 1976; Law 83-1995; Law 33-1996; Law 4-2017]

Article 14. – (29 L.P.R.A. § 286)

The Secretary of Labor and Human Resources shall be empowered to adopt and promulgate the regulations necessary to administer the provisions of this Act. These regulations shall be consistent with the “Fair Labor Standards Act,” approved by the Congress of the United States of America on June 25, 1938, as amended, and the regulations issued thereunder, as applicable to Puerto Rico, unless expressly provided otherwise by this Act.

Article 15. – (29 L.P.R.A. § 287)

Any employer who fails to pay the type of salary stipulated in this and for regular hours or overtime, or that allows, induces or compels an employee to waive, or to accept, or agree to waive, compensation based on a double rate of overtime wage, or not to carry the employee payrolls. wages as determined by the Secretary of Labor and Human Resources, or fails to provide the salary reports requested by the Secretary of Labor or Human Resources, or precludes the examination of said payroll by the Secretary of Labor and Human Resources or his authorized agents, or knowingly include false information in said payrolls or reports, or that violates any provision of this Act of the orders, rules or regulations issued by the Secretary of Labor and Human Resources as determined herein, or who dismiss or otherwise discriminate against any employee because he has initiated or initiated any procedure in accordance with this Law or related thereto, or that it uses any remedy, fraud, simulation or subtraction for not pay, cheat, deny or deprive any employee of the right to receive a double wage rate for overtime, shall incur a misdemeanor and, if convicted, shall be punished by a fine of not less than fifty dollars ($ 50) or imprisonment for a period of less than fifteen (15) days, or both penalties at the discretion of the court. In case of recidivism,shall be punished with a fine of one hundred ($ 100) to five hundred dollars ($ 500) or imprisonment for a term of thirty (30) to ninety (90) days, or both penalties at the discretion of the court.

Article 16. – (29 L.P.R.A. § 288)

In this Act, unless otherwise stated, the following definitions of words and phrases of the same shall be accepted.

(1) “Employee”. – means any natural person who works for an employer and receives compensation for his or her services. It does not include independent contractors as well as officers or workers’ union organizers when acting as such.

(2) “Patron”. – means any natural or legal person of any nature who hires and uses the services of an employee.

(3) “Employ”. – means to tolerate or allow to work.

(4) “Salary”. – includes salary, wages, salary, and any other form of pecuniary remuneration. It will not include that part of tips received that exceed the amount used to meet the payment of the legal minimum wage, nor the charges for services.

(5) “Tipping.” – means any gift or gratuity which it grants, directly or indirectly,

indirectly, a person who is not the employer to an employee in recognition of the services received.

(6) “Charges for services”. – means any amount of money added to an account, and required by an establishment, which is distributed in whole or in part to employees. It also includes charges negotiated between an establishment and a customer.

[Amendments: Act 11 of April 26, 1963; Law 223 of July 23, 1974; Law 27 of May 5, 1976; Law 61 of 3 June 1983; Law 83-1995; Law 4-2017]

Articles 17 – 19. – [Note: The subsequent amending laws renumbered Arts. originals of this Law]

Article 20. – (29 L.P.R.A. § 271 note)

If any clause, paragraph, article, section or part of this Act is declared unconstitutional, by a court of competent jurisdiction, said ruling shall not affect, impair or invalidate the rest of this Law, but its effect shall be limited to the clause, paragraph, article, section or part of the law that has been declared unconstitutional.

Article 21. – (29 L.P.R.A. § 2)

Law No. 49, approved on August 7, 1935, entitled “An Act to regulate the hours of work of persons employed in commercial, industrial and other lucrative businesses, and for other purposes, is hereby expressly repealed. “.

Article 22. – (29 L.P.R.A. § 271 note)

Any law or part of law that opposes the present, is hereby repealed; Provided, however, that the provisions relating to the duration of the workweek and to the payment of overtime that appear in mandatory decrees nos. 11, 16, 20 and 21, approved by the Salary Board Minimum under Law No. 8 of April 5, 1941, as amended, which would be of greater benefit to the employee, the

which shall remain in force until the corresponding provisions established in Section 8 of this law are more favorable to those established in said decrees, in which case the provisions of the law shall prevail; Article V of Mandatory Decree number 4 approved by the Minimum Wage Board under the aforementioned law, which provides a Minimum Weekly Compensation Guarantee, which is hereby modified to be an amount to the product that results in multiplying the type of regular salary per hour that the worker is receiving for forty; Law no. 73, entitled “Law regulating the work of women and children, and protecting them against dangerous occupations,” approved June 21, 1919, as amended; Act No. 230, entitled “Law to regulate the employment of minors and to provide compulsory attendance of children of Puerto Rico to public schools”, to repeal Act No. 75, adopted on June 20, 1921, as subsequently as amended, and for other purposes, approved May 12, 1942, as amended; Article 553 of the Penal Code, generally known as the “Law on the Closure of Commercial and Industrial Establishments”, as amended, and Act No. 289, adopted on April 9, 1946, as it has been or has subsequently been amended.

Article 23. – (29 L.P.R.A. § 2)

This Act, being of an urgent and necessary character, will take effect immediately after its approval.

Puerto Rico tax incentives
Christian Reeves

A Detailed Analysis of Puerto Rico’s Tax Incentive Programs

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Below is an updated review of Puerto Rico’s tax incentives for 2017. Major changes were made to Act 20 and Act 22 on July 11, 2017 (the most popular of Puerto Rico’s tax incentives). In addition, some of the tax incentives have been added and others have been amended. Below is a complete list of the tax holidays available in Puerto Rico as of August 2017.

A new business friendly government has been elected in Puerto Rico and they’re making you a tax deal you can’t refuse. Move a business to the island and pay only 4% in tax, move yourself to Puerto Rico and pay zero in capital gains, set up a bank or hedge fund and pay only 4% tax, etc. The list of tax incentives in Puerto Rico has become very impressive.

And only Puerto Rico can offer you these tax incentives. We US citizens are taxed on our worldwide income. The ONLY exception to this is residents of the US territory of Puerto Rico.

Residents of Puerto Rico don’t pay US taxes on Puerto Rico sourced income. They pay only Puerto Rico tax on local profits and capital gains (including stock gains in publicly traded companies). See US Tax Code Section 933.

This means that Puerto Rico is free to set whatever tax rates it wants. In years past, the government would charge residents about the same as the US IRS, so there was no benefit to relocating.

Today, Puerto Rico has many tax incentives for business and high net worth individuals. The government is very motivated to attract quality businesses to the island and has pulled out all the stops with these updated tax incentives. For more, see How to benefit from Puerto Rico’s bankruptcy.

Puerto Rico’s tax incentives have turned this territory into a tax haven on steroids. Whether you’re a high net worth individual, a one man shop, or a multinational, there’s a tax incentive for you.

Few places in the world offer a better return on investment than Puerto Rico. With a growing variety of services and emerging industries, the island’s success will be directly attributable to the incentives available. To diversify the economy, the local government has developed an aggressive economic stimulus package in the form of tax incentives to help make operations on the island more profitable for companies settling here.

Ranging from exporting services, practicing medicine, tourism, and manufacturing, there are a variety of tax incentives available in Puerto Rico. Below is an updated list of tax incentives the territory has to offer:

A List of Puerto Rico’s Tax Incentives for 2017

Act 20 Known as the law to promote the export of services, Act 20 offers attractive tax incentives for companies at fixed rate of 4% and minimal requirements that establish and expand the export services industry on the island. The tax incentive is guaranteed for 20 years. See below for more information.
Act 22 Law to Encourage the Relocation of Individual Investors to Puerto Rico seeks to attract new residents to the Island. It offers a total tax exemption on passive income generated or accumulated once the individual is a bona fide resident of Puerto Rico. Tax exemption on capital gains and much more.
Act 73 Known as the Puerto Rico Economic Incentives for Development Act, was established to provide an efficient environment and opportunities for the development of local industry, to offer an attractive contributory proposal, to attract foreign direct investment and to promote the economic and social development of Puerto Rico.
Act 273 Regulates the organization and operation of international financial institutions authorized by the Office of the Commissioner of Financial Institutions to operate in Puerto Rico, and grants tax exemption decrees, among other benefits. The export of services is an economic activity that has been identified as one of the key pieces for the economic development of Puerto Rico and financial services employ the largest number of people per business under the tax incentives. The IFE tax incentive is generally used by international banks, investment funds, hedge funds and family offices.
Act 399 International insurers and reinsurers act allows entities to organize a captive insurance in Puerto Rico. International insurers may incorporate a holding company for the interest in another company. Tax exemptions for insurers that qualify for an international insurer license are 100% exempt on all income (including liquidation and dissolution of its operations in PR) derived by the international insurer or international insurer holding company. Also, 100% tax exemption on municipal license tax, property tax, dividends, and distributions to its shareholders. Moreover, interest, dividends or distributions paid to foreign entities or non-residents, not engaged in business in Puerto Rico are tax free. Captive insurance in Puerto Rico facilitates business through alternative risk management strategies and as a vehicle to enter Latin America and US markets. Integrated insurance plans and segregated assets plans serving high net worth individual markets are the focus of most companies using this tax incentive.
Act 185 Private Equity Funds not only represent a proven alternative to investment, but also constitute a financing and economic propulsion tool that facilitates the pooling of private capital in order to finance the expansion of companies, restructure businesses at risk and to promote pioneering businesses in full development. In addition, by promoting this investment vehicle used by investors around the world, it promotes the creation of jobs for professionals in the field of securities and financial business in Puerto Rico, as well as the development of the securities industry on our Island. Private equity funds generally pay a 4% tax rate on gains.
Act 135 The Young Entrepreneurs Act was established for hard working young adults within the ages of 16 to 35. The subsections of this Act grants tax exemption for individuals (from ages 16 to 26 making under $40,000) and new business (from ages 16 to 35 until $500,000).
Act 74 The Act for Tourism Development, offered through the Puerto Rico Tourism Company, provides incentives for the development of world-class tourist industry. The benefits granted under this law will be valid for 10 years from the time that the eligibility of the tourism project is established and if they are eligible they can be extended to apply to the operational phase for an additional 10 years. Act 74 is most commonly used by large  hotel projects, but a variety of projects can qualify.
Act 14 The law for the retention and return of medical professionals hopes to keep and return some doctors to the island by offering them a tax deal. In order to establish a rate of contribution on income and dividends accrued in medical practice to doctors residing in Puerto Rico the law hopes to halt the mass exodus of the Puerto Rican medical class and encourage the return or transfer of medical professionals to Puerto Rico, especially medical specialists. As of July 11, 2017, Act 14 can be combined with the telemedicine components of the Act 20 tax incentive program.
Act  83 Establishes standards to promote renewable energy, in accordance with short, medium and long-term compulsory targets, known as the Renewable Energy Portfolio

These are benefits of the Puerto Rico Tax Incentives in 2017:

Act 20 Export Services from Puerto Rico attempts to create a “World Class International Service Center” in the Commonwealth of Puerto Rico. The Act 20 tax incentive is for businesses providing a service from Puerto Rico to companies or person’s outside of Puerto Rico. Just about any portable, online, or service business can qualify.

Remember that residents don’t pay US federal taxes on Puerto Rico sourced income (Section 933). Under the umbrella of the Act 20 tax incentive, the entity in Puerto Rico will pay 4% corporate tax for eligible export services and receive a 100% exemption on dividends for PR bona fide resident shareholders. That means the corporation will pay 4% on net profits and can distribute those profits to a residents of Puerto Rico tax free. You can exchange your US rate of 40% for a PR rate of 4% overnight.

In general, businesses providing eligible services in the categories of corporate headquarters, call centers, internet marketing, online businesses, and just about any portable business will pay 4% in corporate tax and enjoy 100% exemption from property taxes during the first five years of operations. After the 5 years period, a 90% exemption will apply to property taxes and the 4% rate is good for 20 years. The Act 20 decree is granted for a 20-year term, renewable for 10 additional years, provided certain conditions are satisfied. That is to say, the 4% Act 20 tax incentive is guaranteed for 20 years.

To obtain an Act 20 decree, the business must meet minimal requirements. For example, the entity should be a new entity incorporated and the owners must pass a background check (can’t have a criminal record). Local businesses may apply for the Act 20 tax incentive program.

As of July 11, 2017, there is no minimum number of employees of an Act 20 tax incentive. As you read articles on the web, note that the number of employees was 3 in 2012. It increased to 5 in December of 2015 and is now zero. For more information, see: Puerto Rico Eliminates 5 Employee Requirement.

There are a few exceptions to this rule. If the Act 20 tax incentive company offers a substantial amount of employment outside of Puerto Rico, the Secretary of DDEC may mandate reasonable ratios of local to non resident employees. For example, you have 100 employees in the Philippines and 2 in Puerto Rico. The government is likely to require you increase your PR workforce.

Also, the Act 20 tax incentive business must provide eligible export services specified under the regulations. You will find a list of those services below. Also, an Act 20 company is prohibited from offering services to locals.

That is to say, an Act 20 tax incentive company must be providing a service from Puerto Rico to companies or persons outside of Puerto Rico.

Only Puerto Rico sourced income qualifies for this 4% tax incentive. Puerto Rico sourced income is usually income generated by work done in Puerto Rico.

Likewise, income earned from work done in the United States is always US source income and taxable in the US. US source income is never Puerto Rico source income and doesn’t qualify for the tax incentive. For more, see: What is Puerto Rico Sourced Income for an Act 20 Business.

Eligible Activities For Act 20 Tax Incentive in Puerto Rico

  • Research and development;
  • Advertising and public relations;
  • Consulting services, including, but not limited to, economic, scientific, environmental, technological, managerial, marketing, human resources, computer and auditing consulting services; Advisement on matters of any industry or business;
  • Creative industries defined as any business with the potential to create jobs and income, principally on exportation of good and services in the following sectors: Design (graphic, industrial, fashion, interior) Art (music,visual art, performing arts, publications)
  • Media (app development, video games, online media, digital content and multimedia)
  • Creative Services (architecture and creative education);
  • Production of blueprints, architectural and engineering services, and project management;
  • Professional services such as legal, tax and accounting services;
  • Centralized management services, including, but not limited to, strategic direction, planning, distribution, logistics and budgetary services carried out by the headquarters or similar regional offices of an entity engaged in rendering such services;
  • Centers for electronic data processing;
  • Development of computer software;
  • Voice and data tele-communications between persons located outside of Puerto Rico;
  • Call centers;
  • Shared services centers, including, but not limited to, accounting, finance, tax, auditing, marketing, engineering, quality control, human resources, communications, electronic data processing, and other centralized management services;
  • Storage and distribution centers of businesses dedicated to transportation of products and articles pertaining to third parties, also known as hubs;
  • Educational and training services;
  • Hospital and laboratory services;
  • Investment banking and other financial services, including but not limited to, asset management, management of investment alternatives, management of activities related to private capital investment, management of hedge funds and high risk funds, management of pools of capital, management of trusts that serve to turn different types of assets into stocks, and management of escrow accounts;

New Eligible Activities for the Act 20 Tax Incentive as of July 2017

  • Hospital services and laboratories including medical tourism and telemedicine facilities.
  • Companies dedicated to international trading (known as trading companies) – Trading companies will mean any entity that produces no less than 80% of gross income from the following:
    • Sales to any persons or entities that are outside of Puerto Rico, for use, consumption or disposition outside of Puerto Rico, of products which have been manufactured inside or outside of Puerto Rico and have been bought by the eligible business for resale;
    • From commissions derived from sales of goods for consumption and use outside of Puerto Rico will be considered industrial development income. The property used for this income is not used for other activities not authorized under tax decree; and
    • Other eligible exportation services as described under this law.

Puerto Rico’s Act 22 Tax Incentive

The Act 22 tax incentive, also known as the Act to Promote the Relocation of Investors to Puerto Rico, provides a total exemption from tax on Puerto Rico sourced capital gains, interest, and dividends realized once the individual is declared a bone fide resident. Once the investor becomes a bona fide resident, Puerto Rico’s Act 22 tax incentive will also grant them a 100% tax exemption with respect to gains from the sale of Puerto Rico property acquired if the sale takes place before 1/1/2036 and after their bonafide residence status. In addition, 90%-100% exemption on short and long-term capital gains, and 100% exemption on passive income, and 100% exemption on federal taxes on Puerto Rico source income for bona fide residents.

Act 22 decree holders may also qualify for Act 20 and various other tax holidays.

If you’re already a resident of Puerto Rico, you can’t use the Act 22 tax incentive. To obtain decree, you must not have been a resident of Puerto Rico at any time during the 6-year period prior the effective date of the Individual Investors Act (Jan 11, 2012). (Amended to 6 years before 2012 – it was previously 15 years.)

A Puerto Rico bona fide resident is an individual who is domiciled in Puerto Rico. Physical presence in Puerto Rico for a period of 183 days during the taxable year will create a presumption of residency for tax purposes. Other requirements are the individual cannot have a tax home outside of Puerto Rico and can’t maintain closer connections to United States or any other foreign country than to Puerto Rico.

Also, you must purchase a residence in Puerto Rico within 2 years of applying for Act 22. I suggest you do this ASAP because you must prove to the IRS that Puerto Rico is your home and you’re not there on a temporary basis. Buying a home within 2 years is required under the law and buying a home as soon as possible will help you if you’re selected for audit in the United States.

Basically, Puerto Rico should be your home for the foreseeable future. The territory should be where you call home, where you return to when you travel, and where most of your business interests are located. On a similar note, you should break as many ties to the United States as possible and focus your life in Puerto Rico.

Annual reports with the Office of Industrial Tax Exemption including evidence of compliance of conditions and requirements of the grant for taxable year immediately before the filing date of report.

Government Fees

$5,000 fee is due upon the approval of decree under Act 22 in addition to fees due with filing of Grant application. These fees do not include legal and other fees associated with negotiating the decree.

New July 2017 amendment requires you to donate at least $5,000 per year to an official charity in Puerto Rico each year. See: Changes to Puerto Rico’s Act 20 and Act 22

To qualify for the full Act 22 incentives, individual must become a bona fide resident of Puerto Rico.

Again, applicants must acquire a residential property in the first 2 years since the date of the notification of residency. (2015 amendment). The presentation of the Deed of Purchase & Sale is mandatory.

The focus of the Act 22 tax incentive is to eliminate capital gains on assets acquired after you move to the island. It’s also possible to allocate gains on assets acquired before you move to Puerto Rico between the United States and Puerto Rico.

Puerto Rico Tax Incentive Allocations

Tax exemptions on capital gains for Act 22 has a 10 year rule.

  • If the gain is Puerto Rico sourced income, the 10 year rule doesn’t apply and you pay zero tax. This usually applies to gains on stocks purchased after you move to Puerto Rico.
  • For Non-PR sourced income, which is usually assets purchased prior to becoming a Puerto Rico bona fide resident, you pay 10% in capital gains to Puerto Rico if you sell before before 10 years of residency and 5% to Puerto Rico if you sell after 10 years residency but before 1/1/2036.
  • A US investor with a US source gain, that sells before the 10 year term, pays US capital gains tax on the sale. After the 10 year term, you pay no federal income taxes.

Let’s say you buy Microsoft stock in 2010. When you move to Puerto Rico in October of 2017 you have an accrued gain of $200 per share. You live in Puerto Rico for 5 more years and accrue another $100 in gains. So, your total appreciation in the stock from 2010 to 2022 is $300 per share.

You sell the stock in 2022 and allocate the $300 gain between the United States and Puerto Rico. $200 of the gain is taxable at standard US capital gains rates, or 20% (assuming Trump does away with the Obamacare tax).

You also pay 10% on the $100 Puerto Rico sourced gain – the gain that accrued while you were a resident of Puerto Rico.

Had you held the stock for 10 years in Puerto Rico, or until October of 2027, you would have paid only 5% in capital gains tax on the $300 gain. You would not have paid any tax to the United States.

It’s important to note that Puerto Rico’s tax incentive for investors applies to Puerto Rico sourced gains and not US sourced gains. So, real estate in the United States, and rental properties in the United States do not qualify for Act 22. These are always US sourced gains and taxable by Uncle Sam. The same applies to partnership income (K-1s), interest income from banks in the United States, and any other US source income.

Remember that only Puerto Rico can offer these tax incentives on capital gains. When a US citizen moves to a foreign country, they must pay US tax on their passive income. Only Puerto Rico is exempted from US tax on capital gains.

So, in the stock example above, if you were living in France or Panama, you would pay US capital gains tax on your stock sale. Regardless of whether you sold those Microsoft shares in 2022 or 2027, you would pay US long term capital gains on the transaction.

Puerto Rico’s Act 273 Tax Incentive

Act 273-2012 was approved with the intention of ​​expanding International Financial Centers into Puerto Rico and significantly increasing the promotion and knowledge of the Island throughout the world’s financial circles. The result has been to turn Puerto Rico into a major international banking center.

Most who secure an Act 273 tax decree and license use it to build an international or offshore bank. A full service international bank that provides services to people and companies outside of Puerto Rico. Act 273 tax incentive for financial entities may offer services in the United States. Activities for the IFE must comport by AML and KYC regulations, BSA, FDIC “Standards” (does not need to be FDIC regulated) under the government of Puerto Rico.  

What makes Act 273 unique is that the charter can be used to build any type of financial services entity you require. It’s not just a simple banking charter as is available from other jurisdictions. With Puerto Rico’s tax incentive program you select from a menu of services you wish to offer. Depending on the services you select, you can setup either a bank, fund manager, investment advisory firm, family office, etc.

And Puerto Rico’s Act 273 has been an amazing success. While other tax havens are adding 1 or 2 banks a year, Puerto Rico issued 15 licenses in 2016 and looks to approve 20 IFE’s in 2017. Puerto Rico is already the largest offshore banking jurisdiction in the Caribbean after the Cayman Islands… and Cayman has a 20 year head start. It seems that Puerto Rico could pass Cayman in 3 or 4 years. For more, see Top 5 Offshore Bank License Jurisdictions for 2017

To date, International Financial Entities licenses have been issued to operate an international bank, a fund and investment manager, a family office, trading desks for international banks, and “in-house” correspondent bank, brokerages (additional license required), Bitcoin exchange, blockchain based bank, money transmitters / remitters, merchant services, and many other types of financial service entities.

In its most basic form, Puerto Rico’s Act 273 tax incentive is Act 20 for banks. It’s used to incorporate and license offshore banks in the territory, most of which do business with companies and individuals outside of Puerto Rico and outside of the United States. For an introductory article on using this tax incentive from Puerto Rico to operate an offshore bank, see: Lowest Cost Offshore Bank License is Puerto Rico.

In addition to operating as a bank, IFEs, along with the support of the Office of the Commissioner of Financial Institutions, are allowed to the purchase loans in Puerto Rico that are classified or high risks, from any bank that is considered to be a domestic person or any branch of Puerto Rico of a foreign bank. This include the execution of collateral related to said loans and the sale of the property that served as collateral of such loans.

If an investor wanted to come in and buy up properties in Puerto Rico while the bankruptcy is in process, they could do so in a tax advantaged way by forming and IFE under the Act 273 tax incentive.

Requirements For Puerto Rico’s Tax Incentive Under Act 273

  • Non refundable application fee of $5,000.00
  • BSA, KYC, AML compliance program requiredAuthorized capital stock no less than $5 million
  • Paid in capital of at least $250,000
  • Deposit with a local bank as a bond of $300,000
  • Minimum of 4 employees in Puerto Rico
  • Local office and IT infrastructure approved by regulators.
  • Financial Statements for the past 10 years, for shareholders with 10% or more in capital of the proposed IFE

Puerto Rico’s Act 273 tax incentive is guaranteed for 15 years and may be renewed.

Your IFE will pay corporate tax at 4% on its net profits. This tax rate applies to Puerto Rico sourced income. PR sourced income is earnings and profits from work performed in Puerto Rico. Therefore, most IFE’s have a significant number of employees in Puerto Rico. For a detailed article, see: Tax Planning for an International Bank License

List of Services Permitted Under Act 273

  1. Accept deposits from foreign individuals in accounts as well as demand or fixed term deposits and interbank deposits of funds, or otherwise borrow money from international financial institutions and any other foreign person;
  2. Make, procure, place, guarantee, secure , bond or service loans;
  3. Issue, confirm, give notice, negotiate or refinance letters of credit, including transactions for the financing of exports, even if the beneficiary is a domestic person;
  4. Discount, rediscount, deal or otherwise trade in money orders, bills of exchange and similar instruments;
  5. Invest in securities, stocks, notes and bonds of the Government;
  6. Carry out any banking transactions allowed by the Act in the currency of any country, or in gold or silver, and participate in foreign currency trade;
  7. Underwrite, distribute, and otherwise trade in securities, notes, debt instruments, drafts and bills of exchange issued by a foreign person for final purchase outside of the jurisdiction;
  8. Engage in trade financing of import, export, barter and exchange of raw materials and finished products activities with domestic persons;
  9. Engage in any activity of a financial nature outside of the jurisdiction which would be allowed to be done, directly or indirectly, by a bank holding company or by a foreign office or subsidiary of a United States bank under applicable United States law;
  10. Act as fiduciary, executor, administrator, registrar of stocks and bonds, property custodian, assignee, trustee, attorney in fact, agent, or in any other fiduciary capacity;
  11. Acquire and lease personal property at the request of a lessee who is foreign person, pursuant to a financial lease agreement that complies with the Regulations;
  12. Buy or sell securities and provide investment advice in relation to such transactions;
  13. Act as a clearinghouse in relation to financial contracts of instruments of foreign persons;
  14. Organize, manage, and provide management services to international financial institutions, and other types of financial entities located outside of the jurisdiction, such as investment companies and mutual funds;
  15. Engage in such other activities as are expressly authorized by the Regulations or order of the Director/Commissioner, or are incidental to the execution of the services authorized by the Act;
  16. Participate in the granting and/or securing of loans that originate and/or are secured by the stated governmental authorities mentioned in the Act;
  17. Establish branches outside of the jurisdiction, in the continental United States or its possessions, or in other foreign countries. Puerto Rico excludes the acceptance of deposits for these branches;
  18. Establish a service unit or office in the jurisdiction, in which only specific operations related to the services of the international financial institutions shall be conducted;
  19. Provide to other international financial institutions or to foreign persons outside of the jurisdiction, those services of a financial nature, as these are defined and generally accepted in the banking industry of the United States and the jurisdiction, and which are not listed in this section.
  20. Accept  properly collateralized deposits or otherwise borrow duly secured money from the Government Development Bank for Puerto Rico and the Economic Development Bank for Puerto Rico;
  21. Make or place deposits in, and otherwise give money on loan to, the Government Development Bank for Puerto Rico and the Economic Development Bank for Puerto Rico, any international financial institution, or any bank, including banks organized under the laws of Puerto Rico, and branches in Puerto Rico of banks that are foreign persons;
  22. Participate in the granting and/or securing of loans originated and/or secured by any bank considered a domestic person, excluding transactions between any bank considered a domestic person and an affiliate entity;
  23. Acquire classified or bad loans, as well as any personal or real property (tangible and intangible) that serves as collateral for such loans, from any bank considered a domestic person or from any branch of a foreign bank in Puerto Rico. This includes the execution of the collateral related to the aforementioned loans and the sale of property serving as collateral for said loans;
  24. Finance, through loans or financial securities, projects in areas of priority for the Government of Puerto Rico in those cases designated as extraordinary by the Secretary of the Treasurer and the Commissioner;
  25. Engage in rendering the following services: (i) asset management; (ii) alternative investment management; (iii) management of private capital investment activities; (iv) management of hedging funds or high risk funds; (v) pools of capital investment; (vi) administration of trusts that serve to convert different groups of assets into securities; and (vii) escrow accounts administration services; provided, that such services are offered to foreign persons.  

Puerto Rico’s Act 73 Tax Incentive

The industrial incentives program of the Commonwealth of Puerto Rico began in 1947 with the purpose of developing a manufacturing and export economy. The program has been transformed over time adapt to challenges of the economy.

Law No. 73 of 2008, known as the Economic Incentives for Puerto Rico Development Act, is the result of over six decades of experience in industrial development. This statute offers contributory incentives to attract new operations to the Island, as well as retain and stimulate the development of existing ones. The Law grants contributory credits for the creation of jobs and for the investment made by the company in research and development activities. Companies can access other incentives to reduce their operating costs and energy consumption, so that their operations are efficient and profitable.

The offer of tax incentives of the Commonwealth of Puerto Rico is particularly attractive for global high technology companies that require manufacturing processes with high added value. Likewise, they are a very effective instrument to promote innovation, since the Puerto Rico offers companies the most complete protection of their intellectual property rights under US laws.

Tax Incentives Available Under Act 73

  • Maximum income tax of 4%; Can be reduced to 1% and 0% for activities involving the use of pioneering technology
  • Tax credits of up to 50% for the purchase of local and recycled products
  • Tax credits up to $5,000 for job creation
  • Tax credits up to 50% for research and development (R&D)
  • Special deductions for investment in infrastructure, machinery and equipment
  • Tax credits of up to 50% for the investment in machinery and equipment for the production of renewable energy

Puerto Rico wishes to develop a productive business culture based on quality and competitiveness. Also invested in maximizing the yield of high potential land while developing sustainable operations. Monsanto, Pioneer Hi-Bred, BASF, Agrochemical, Bayer-Cropscience, Syngenta Seeds and Rice Tec are among the many companies that have identified Puerto Rico as fertile land for agriculture because of the tropical climate, and water supply. Due to weather conditions in Puerto Rico, 4 to 5 harvests per year can be produced compared to the United States whereas seasonal harvest produce only once a year.

Puerto Rico’s Act 399 Tax Incentive Program for International Insurance Centers

Puerto Rico is the ideal gateway for insurers and reinsurers wishing to enter the insurance market and the financial market because it enjoys direct access to the United States and other international markets.

Legal Background

Law No. 399 of 2004 and Act No. 400 of 2004 of Chapter 61 of the Puerto Rico Insurance Code were adopted in order to establish the basis for the International Insurance Center (IIC).

International Insurance Centers offer a competitive environment for insurers and reinsurers to cover risks outside of Puerto Rico, in accordance with a safe and flexible regulatory system that offers highly attractive tax benefits. Law No. 98 of 2011 provides a long-term contributory framework that will guarantee the treatment of international insurers and reinsurers for an initial term of 15 years, renewable for two additional periods of 15 years.

International insurers have a variety of options for organizing and operating within Act 399. These options include operating as an international insurance holding company, such as an international insurer or a branch of an international insurer and segregated asset regimes.

Tax Incentives Under Law 399

Among the tax incentives granted by the Puerto Rico International Insurers and Reinsurers Act are:

  • Tax exemption on premiums.
  • Tax exemption on dividends and other profit distributions generated by the international insurer and the holding company of the international insurer.
  • Exemption from taxes on municipal franchises, personal income and real property.
  • Exemption in the tax withheld on the payment of dividends and other distribution of profits to third parties, as well as exemption from the filing of tax returns with the Department of Treasury of the Commonwealth of Puerto Rico.
  • Tax exemption on the first $2.2 million of net income, applicable to individual cells within segregated and company-level asset plans. Any excess income will benefit from a tax rate. This amount was increased from $1.2 million to $2.2 million in 2016.
  • Preferential rate of 4%, guaranteed by Puerto Rico’s tax incentive program for 15 years and renewable.

Business Opportunities Under Law 399

The International Insurance Center is a platform to serve as:

  • Alternative risk management strategies as captive insurers or associated captives
  • Insurers or reinsurers access to Latin American or US markets.
  • Special Purpose Vehicles
  • Vehicle for integrated insurance plans
  • Corporate reorganization through holding companies of international insurers
  • Segregated asset plans to serve the market of individuals with high net capital
  • Risk assessment programs

Puerto Rico’s Act 185 Tax Incentive Program

The purpose of the Act 185 tax incentive is to establish the “Private Equity Fund Act” to promote the development of private capital in Puerto Rico. This is done through the formation of investment capital funds aimed at investing in companies that do not have access to public  markets and establish the applicable tax incentive framework.

The purpose of creating a Puerto Rico Private Equity Fund is to encourage the injection of private capital into Puerto Rico in various industries. Private equity funds that invest in securities that do not have access to public capital markets (such as the New York Stock Exchange, NASDAQ or other international markets), have become a key part of the recovery Economic development of the United States.

During the calendar year 2009, investment from private equity funds around the world totaled approximately ninety (90) trillion dollars, of which 36% was invested in the United States, which has particular significance in light of constraints faced by traditional banks in providing financing to private businesses.

Private Equity Funds not only represent a proven alternative to investment, but also constitute a financing and economic propulsion tool that facilitates the pooling of private capital in order to finance the expansion of companies, restructure businesses at risk and / or to promote pioneering businesses in full development.

In addition, by promoting this investment vehicle used by investors around the world, the government hopes to bring quality jobs in securities and financial businesses in Puerto Rico, as well as the development of the securities industry in the Island.

The Act allows for domestic or foreign investments, structured as partnerships and limited liability companies to elect to be treated as a fund under the Act (“Fund”) and to obtain tax benefits to Fund investors, among others, under the Puerto Rico Internal Revenue Code of 2011, as amended, (the “Code”).

Eligibility for Act 185

Any corporation or limited liability company, organized under the laws of the Commonwealth of Puerto Rico, of any State of the United States or of any foreign jurisdiction, engaged in investments in promissory notes, bonds, notes,  with or without collateral and including such collateral, shares, or any other value of a similar nature issued by entities that at the time of purchase, which are not quoted or traded in public securities markets of the United States or foreign countries, will qualify to be treated as a Fund, under the provisions of this Act, during each fiscal year that meets the following requirements:

  • Office located in Puerto Rico;
  • Engaged in business in Puerto Rico;
  • Accredited investors must be among the qualified investors;
  • The advisory board must include at least one resident of Puerto Rico;
  • Registered investment officer EBT-PR with an office in Puerto Rico;
  • Minimum $10 million capital within 2 years of receiving the license to operate;
  • A minimum of eighty percent (80%) of the capital contributed to the Fund by its paid-in capital, (excluding from such capital the money held by the Fund in bank accounts and other investments that are considered equivalent to cash) is invested in promissory notes, bonds, notes (including loans with and without collateral and including such collateral), shares or any other value of a similar nature that, at the time of purchase, are not quoted or traded In the public securities markets of the United States or foreign countries;
  • Up to 20% allowable in short term investments;
  • With 4 year restrict investment in and one business to 20% funds capital;
  • Foreign private equity must derive at least 80% of gross income from PR source;
  • Foreign PEF must within 4 years maintain at least 15% of funds capital invested in private securities; and
  • For PR PEF must within 4 years maintain at least 60% of funds capital invested in either private securities or exempt investment trust.

Certain income of the fund may be exempt from tax. General withholding tax provision are applicable. For investors interest and dividends received from fund are taxed at fixed 10%, and capital gains pay zero tax. Sale of ownership interest has a fixed rate 5% on capital gains unless reinvested. PR resident investors benefit from deductions of capital loss and deductions for initial investment. General partners (advisors, and PEF) to receive income are taxed at fixed 5% and capital gains at 2.5%.

The 185 Act will not affect tax treatment in respect to other tax incentive programs or future incentive programs. Remember that this Act is focused on those who wish to invest in Puerto Rico. Act 273 should be used by those wanting to manage US or international funds.

Puerto Rico’s Tax Incentive Act 135

The Law on Incentives and Financing for Young Entrepreneurs aims to expedite and facilitate the creation of new businesses by young residents of Puerto Rico.

Eligibility for the Young Entrepreneurs Tax Incentive Program

“Young Entrepreneur” means any individual who is a resident of Puerto Rico between the ages of 16 and 35 and who wishes to create and operate a new business in the territory. Also must have obtained a high school diploma or an equivalent certification or college degree.

A written agreement for youth entrepreneurship with CCE (Compañía de Comercio y Exportación de Puerto Rico) before starting commercial operations is required. This Act shall take effect immediately after its approval, and shall be effective for taxable years beginning before January 1st, 2020.

New Business Created by Young Entrepreneurs

  • Business that begins its main commercial operation after signing a Special Agreement for the Creation of Companies.
  • It must be operated exclusively by Young Entrepreneurs, as defined in the Law.
  • It will not be considered as New Business that has been operating through affiliates or is the result of a reorganization.

Puerto Rico Tax Incentives Available

  • Income tax exemption for youth ages 16 to 26 on the first $40,000 of gross income generated by wages, services and / or self-employment;
  • Student loan refinancing which shall not exceed 6%
  • Total tax exemption on income, municipal patent and property tax on new businesses established by young people aged 16-35 over the first $500,000 of gross income generated during the first three (3) years of operation;
  • Program for financing and for Venture Capital Investment with the BDE ( Banco de Desarrollo Economico) for young entrepreneurs;
  • PRIDCO Preferential Property Rentals and Land Authority;
  • Expedited process for the granting of permits and certifications.

To obtain the Act 135 decree applicant must provide:

  • Online application
  • US or PR government issued ID
  • Original birth certificate
  • Recent no debt certificate with Treasury Department of Puerto Rico (Hacienda)
  • Recent certificate of filed tax returns for last 5 years
  • Recent certificate of no debt with CRIM (and financial statement)
  • Recent certificate of compliance with ASSUME (Child support)
  • Any reasonable information asked for by the Commerce and Exportation Company (CCE)

Act 135 is limited to one new business per each applicant. Registration and permits up to date are required. A specific list of other incentive acts can not be availed in combination with Act 135.

Puerto Rico’s Act 74 Tax Incentive Program

The Tourism Development Act desires to transform Puerto Rico into a world class tourist destination by providing tax credits and tax incentives for businesses engaged in eligible activities.

Specifically focused on the development of the hotel industry, the act seeks to move capital onto the island. Act 74 provides 90% of most tax exemptions if the activity is in most areas of Puerto Rico (such as San Juan) and 100% if in Vieques. The tax incentive period is 10 years.

Eligibility for Act 74 Tax Breaks

  • Hotel administration and ownership including timeshares, vacation club programs condo hotels, guest houses, theme parks golf courses, marina, port facilities, agro hospices, agro tourism, medical tourism, nautical tourism among others.
  • Ownership of leases made with an Act 74 decree
  • Development of natural resources such a cavern, forest, natural reserve, and others
  • Purchase of existing hotels

Description of Puerto Rico’s Tax Incentives Under Act 74

The following is a brief description of the tax incentives available under Act 74. In most cases these are being used for the purchase of large hotels. But, Act 74 has many uses in Puerto Rico for the right small and medium sized investor. For a hotel deal, see: Chinese investor buys Marriott casino hotel in San Juan for $184M

  • The 10% of net profits are taxed at the regular rate and zero tax on 90% of the net profits (ie. 39% corporate tax on first 10% = 3.9% of full tax);
  • 100% exemptions on alternative minimum tax and undistributed income (retained earnings);
  • 90% tax exemption on personal property tax (up to 8.83% = .888%) and real property tax (10.83% = 1.083%);
  • 90% tax municipal license tax (up to 5% = .5%);
  • Up to 100% tax exemption on excise tax on imported goods;
  • Up to 100% tax exemption on sales and use tax (11.5% to 0);
  • Up to 100% tax exemption on municipal construction excise tax; and
  • Persons with equity interests in approved activities may receive tax credits of up to 50% of the cash paid for equity or 10% tax credit on total project cost.

Under Act 74, anyone acquiring an equity interest or who contributes land to an entity that develops an exempt tourism business will be entitled to an investment tax credit equal to 50% of the cash paid for equity investment or 10% tax credit on total project cost, whichever is lowest. The tax credit is to be taken in two installments. Half of the credit during the first year of the investment, while the remaining tax credit may be used in the second year. Any unused tax credits may be carried forward. The tax credits may also be assigned, transferred or sold. Puerto Rico has a healthy secondary market for the immediate sale of such credits. Many developers choose to inject such credits into the project, reducing the amount of equity required.

Puerto Rico’s Tax Incentive Act 14

Puerto Rico’s tax incentive Act 14 is titled the Return and Retention of Doctors in Puerto Rico and was established on February 21, 2017. This tax decree is for all qualified doctors with Puerto Rico source income. Puerto Rico sourced income is income from work performed in Puerto Rico.

Qualified Physicians who have a Decree under this Act will be subject, excluding any other contribution on eligible income provided by the Code or any other law, to a fixed rate of income tax of 4% on their eligible income generated by offering professional medical services.

Qualified physicians who have a decree under this Act may make voluntary contributions, after the payment of income taxes, up to twenty-five percent (25%) of the net income in the case of individual retirement plans (Keogh) or up to one Twenty five percent (25%) of their salary in the case of corporate retirement plans.

Eligible dividends shall be exempt from withholding tax on income at source and from payment of income taxes of Puerto Rico, including the alternate minimum tax provided in the Code, up to a limit of two hundred and fifty thousand ($250,000) dollars per taxable year.

As of July 11, 2017, Puerto Rico’s tax incentive Act 14 can be combined with Act 20. This new section allows for telemedicine and other “export services.” Through this combination, a medical doctor in Puerto Rico can receive tax free dividends and a 4% rate on income in excess of Act 14’s $250,000 cap.

Term to Apply for the Decree

All Qualified Physicians will have a term of two (2) years from the date of this law to submit their application to the department. Any request submitted to the Department after that date will not be accepted or evaluated.

Period of Tax Incentive

A Qualified Physician who holds a Decree granted under this Act, shall enjoy the tax holiday for a period of fifteen (15) years provided that during the term standards are met.

Doctor must comply with:

  • One hundred and eighty (180) hours of community service specified in the regulations or
  • By providing medical services as part of a service contract with the Health Plan of the Government of Puerto Rico. The Qualified Physician must provide one hundred and eighty (180) hours of service to health plan patients (typically low income persons). This work will not need to be offered free of charge and may be offered as an employee or independent contractor of the person or entity contracting with the Health Plan of the Government of Puerto Rico.

Puerto Rico’s Tax Incentive Act 83

An exempt business operating in Puerto Rico under the Green Energy Incentives Act by means of a Puerto Rico entity is not subject to any taxes (such as a dividend tax, import tax or other similar taxes) on its income from its eligible activities in Puerto Rico, other than the Puerto Rico fixed income tax rate established in the tax decree, regardless if said income is distributed or retained by the entity.

Upon repatriation, the distributed income will be subject to the tax imposed by the jurisdiction in which the owners of the Puerto Rico entity reside, if any. If the owners are residents of Puerto Rico, these distributions are likely tax free.  If the owners are residents of the United States, these distributions will be taxed as qualified dividends at 20 to 23.5% (depending on what happens with the Obamacare tax).

For the purpose of promoting the generation of green energy markets and the development
of mechanisms to incentivize the establishment, organization, and operation of green energy
production units in Puerto Rico at commercial level, and to stimulate the development of
sustainable energy systems that further energy use savings and efficiency, a special fund
denominated the Green Energy Fund of Puerto Rico was established pursuant to the
short, medium, and long-term objectives of this Act.

Eligibility for Act 83

Under the Green Energy Incentives Act, businesses engaged in the following activities will be considered eligible to apply for a tax decree:

  • Production and sale of renewable energy;
  • Operating renewable energy production units;
  • Businesses involved in the assembly of renewable energy equipment; and
  • Owners of property, real or personal, used by an exempt business in its exempt operations, such as a lessor of real estate used in operations of an exempt business.

Tax Exemptions Under Act 83

  • 4% fixed income tax rate on income derived from the production of energy in Puerto Rico;
  • 12% fixed income tax rate, withheld at source, on royalties paid to foreign entities with respect to intangible property used in the exempt business;
  • 100% tax exemption on dividend distributions;
  • 4% fixed income tax rate on gains derived from the sale of ownership interests or substantially all the assets of the exempt business, in lieu of any other Puerto Rico income tax imposed on such gains;
  • 90% tax exemption from personal property taxes. The taxable portion will be subject to the regular tax rate, that currently can be up to 8.83%; therefore, after considering
    the 90% exemption, the effective tax rate would be up to 0.883%;
  • 90% tax exemption from real property taxes. The taxable portion will be subject to the regular tax rate, that currently can be up to 10.83%; therefore, after considering the 90% exemption, the effective tax rate would be up to 1.083%;
  • 60% tax exemption on municipal license taxes, with the first 3 semesters being 100% exempt. Any taxable portion will be subject to the regular tax rate, that currently can be up to 0.5%; therefore, after considering the 60% exemption, the effective tax rate would be up to 0.02%;
  • 100% tax exemption on municipal construction taxes;
  • 100% tax exemption on excise taxes and sales and use tax on renewable energy equipment; and
  • Accelerated depreciation – 100% first-year bonus depreciation, with ability to carry over to subsequent tax years until exhausted.

Tax Credits

The Green Energy Incentives Act also provides various tax credits, including:

  • 25% tax credit on purchases of products manufactured in Puerto Rico;
  • 35% tax credit on purchases of products manufactured in Puerto Rico made from recycled materials;
  • Tax credit for job creation during the first year of operations that ranges from $1,000 per job created in an industrial area of intermediate development (as determined by the Office of Industrial Tax Exemption) to $2,500 for jobs created in an industrial area of low development. In the case of businesses established in the municipalities of Vieques and Culebra, this tax credit is $5,000 per job;
  • 50% tax credit on eligible research and development activity costs; and
  • 12% tax credit for royalties paid to foreign entities with respect to intangible property used in the exempt business.

Conclusion

Thank you for sticking with me on this article on all of Puerto Rico’s tax incentive programs. The territory of Puerto Rico is making a series of offers that can’t be matched by any foreign jurisdiction… at least for US citizens and US owned businesses.

Only Puerto Rico can offer a zero percent tax on dividends to its residents under Act 20. Only Puerto Rico can offer a zero percent tax rate on capital gains. Only Puerto Rico can offer an offshore bank charter without all the headaches of Federal oversight (not to mention the 4% tax rate). Only Puerto Rico can distribute dividends to its residents under Act 20 tax free.

If you want to reduce your worldwide tax on business income and capital gains, give the tax incentives of Puerto Rico a shot. For more information, please contact me at info@premieroffshore.com or call us at (619) 483-1708. We’ll be happy to help you to set up in Puerto Rico.

Puerto Rico Act 20 no employees
Christian Reeves

Puerto Rico Eliminates 5 Employee Requirement

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Puerto Rico has opened up its Act 20 program by eliminating the 5 employee requirement. Any US citizen can now move to Puerto Rico, set up a business under Act 20, and pay only 4% in corporate tax. By eliminating the 5 employee requirement for Act 20 businesses, Puerto Rico has opened the floodgates.

Note that this article on Puerto Rico eliminating the 5 employee requirement is based on a law change signed on July 11, 2017. For a detailed review of all the modifications, see Changes to Puerto Rico’s Act 20 and Act 22.

First, a quick review of Puerto Rico’s Act 20.  

If you move you and your business to Puerto Rico, you can exchange your US tax rate of 40% (including your state) for Puerto Rico’s Act 20 rate of 4%. To qualify, you must be moving a service business to the territory. One that can provide a service from Puerto Rico to persons and companies outside of Puerto Rico.

You’ll pay 4% tax on corporate profits earned on income generated from work done in Puerto Rico. That is to say, you pay 4% on Puerto Rico sourced income… on the earnings and profits from work performed in Puerto Rico.

4% is your corporate tax rate payable on net business income. Net income is after you pay yourself a reasonable salary. Most pay themselves $50,000 to $100,000, which is taxed at ordinary rates by Puerto Rico (not the United States). 

For this reason, Puerto Rico’s Act 20 is best for those earning $250,000 or more. If you’re netting $100,000 or less, you can use the Foreign Earned Income Exclusion to pay zero tax on your business income. The bottom line is that, the more you earn the more you save with Puerto Rico’s Act 20. For more, see Panama vs. Puerto Rico.

In order to qualify for Puerto Rico’s Act 20, you must spend 183 days a year on the island and become a resident. Moving to Puerto Rico is much easier than the FEIE which requires you spend 330 out of 365 days a year offshore, at least in the first year.

Puerto Rico Eliminates 5 Employee Requirement

When Puerto Rico’s Act 20 was first passed in 2012, it required a minimum of 3 employees. Then, in December of 2015, the minimum number of employees was increased from 3 to 5. As of July 2017, there is no employee requirement.

Remember that only Puerto Rico sourced income qualifies for the Act 20 4% tax rate. Puerto Rico sourced income is earnings and profits from work performed in Puerto Rico. Therefore, all Act 20 companies must have at least 1 employee… someone must be doing the work and generating the profits. This employee can be the business owner. 

Eliminating the 5 employee requirement opens the doors of Puerto Rico to any portable business. Even a one man affiliate marketer, or a one woman online publisher / SEO maven, can set up in PR and cut his or her taxes from 40% to 4% overnight. Grab your laptop and get your rear to Puerto Rico immediately!

New Risks of Act 20 in 2017

I should point out that eliminating the 5 employee requirement for Puerto Rico’s Act 20 can lead to abuse. Someone will try to work from the US and hire a secretary in Puerto Rico for $10 an hour as his 1 employee.

His Act 20 company might be approved, but he’ll get crushed by the IRS if and when he’s audited Again, for the third time, Puerto Rico sourced income is earnings and profits from work done in Puerto Rico. Likewise, US source income is earnings and profits from work performed in the United States.

In the above hypothetical, 99% of the effort to create the income will be done in the US with a very small amount attributable to the employee in Puerto Rico. The IRS is sure to look at these arrangements very closely and assess all kinds of interest and penalties.

Remember that, when you move to Puerto Rico, you must follow the tax laws of Puerto Rico and the United States.

For this reason, I suggest any business owner with less than 5 employees in Puerto Rico must move to the island. You should spend 183 days in the Territory and become the employee of your Puerto Rico Act 20 company.

If you move you and your business to Puerto Rico, it’s fine if you’re the only employee. If all work is done by you, a resident of Puerto Rico, all income is Act 20 eligible. If you live in the United States, and operate a division in Puerto Rico, a much more in depth analysis must be undertaken.

Getting Money Out of Puerto Rico Act 20 Company

Dividends from a Puerto Rico Act 20 company are tax free when paid to a PR resident. This means you’ll pay zero tax on these distributions. You’ll pay ordinary rates on your salary, 4% on your corporate profits, and zero on dividends from your Act 20 company.

And we’re not talking about tax deferral here. Puerto Rico’s Act 20 gets you tax free distributions. You’ll never pay US tax on this income. Even when you shut down the business and move back to the US, you pay zero to Uncle Sam.

Conclusion

I hope you’ve found this article on how Puerto Rico opened up its Act 20 program by eliminating the 5 employee requirement to be helpful. For more information on setting up a business in Puerto Rico, please contact me at info@premieroffshore.com or call us at (619) 483-1708. 

Changes to Puerto Rico’s Act 20 and Act 22
Christian Reeves

Changes to Puerto Rico’s Act 20 and Act 22

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On July 11, 2017, major changes to Puerto Rico’s Act 20 and 22 were approved. These changes make it much easier to qualify for Puerto Rico’s Act 20 tax holidays. Here’s everything you need to know about the changes to Puerto Rico’s Act 20 and Act 22.

As of July 2017, Puerto Rico has a tax deal that can’t be matched by any offshore jurisdiction. All the other tax havens might as well just close down…. Puerto Rico just hit it out of the park… did the best set ever and dropped the mic. Offshore tax havens are done.

The US territory of Puerto Rico is working hard to bring new business and high net worth persons to the island. As a territory, Puerto Rico can offer tax deals to US citizens that can’t be matched by any foreign country.  

This is because US Tax Code Section 933 excludes Puerto Rico sourced income from US tax. When a US citizen moves to a foreign country, we pay US Federal tax on our business profits (less the FEIE) and US capital gains tax on our investment profits. 

Residents of Puerto Rico don’t pay US Federal tax on their Puerto Rico sourced income. They pay only Puerto Rico tax on these profits and capital gains. And Puerto Rico is free to charge whatever tax rate they want, which is why Act 20 and Act 22 are possible.

To qualify for Puerto Rico’s Act 20 and 22 tax holidays, you must be a resident of Puerto Rico and spend a minimum of 183 days a year on the island.

Puerto Rico’s Act 22 gives you a zero percent tax rate on capital gains on assets acquired after you move to Puerto Rico.

Puerto Rico’s Act 20 gives you a 4% corporate tax rate on any Puerto Rico sourced business income earned inside an Act 20 company. Puerto Rico sourced business income is earnings and profits from work performed in the territory. 

This post will focus on changes to the law which were approved on July 11, 2017. You might also take a read through my article comparing Puerto Rico’s Act 20 with Panama (or any offshore jurisdiction). Just remember that this article does not include the changes described below.

For more on Act 20, see: Puerto Rico Eliminates 5 Employee Requirement

The primary changes to Puerto Rico’s Act 20 and Act 22 are:

  1. Adding eligible services of
    1. Hospital services and laboratories including medical tourism and telemedicine services
    2. Trading companies with no less than 80% of business in PR exporting business.This means Act 20 is no longer limited to online and service businesses. 
  2. No minimum number of employees required for most Act 20 businesses. Some exceptions will apply based on regulations yet to be written by the Secretary of DDEC. It seems these regs will focus on call centers and telemedicine. We believe all service and tech businesses can operate with only one employee (the business owner).
  3. 30% of doctors at medical tourism and telemedicine facilities should be Puerto Rican residents.
  4. Annual filings and reports shall be be required.

Amendments to Act 22 include an annual donation of $5,000.00 per decree holder to a recognized Puerto Rican non profit organization.

Here is a loose translation of Puerto Rico’s Act 43, approved July 11, 2017, which modifies Puerto Rico’s Act 20 and 22. This is not meant as a legal translation and you should consult an expert before acting upon this summary.

We translated the full memo because I love the way it’s written. The current government is the blue party, which is the party that was in power in 2012. They couldn’t help but take a shot at the red party which was in power in 2015.

As you read this, you’ll see that the focus of Puerto Rico’s Act 20 is to bring business and employment to an island. You might also want to take a read through my article, How to benefit from Puerto Rico’s bankruptcy.

I’ll be happy to assist you to set up a business in Puerto Rico under Act 20 or qualify for Act 22 to eliminate capital gains tax on assets acquired after you become a resident and receive your decree. Please contact us at info@premieroffshore.com or call us at (619) 550-2743 with any questions.

Explanatory Memorandum on Changes to Puerto Rico’s Act 20 and Act 22

Beginning in the 1970s, the economic development of Puerto Rico has focused on the promotion of foreign industries through granting Federal and state tax incentives. Since that time, the Puerto Rican economy has fallen upon hard times, as federal incentives were removed, over which the local government of Puerto Rico had no control resulting in conflict with the strengthening and development of new local companies.

The deterioration of the Puerto Rican economy became more defined when the government incurred expenses that exceeded over receivable income, which in turn led to more taxes and high fees for local businesses, as well as the whole island, later lead to a reduction in local economic activity. With the exception of fiscal year 2012, since fiscal year 2007, there has been an economic contraction of fifteen percent (15%). Since then, the Gross National Product of the Commonwealth of Puerto Rico has been in negative numbers.

Puerto Rico looks to become more competitive  in achieving their economic development goals in a globalized and interconnected economy. According to the Global Competitiveness Report 2016-2017 World Economic Forum, competitiveness is defined as the set of institutions, policies and factors that determine the level of productivity of an economy, which in turn, marks the level of prosperity that a country can attain.

It is imperative to revert, as a matter of urgency, the negative of our economy and return to the path of prosperity. For this, we need to make a paradigmatic change in the way we conceive the function of our public institutions and our model of development economic. Precisely, the Plan for Puerto Rico that the People endorsed on November 2016, includes measures to achieve fiscal responsibility and economical development of the island. This administration has been active and, in less than 50 days, has passed more laws than on any previous occasion. At the beginning of a four-year term, more than a dozen laws that seek to promote development of our economy and to tackle the fiscal crisis. See Laws Number 1-11 of 2017.

In order to achieve the development and growth of our economy, during the administration of  ex-governor, Hon. Luis Fortuño, the Government of Puerto Rico identified the need to encourage the export of services. He approved Law No. 20-2012 (Act 20) to find ways to encourage the development of local companies, also for those that want to move to the Island to expand their capacity to export services and help insert Puerto Rico, in better conditions, into the global economy.

A study carried out by the company “Estudios Técnicos”, published in December 2015, revealed that by November of that year 360 decrees had been issued under Act No. 20-2012; That companies operating under the law created about 3,350 direct jobs, 2,160 indirect jobs and more than 1,500 achieved, for a total of 7,000. This shows that Act 20 has been essential in fostering the economic development of Puerto Rico.

In fact, this Law was endorsed by the Garcia Padilla Administration, through former secretary of Economic Development and Commerce, Alberto Bacó Bagué, who became its main promoter. He stated that Law No. 20-2012 has been an economic stimulus tool that has generated thousands of opportunities for well-paid jobs and has avoided a greater exodus of professional Puerto Ricans.

However, during the last four years, Act No. 20-2012 was amended by the past administration to establish restrictions which, instead of stimulating the service industry, discouraged growth. It is time to put aside “not my problem” politics and take into our hands the course of economic development started by the Fortuño Administration, which was depleted by the lack of interest of García Padilla Administration.

Certainly, Puerto Rico’s greatest asset is its human resource. We count with a high level of quality of professionals, technicians, advisers, consultants and service providers, who have the talent to offer from Puerto Rico their services to other jurisdictions with the greatest guarantee of success. It is a commitment of this Administration to help push our workers forward and all those that see Puerto Rico as an economic investment destination.

In order to promote the export of services, the public policy that Puerto Rico must be focused on developing the growth of the services sector in its economy. At the same time, these incentives should promote sustainable economic development and creation of employment in the island. We have a bicultural and bilingual population and a strategic relationship that serves as a bridge between Latin America and the continental United States.

To achieve the objectives described here, this Administration believes it necessary to promote amendments to the “Law to Encourage the Export of Services.” For this reason, it is included as part of the services eligible under Law No. 20-2012, medical tourism services and telemedicine facilities. This broadens the range of eligible services to allow foreign or local investment to have an incentive to develop in Puerto Rico an economic component predicated on the export of medical services. This, in turn, together with the medical incentives approved under Act No. 14-2017, will help our doctors to expand their services in this area, and decide to remain in Puerto Rico.

It is a principle of this administration, included in the Plan for Puerto Rico, that the role of government must be based on encouraging and facilitating economic development, developing the financial capital to attract service companies and large institutions to Puerto Rico, and to encourage local companies to export services outside the island.

This commitment contemplates the implementation of a development model based on the global principles of competitiveness and sustainability that allows the private sector to be a protagonist and leader of our economic development. This Government is committed to eliminate any obstacle so that Puerto Rico can compete favorably with other jurisdictions.

Amendments to Act 20: articles 3, 10, 12 and 13:

Section 1.- Amendment are made to subsection (k) Article 3 of Act 20-2012 as follows:

Article 3: Definitions;

(k) Eligible services include the following:
 (xvi) Hospital services and laboratories including medical tourism and telemedicine facilities;
 (xxi) Companies dedicated to international trading (known as trading companies) – Trading companies will mean any entity that produces no less than 80% of gross income from the following:
 (a) sales to any persons or entities that are outside of Puerto Rico, for use, consumption or disposition outside of Puerto Rico, of products which have been manufactured inside or outside of Puerto Rico and have been bought by the eligible business for resale;
 (b) from commissions derived from sales of goods for consumption and use outside of Puerto Rico; stipulating that none of the income derived from selling and reselling of products be used or consumed in Puerto Rico will be considered industrial development income. The property used for this income is not used for other activities not authorized under tax decree;and
 (c) Other eligible exportation services as described under this law

Section 2.- Eliminating subsection (a), amending subsection (b) and renumbering as (a) as well as renumbering subsections (c) to (f)  and (b) to (e) of Article 10 of Act 20-2012 as follows:

Article 10: Procedures-
 (a) Ordinary procedure:
 (i) Tax Decree applications. –  

Any person that has established or proposes to establish an eligible business in Puerto Rico can apply for all the benefits provided by law through a sworn application before the Exemption Office.

The secretary will establish through administrative orders or regulation the criteria to be used in the evaluation process of applications, including as part of the evaluation criteria benefits that the business will generate to Puerto Rico’s economic development.

Criteria includes but is not limited to:

(i) job creation;

(ii) investment of capital;

(iii) direct or indirect contributions to the economy.

The secretary may require in the decree, that if a business requires employees or independent contractors to operate, a certain number of those employees must be Puerto Rican residents or performed by local entities in the industry or business in Puerto Rico.

However, in case of telemedicine services, the Secretary will require that 30% of doctors contracted must be Puerto Rican residents. If there are no qualified professionals to provide such services, then doctors can be outsourced from any other jurisdiction. All businesses that have an approved Act 20 Tax Decree or has submitted applications pending approval, that had direct employees under contract, cannot dismiss employment contracts hereafter of the amendments established under this act which eliminates the employee requirement.

Section 3.- Amendments for subsection (f) of Article 12 of Act 20-2012 as follow:

Article 12. – Periodical reports to Governor and Legislative Assembly.-

(f) The Secretary, along with the support of the Industrial Development Office and Treasury Department will establish an electronic database that will provide information on the businesses with approved tax decrees and will allow access to pertinent government agencies to review information, with the precautions of safeguarding confidentiality of all information provided.

The information will be used for compliance purposes for all businesses that have been granted tax decree and will be used to develop an intelligence promotional program by Department of Economic Development to identify and help eligible businesses that are in precarious situations.

Section 4.- Amendment to subsection (d) in Article 14 of Act 20 are as follows:

Article 13. –  Reports required for exempt business and stockholders or shareholders:

(d) All eligible businesses which has been granted an Act 20 tax decree will file an annual reports at the exemption office, with copies to the Secretary, Treasury Department Secretary and Executive Director, no more than 30 days after income tax returns have been filed. This report will include an authenticated statement from either the President, administrator or authorized agent, that business has complied with all terms and conditions provided in tax decree. The report will include, but is not limited to the following areas: average employment, services provided as per decree and any other information that is required by regulations. This report will include filing fee established under regulation and payable to Secretary of Treasury. Information provided in this report will be used for statistical purposes and economic study. The Secretary of Economic Development Department will be auditing every two (2) years compliance of terms and conditions stipulated and granted under tax decree.

Act 45 Approved July 11, 2017

Amendments to Act 22: articles 3, 5, and 6:

Section 1.- Subsection (a) of Article 3 is eliminated and substituted by new subsection (a) in the Act 22 as follows:

Article 3. – Procedures.

a) In order to benefit from incentives provided by law, all individual resident investor that requests an Act 22 tax decree will be required to file a sworn application before the tax exemption office.

At the time of filing, the Director will collect the rights for the corresponding procedure that is provided by regulation. They will be paid in the manner and manner established by the Secretary. After the Exemption Office issues a favorable recommendation, the Secretary will issue a tax exemption decree, which will detail all the tax treatment provided in this Law. Decrees under this Act will be considered a contract between the concessionaire and the Government of Puerto Rico, and said contract will be considered law between the parties. The decree shall be effective during the period of effectiveness of the benefits granted in this Law, but never after December 31, 2035, unless prior to the expiration of said period the decree is revoked pursuant to section (b) of this Article. The decree shall not be transferable.

Section 2.- Subsection (a) of Article 5 of Law 22-2012, is amended, to read as follows:

“Article 5.- Special Contribution to Individual Resident Investor on Net Capital Gain.
(A) Assessments before becoming a resident of Puerto Rico.- The portion of net long-term capital gain generated by a Resident Individual Investor that is attributable to any valuation that had securities owned by them before becoming a resident of Puerto Rico, to be recognized after ten (10) years of becoming a resident of Puerto Rico, and before January 1, 2036, Shall be subject to the payment of a five percent (5%) contribution, in lieu of any other contributions imposed by the Code, and shall not be subject to the alternate basic tax provided by Subtitle A of the Code. If such appreciation is recognized at any other time, net long-term capital gain in relation to such securities will be subject to the payment of income taxes in accordance with the contributory treatment provided in the Code. The amount of this net long-term capital gain will be limited to the portion of the gain that relates to the appreciation of the securities while the Resident Investor Individual lived outside Puerto Rico. Provided that, for taxable years beginning after December 31, 2016, said capital gain shall be considered income from sources outside Puerto Rico for purposes of the income tax provided in the Code.

Section 3.- Article 6 of Law 22-2012, as amended, is hereby amended to read as follows:

“Article 6.- Reports Required to the Resident Investor Individual. – Any Resident Investor Individual who has a decree granted under this Law, will file an annual report in the Exemption Office, with a copy to the Secretary of the Treasury, thirty (30) days after filing the income tax return before the Department of the Treasury, including any extension. The Director of the Exemption Office may grant an extension of thirty (30) days in cases where it is requested in writing before the expiration of the period for filing the Report, provided that there is just cause for it and expressed in the request. In the case of the Report for the first year as a bona fide resident of Puerto Rico with a tax exemption decree under this Law, said report shall contain a list of data that reflect compliance with the conditions established in the decree for the immediately preceding taxable year At the date of filing, including, in the case of Resident Investing Individuals who were previously residents of other jurisdictions in the United States, evidence of filing Form 8898 with the United States Internal Revenue Service (IRS), or its equivalent in the case of Resident Investing Individuals who were previously residents of any foreign jurisdiction, giving notice of their intention to become a bona fide resident of Puerto Rico and, together with the reports to be filed annually, submitting evidence Of having made an annual contribution of at least five thousand dollars ($ 5,000.00) to non-profit entities operating in Puerto Rico and duly certified under Section 1101.01 (a) (2) of the Internal Revenue Code of Puerto Rico 2011, as amended, that is not controlled by the same person, as well as any other information that may be required by regulation, including the payment of annual fees. The rights will be paid in the form established by the Secretary. The information provided in this annual report will be used for statistical purposes and economic studies. Likewise, the Exemption Office must carry out a compliance audit every two (2) years with respect to the terms and conditions of the decree granted under this Law. “

Click here to read the law in Spanish (downloadable PDF on the government website)

Puerto Rico Bankruptcy
Christian Reeves

How to benefit from Puerto Rico’s bankruptcy

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The US territory of Puerto Rico is going through some tough times and will enter bankruptcy in the next few months. Puerto Rico is set to become the largest bankruptcy case in the history of the American public bond market. Here’s how you and your business can benefit from Puerto Rico’s bankruptcy.

Puerto Rico plans to file bankruptcy on $123 billion of debt owed by the government and its public corporations. Most is owed to bondholders and public employee pension systems. The bankruptcy is an attempt to deal with creditors while keeping public services going and will likely mean a 60% haircut for bondholders.

By comparison, Detroit’s bankruptcy was for $18 billion — one-ninth the size of Puerto Rico’s. Puerto Rico has a long way to go to reach the largest bankruptcy in history. Greece owed $220 billion in bailout cash when it defaulted.

Bottom line: Puerto Rico is in financial crisis… there’s blood in the streets… now is the time to make money!

Now is the time to setup a business in Puerto Rico.

Because of these financial woes, Puerto Rico is offering a number of tax holidays to new businesses. If you move a service business to Puerto Rico, and hire 5 employees on the island, you’ll cut your business tax rate to 4% on Puerto Rican sourced income.  

EDITORS NOTE: On July 11, 2017, the government of Puerto Rico did away with the requirement to hire 5 employees to qualify for Act 20. You can now set up an Act 20 company with only 1 employee (you, the business owner). For more information, see: Puerto Rico Eliminates 5 Employee Requirement

Just about any business that can provide a service from Puerto Rico to companies and persons outside of Puerto Rico will qualify for this tax deal. This includes banks, brokerages, investment advisors, internet marketers, call centers, technical support, and most online business.

If your business is portable, and requires at least 5 full time employees, you should consider relocating to Puerto Rico. For more see: Puerto Rico is the Top Offshore Business Jurisdiction for Americans.

EDITORS NOTE: On July 11, 2017, the government of Puerto Rico did away with the requirement to hire 5 employees to qualify for Act 20. You can now set up an Act 20 company with only 1 employee (you, the business owner). For more information, see: Puerto Rico Eliminates 5 Employee Requirement

In addition to online and portable service businesses, the following licenses qualify a 4% tax holiday guaranteed for 20 years:

And here’s the killer: Individuals who spend 183 days a year or more in Puerto Rico, and qualify as residents under Act 22, have a zero percent rate on passive income. Dividends from your Act 20 company are tax free, as are capital gains on assets acquired after moving to Puerto Rico. For more, see: Who is a Resident of Puerto Rico for US Tax Purposes.

Move your business to Puerto Rico and get tax deferral at 4%. Move you and your business to Puerto Rico and get tax free!

Puerto Rico is offering some amazing tax deals to businesses and high net worth individuals. The purpose of these tax deals is to bring employment to the island. The reason these tax deals exist is that Puerto Rico desperately needs jobs.

That is to say, Puerto Rico is making you an offer you can’t refuse because they’re broke… because Puerto Rico is in bankruptcy… because there’s blood in the streets.

And these offers from Puerto Rico come with a number of guarantees and protections. Yes, you’re investing in a distressed territory, but you have the protection of the US government and the guarantee of the Puerto Rican government.

As a territory, Puerto Rico is a hybrid. The island is exempted from US Federal tax law and free to create it’s own tax code. At the same time, most other Federal laws apply, such as employment, FDIC, etc.

Only Puerto Rico can offer these tax deals to US citizens because only Puerto Rico is exempted from the US tax code. Of the territories, only Puerto Rico has built a business friendly tax code.

Banking in Puerto Rico

Federal tax law applies to all US owned business abroad and all American citizens and green card holders living in foreign countries. Only American’s living in Puerto Rico are exempted from US Federal tax. For a comparison of Federal income tax of American’s abroad and Puerto Rico’s tax deal, see: Panama vs. Puerto Rico.

Yes, Puerto Rico is in bankruptcy, but their banks are protected by US law. Puerto Rico won’t go the way of Cyprus because all of their local banks are FDIC insured. There’s no risk of the government seizing the assets of depositors.

  • Local banks that accept deposits from Puerto Rican residents are required to have FDIC. Offshore banks licensed under Act 273 generally don’t apply for FDIC coverage.

And the state of banks in Puerto Rico is irrelevant to you. There’s no requirement to hold your income or retained earnings in Puerto Rico. The only requirement for retained earnings is that they remain inside a Puerto Rican corporation.  

So, form a Puerto Rican company and open a bank account in the United States. You can hold your cash at your favorite US bank with zero risk from Puerto Rico.

That is to say, a Puerto Rican company can open an account anywhere in the US. You can take your company documents into any Wells Fargo, Bank of America, or Citibank and get an account opened in a matter of minutes. While it’s impossible to open a US account for an offshore corporation, a Puerto Rican company is treated just like a structure from Delaware or Nevada by US banks.

20 Year Tax Holiday Guarantee

More importantly for a business seeking stability in Puerto Rico, your 4% tax holiday is guaranteed for 20 years. No matter how the political winds blow, your tax deal can’t be reviewed or revoked by the government of Puerto Rico. Even if the law is amended or repealed, you’re golden.

And only the government is locked in. So long as you have 5 employees in Puerto Rico and comply with the rules, you’re guaranteed a 4% tax rate on your Puerto Rico source income. If you want to walk away, you can shut down at any time without penalty.

As to a change in the law, once your company is set up and your tax deal approved, a change could be a great thing. I often tell clients that they should hope the law is repealed. When that door closes, the acquisition value of their Puerto Rican business will increase significantly.

Conclusion

Puerto Rico is offering you a tax deal you can’t refuse… and a deal that can’t be matched by any foreign country. For more information, please contact me at info@premieroffshore.com or call us at (619) 483-1708  for a confidential consultation on moving you and/or your business to Puerto Rico.

EB-5 visa scam
Christian Reeves

Another EB-5 Visa Scam

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The EB-5 visa program is fraught with fraud and under fire from Democrats in the U.S. Congress. I expect it to survive, but problems will continue to plague the program. Here’s why and what you can do to protect yourself.

First, a brief review. The U.S. EB-5 visa program promises high net-worth foreigners a green card in exchange for an investment of $500,000 to $1 million depending on where the investment or business is located. After 5 years of residency, you’re guaranteed citizenship and a passport.

Most of the money for EB-5 visas has come from Chinese investors. In fact, 84% of U.S. visas issued under the EB-5 program are to Chinese nationals.

There are two ways to use the EB-5 visa program. You can start a business or invest in someone else’s project. The only requirement is that the businesses must hire 10 employees. The purpose of the EB-5 program is job creation.

It’s that second option, investing in another person’s project or business, where the risk of fraud comes in. I’ve been warning about this for years, but investors continue to be scammed and robbed by unscrupulous promoters.

The most recent EB-5 visa scam hit us at Premier very close to home… literally.

Here’s the story:

As reported in the Los Angeles Times, the SEC alleges that Orange County lawyer Emilio Francisco misspent at least $9.5 million from 131 investors who wanted to participate in the federal EB-5 visa program. Apparently, he diverted cash from Chinese investors to support his business and buy a yacht.

This likely means that the investors have lost their money, their green cards, and their residency status. Because the money wasn’t used to build a business, it’s safe to assume Mr. Francisco can’t afford to hire 10 employees for each investor and keep them employed for 5 years until his clients receive their passports.

Mr. Francisco promised to build assisted living facilities and restaurants under the name Cafe Primo throughout Southern California. He built a few Primo’s, but no assisted living units.

And here’s why it hits close to home: Our office is in a building in San Diego with one of the few Cafe Primo’s that was actually built out and operational. Primo’s was where we’d meet for lunch to plan our publishing schedule, gather for a beer or three after work, and watch NFL games.

I was basically sitting above Cafe Primo when I wrote my most recent article on EB-5 visa fraud. The coincidence is amazing…

Coincidence aside, the EB-5 visa scam is relatively common. The U.S. government has indicted about 10 groups of promoters in the last 2 years. Based on the various court filings and news reports, hundreds of millions of dollars has been lost to fraudsters.

There’s only one way to avoid the EB-5 visa scam – start your own business in the United States. Don’t rely on a promoter or bet your future on the success of a large real estate development. Set up a small business with 10 employees and do it yourself.

We at Premier offer a very unique version of the EB-5 visa. One that eliminates U.S. tax on your business and on your worldwide income.

  • Once you have a green card, the U.S. will tax your worldwide income. The only way to avoid this is with pre-immigration tax planning and the option described below.
  • Most EB-5 visa applicants pay about 35% in Federal taxes and 7 to 12% in state taxes on their worldwide income.

Here’s how to qualify for the EB-5 visa and cut your tax rate down to 4%.

U.S. Federal taxes apply to U.S. citizens no matter where they live. Americans in every state pay Federal taxes. American’s living abroad pay Federal taxes.

The ONLY exception to U.S. Federal income tax is found in the U.S. territories. Federal tax law does not apply in the U.S. territories. Each territory has its own tax code which superseeds the Federal code.

And the U.S. territory of Puerto Rico has a tax deal you can’t refuse: start a service business with 5 employees on the island and pay only 4% corporate tax on your profits. If you live on the island, you’ll pay zero Federal income tax on your capital gains and dividends from your Puerto Rico company.

As a territory, the island’s tax laws trump Federal tax law. But, U.S. immigration law applies, thus the EB-5 visa program is available (and thriving). I should also note that anyone born in Puerto Rico is a U.S. citizen, just as they are when born in a state.

When we combine Puerto Rico’s tax laws with the EB-5 visa program, we get a service business with at least 10 employees operated from Puerto Rico. A business that’s providing a service from Puerto Rico to persons and companies outside of Puerto Rico.

  • Puerto Rico’s tax law required 5 employees, but the EB-5 program required 10.

Using Puerto Rico’s tax laws and the EB-5 visa program together, you have a business paying only 4% in tax and a green card. You can immigrate to the United States, stay as a resident for 5 years, and be guaranteed citizenship and a passport… all without paying U.S. taxes.

For the entrepreneur, the EB-5 visa program is an amazing opportunity. And Puerto Rico is the ONLY place this tax efficient version can be had.

I hope you’ve found this article. For more on setting up an EB-5 visa business in Puerto Rico, see: Coming to America Tax Free with the EB-5 Visa and Puerto Rico

For assistance with Puerto Rico, you can reach me at info@premieroffshore.com or call us at (619) 483-1708. 

software development
Christian Reeves

Research and Development and Intangible Property Tax Breaks in Puerto Rico

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Puerto Rico has the best tax deals available to Americans… period. No offshore jurisdiction can compete with the US territory of Puerto Rico when it comes to cutting your taxes.

This post will focus on Puerto Rico’s research and development and intangible property tax breaks. Act 73 is for those who develop licensed or patented software that may be reproduced on a commercial scale and those who license intangible property.

I’ve also written on the more traditional business tax breaks available under Act 20. Basically, if you set up a business in Puerto Rico with at least 5 employees, your corporate tax rate on Puerto Rico sourced income will be 4%. For more, see: Puerto Rico is the Top Offshore Business Jurisdiction for Americans in 2016.

I focus on the the software development and intangible property or intellectual property development components of Act 73. These are 2 of the 12 industries covered by the Act. For example, tax breaks are also available to large scale manufacturing, scientific experiments and laboratories, recycling, hydroponics, etc.

Software developed under Puerto Rico’s Act 73 must be for commercial distribution. You may license or sell it, but it must be widely available. Software developed under the Act should not be for your company’s internal use or custom work done for a particular client.

Act 73 applies to any and all forms of intangible property. Intangible property is defined as something which a person or corporation can have ownership of and can transfer ownership to another person or corporation, but which has no physical substance. For example brand identity, knowledge, and intellectual property are forms of intangible property . Copyrights, trademarks, and patents are also forms of intangible property.

It doesn’t matter how the intangible property came to be owned by the Puerto Rico company. You may have developed it on the island within the corporation, or you can buy it from a related or unrelated company.

If you do develop the intangible property in Puerto Rico, you may receive additional tax incentives. Also, developing the IP in Puerto Rico rather than the United States will avoid a taxable event and transfer pricing issue when you sell / transfer the property to the Puerto Rico company.

Tax Exemptions Under Puerto Rico’s Act 73

Once you have your IP offshore, or begin selling your software, here are the applicable tax benefits. Remember that these replace the US federal income tax rates of 35% + your state (0 to 12%). In many cases, you can exchange a 40% tax rate for 4% or less.

The base tax rate for an Act 73 business in Puerto Rico is 4%. This rate is guaranteed for 15 years from the date your company is approved.

You might be thinking, wow, a 4% corporate tax rate is just too high. “Pioneer” activities in Puerto Rico are taxed at only 1%. Pioneer businesses are typically those who create or develop intangible property on the island.

If you’re still thinking this is too high, I say come on, give me a break… and it can still go lower. If you setup your business in an approved low income area, your corporate rate will be between 0.5% and 0%. Combine this with the tax credits below and you could have a net positive tax rate.

If you’re not a pioneer, you can get to a 3% tax rate. Any business where at least 50% of the shareholders are residents of Puerto Rico, the rate is lowered from 4% to 3%. The same goes for any small to medium sized software or IP development business operated from the island (where average gross income is $10 million or less during the previous three years).

Still not convinced? You will also find a 100% tax exemption on dividend distributions and a 2% or 12% withholding tax on royalty payments to foreign entities for intangible property used in the exempt business. The lower rate includes a 12% matching tax credit for royalties paid to foreign entities, so your rate may vary depending in your situation.

When you sell the business, you’ll pay a 4% fixed income tax rate on the gain. This tax on capital gains trumps any other Puerto Rico income tax code section. The 4% rate is guaranteed under Act 73 for 15 years, so you should have an exit strategy in place prior to this term expiring.

Other tax breaks include:

  • 90% tax exemption from personal property taxes.
  • 90% tax exemption from real property taxes.
  • 90% tax exemption on municipal license taxes.
  • 100% tax exemption on municipal construction taxes.
  • 100% tax exemption on excise taxes.

Remember that this article is focused on IP and software development businesses. I do not discuss accelerated depreciation, sales and use, and other tax benefits.

Puerto Rico’s Act 73 Tax Credits

The Act provides various tax credits, including:

  • 25% tax credit on purchases of products manufactured in Puerto Rico;
  • 35% tax credit on purchases of products manufactured in Puerto Rico made from recycled materials;
  • Tax credit for job creation during the first year of operations that ranges from $1,000 per job created in an industrial area of intermediate development (as determined by the Office of Industrial Tax Exemption) to $2,500 for jobs created in an industrial area of low development. In the case of businesses established in the municipalities of Vieques and Culebra, this tax credit is $5,000 per job;
  • 50% tax credit on eligible research and development activity costs; and
  • 12% tax credit for royalties paid to foreign entities with respect to intangible property used in the exempt business.

When comparing Act 73 to Act 20, note that there is not a minimum number of employees attached to Act 73. Act 20 requires at least 5 employees. Both Acts 73 and 20 can be combined with Act 22 for a personal tax exemption.

Act 22 gives a Puerto Rico resident a 0% tax rate on capital gains and dividends. If you’re living in the United States, you will pay US tax on distributions from your Puerto Rico corporation. You are not required to take any distributions, but when you do, they will be taxed in the United States.

I hope you’ve found this article on Puerto Rico’s Act 73 research and development and intangible property tax breaks helpful. Click here for a list of my other articles on Puerto Rico’s tax deal.

For more information, and a confidential consultation on moving your business to Puerto Rico, you can reach me at info@premieroffshore.com or (619) 483-1708.  

asset protection puerto rico
Christian Reeves

Asset Protection for a Puerto Rico Act 20 Business

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Once you have your Act 20 business in Puerto Rico up and running, you need to think about protecting its retained earnings or distributed profits. Asset protection for a Puerto Act 20 business  becomes urgent because of the amount of capital held in the company tax deferred.

There are two levels of asset protection for Puerto Rico Act 20 companies. The first is retained earnings within the Puerto Rico LLC or corporation and the second is asset protection of dividends taken out under Act 22.

When you operate an Act 20 business based in Puerto Rico from your home in the United States, you get tax deferral at 4%. That is to say, if the business owner is living in the US, you can hold  Puerto Rico sourced profits in the corporation tax deferred.

You will pay 4% tax on the net profits earned from work done in Puerto Rico. This cash must stay within the Puerto Rico corporate structure to continue to be tax deferred year after year. When you distribute those profits as a dividends to the US based owner, you will pay US tax on the qualified dividend at 20% to 23.5% + your state.

If you’re operating a business in Puerto Rico under Act 20, and living in Puerto Rico while qualifying for Act 22, then you can withdraw the corporate profits from the corporation each year. This is because residents of Puerto Rico pay zero tax on dividends from an Act 20 Puerto Rican business.

When it comes to protecting the assets of your company, remember that Puerto Rico is a US jurisdiction. Any US judgement will be enforceable in Puerto Rico just as it is in any other State. As a result, you must take steps to protect your cash without changing its status as tax deferred “offshore” profits.

The best asset protection for Puerto Rico Act 20 businesses is to move your cash out of Puerto Rico and into a safe and secure bank. We have relationships with a number of banks in Switzerland, Germany and Austria that will open accounts for your Act 20 company and allow you to hold retained earnings offshore and out of reach of civil creditors.

The next level of asset protection for a Puerto Rico Act 20 company is incorporating offshore subsidiaries. This is done to put a layer of insulation between the Puerto Rico company and the assets held offshore. We can form a corporation in Panama, Cook Islands, Cayman Islands, or any other solid asset protection jurisdiction to manage your corporate capital.

In order to maintain the tax benefits of tax deferral, these offshore companies must be wholly owned subsidiaries of the Puerto Rico Act 20 company. For example, we form a Panama Corporation owned by the Puerto Rico company. This gets us access to all of the banks and asset protection benefits of Panama and allows us to maintain our tax deferral status.

For this reason, we can’t use other more advanced techniques. It would not be possible for the owner of the Act 20 business to create a Cook Island Trust and fund the trust with retained earnings. Once those profits moved from the Puerto Rico company to the Cook Island Trust, they would become taxable in the United States as a distribution.

This limitation applies only to retained earnings. Residents of Puerto Rico operating under Act 22 may use any means necessary to protect their personal after tax assets from future civil creditors. Remember that, unlike a business based offshore, once you have paid your 4% corporate tax and withdrawn the dividends tax free, this is “after tax” money. You can invest and do with it whatever you like, just as you can with money taken from a US business after paying 40% in taxes.

If you’re new to the Puerto Rico tax holiday, and would like to compare it to traditional offshore tax plans, see Puerto Rico Tax Deal vs Foreign Earned Income Exclusion and Move Your Internet Business to Cayman Islands Tax Free

One of the best asset protection systems is to have capital paid directly to a Cook Island Trust. This will maximize the asset protection afforded your dividend distribution and keep it out of the reach of any civil creditor.

We can make arrangements for the dividends to pass directly to the Trust and bypassing any risk of a civil creditor reaching them. We can also setup a subsidiary of the Puerto Rico company in the Cook Islands to facilitate this transfer and the related cash management.

Another offshore asset protection strategy for Puerto Rico Act 20 business will allow you to carry forward the tax benefits of Puerto Rico once you move away from the island and no longer qualify for Act 22.

Let’s say you’ve been operating your Act 20 business for 5 years and have been living in Puerto Rico all of this time. You’ve taken out $10 million in tax free dividends, with the only tax paid being 4% to the government of Puerto Rico.

You’ve had enough of island life, your business has run its course, and are want to return to the United States. Once you make the move, all capital gains, dividends and passive income earned on that $10 million will become taxable by the IRS and your State.

One option is to invest this money into an offshore single pay premium life insurance policy. Money held in the policy will be protected from future civil creditors as well as the US taxing authorities.

This is because capital gains earned within the US compliant offshore life insurance policy are tax deferred. You only pay US tax on the gains if you close out the policy or otherwise remove the cash. Of course, you are free to borrow against the life policy with no tax cost.

If you hold the policy until your death, then the total value will transfer to your heirs tax free (or with a step-up in basis). If you put in $10 million, and it’s grown to $20 million, you’re heirs get $20 million tax free… and the only tax you ever paid on any of that cash is the 4% to Puerto Rico. Quite an amazing tax play.

I hope you’ve found this article on asset protection for a Puerto Rico Act 20 business helpful. Please contact me at info@premieroffshore.com or call (619) 483-1708 for more information on setting up your business in Puerto Rico or on protecting your retained earnings within that structure.

Puerto Rico Act 20
Christian Reeves

What is Puerto Rico Sourced Income for an Act 20 Business

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Here’s how to maximize the value of your Puerto Rico Act 20 business using the income sourcing rules. Maximizing Puerto Rico sourced income in an Act 20 business, and thus minimizing US sourced income, is the key to unlocking the 4% tax rate offered in Puerto Rico.

The rule is simple: only Puerto Rico sourced income can be attributed to the Act 20 business and qualifies for the 4% tax rate. Likewise, income sourced to the United States is taxable in the United States at standard rates, even if you run it through a Puerto Rico Act 20 company.

If you’re new to Puerto Rico Act 20, the basics are this: set up a business on the island that employees at least 5 people and pay only 4% in tax on your corporate profits. The balance can be held tax deferred if you live in the US or taken out as a tax free dividend if you live in Puerto Rico.

EDITORS NOTE: On July 11, 2017, the government of Puerto Rico did away with the requirement to hire 5 employees to qualify for Act 20. You can now set up an Act 20 company with only 1 employee (you, the business owner). For more information, see: Puerto Rico Eliminates 5 Employee Requirement

To compare Puerto Rico to typical offshore tax plans, see: Puerto Rico Tax Deal vs Foreign Earned Income Exclusion

For such a simple statement, the Puerto Rico income sourcing rule sure causes a lot of questions. Especially for those who want to live in the United States and operate a business based in Puerto Rico. The same goes for US companies that open divisions in Puerto Rico to get that 4% corporate tax rate on a portion of their profits.

If you move you and your business to Puerto Rico, and break all ties with the United States, all business income will be Puerto Rico sourced income. This is because all of the work to generate sales made after the move will have occurred in Puerto Rico.

Another reason all income in an Act 20 business will be Puerto Rico sourced income is the type of activities that qualify for Act 20. A qualifying business will offer services from Puerto Rico to businesses and persons outside of Puerto Rico. Only service based income will qualify for Act 20.

Service based income is profit from work done in Puerto Rico. Compensation for labor is always taxed where the work is performed. It doesn’t matter where the customer is located… only where you and your employees are when doing the work.

Note that wholesale distribution of products can qualify for Act 20. This is because you are performing the service of sourcing, manufacturing, and/or importing goods that will be sold outside of Puerto Rico.

This only applies to wholesale operations based in Puerto Rico selling to a distributor in the United States. Retail sales, such as selling online to buyers in the US, is not Act 20 income and will be fully taxed in both the United States and in Puerto Rico.

Of course, there are many types of income that could be earned in Puerto Rico. But, only service based income will qualify for Act 20 tax benefits.

Here is a list of the various types of income and where they are sourced.

Item of Income Where Income is Sourced
Salaries, wages, and other compensation for labor or personal services Where labor or services are performed. This is the heart of Puerto Rico’s Act 20 for businesses.
Pensions Contributions: Where services were performed that earned the pension
Investment earnings: Where pension trust is located
Interest Puerto Rico if you are a legal resident of the island under Act 22
Dividends Where corporation or LLC is incorporated. Dividends from an Act 20 corporation will be tax free in Puerto Rico to a resident of the territory who qualifies under Act 22.
Dividends from US states are taxable where the company is formed.
Rents Location of property
Royalties on patents, copyrights, trademarks, etc.: Where property is used. If used by the Puerto Rico company, then taxed in Puerto Rico. Special benefits can apply to intellectual property created in in Puerto Rico.
Sale of business inventory—purchased Where sold. If you sell a physical good (inventory) in to the United States, you have US sourced income. For this reason, all Puerto Rico Act 20 businesses must offer a SERVICE and not sell inventory.
Sale of business inventory—produced Allocation if produced and sold in different locations
Sale of real estate Taxed where the property is located
Sale of personal property Seller’s tax home. Personal property includes such things as cars, trucks, money, stocks, bonds, furniture, clothing, bank accounts, money market funds, certificates of deposit, jewels, art, antiques, pensions, insurance, etc.

Above, I gave you the example of the perfect client – someone who moves herself and her business to Puerto Rico, breaking all ties with the United States. Such a person will maximize Puerto Rico sourced income and thus minimize her total taxes.

For more on this topic, see: How to Maximize the Tax Benefits of Puerto Rico

If you want to live in the United States and operate through a Puerto Rico company, determining Puerto Rico sourced income becomes much more difficult and contentious.

The rule is simple enough: Any value added in Puerto Rico is Puerto Rico sourced income and any value added in the United States is US sourced income. So, if you’re selling an online service for $50, and $25 of the value of that service comes from your 5 employees in Puerto Rico, then half your net profits can be attributed to Puerto Rico.

When you’re attributing income between the US with its 35% Federal + state taxes and Puerto Rico at 4%, you will want to maximize the perceived value of the work done in Puerto Rico.

For small businesses, you can look at the amount of hours spent in Puerto Rico vs the US. You can also estimate the value of work done in Puerto Rico by how much you would be willing to pay an independent and unrelated firm to provide those services to your US company.

When income sourcing between Puerto Rico and the US is a major issue ($1 million or more), then you need to hire a professional. Many large accounting firms have groups specialized in producing transfer pricing studies between the territory and the US. They will create a pricing model that will stand up to IRS scrutiny and remove any risk should you be audited.

The cost for a transfer pricing study will vary widely the the firm selected and the type of business you are operating.  I’ve seen quotes of $6,000 to $65,000 by big name firms in California and New York, as smaller providers in Puerto Rico.

I hope this information on what is Puerto Rico sourced income for an Act 20 business has been helpful. For more information, please contact me at info@premieroffshore.com or call (619) 483-1708. I will be happy to help you structure your business in Puerto Rico.

resident of puerto rico
Christian Reeves

Who is a Resident of Puerto Rico for US Tax Purposes

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If you are considering moving you and a business to Puerto Rico for the tax benefits, be aware that the definition of “resident of Puerto Rico” is a complex one.  The US IRS has created special forms and definitions as to who is and who is not a resident of Puerto Rico for US tax purposes.

If you’re reading this and saying to yourself, “what tax benefits is he talking about?” Let me begin by outlining them here.

First, you can move a business, or part of a business, from the United States to the US territory of Puerto Rico. So long as that business employees at least 5 residents of Puerto Rico, it will pay only 4% in corporate income tax. For more on how to get this 4% rate on Puerto Rico sourced income guaranteed for 20 years, see: Blood in the Streets Offshore Tax Planning.

Second, you can move yourself out of the United States and into Puerto Rico. By doing this you will be exempt from US and Puerto Rico tax on capital gains. You will also pay zero tax on dividends from your Puerto Rico corporation. This zero percent tax rate on capital gains applies to assets acquired after you move to Puerto Rico. For more, please read my article titled How to Maximize the Tax Benefits of Puerto Rico.

Puerto Rico is the only country or territory that can cut your capital gains and dividends tax. When you move offshore, you still pay US tax on capital gains and dividends. The only tax savings for expat Americans is the Foreign Tax Credit. For more on this see: Puerto Rico Tax Deal vs Foreign Earned Income Exclusion.

Third, foreign persons can immigrate to the United States by starting businesses in Puerto Rico and get these same tax benefits. Both the EB-5 business investor visa and the E-2 treaty investor visa are available from Puerto Rico. For more, see: Coming to America Tax Free with the EB-5 Visa and Puerto Rico.

Now that you’re caught up, let’s talk about who is a resident of Puerto Rico for US tax purposes.

IRS Publications 1321 and 570 define a resident of Puerto Rico as someone who:

  1. Meets the presence test by spending at least 183 days a year in Puerto Rico or qualifying under one of the other tests,
  2. Does not have a tax home outside of Puerto Rico, and
  3. Does not have a closer connection to the United States or to a foreign country than to Puerto Rico.

The first of these criteria for being considered a resident of Puerto Rico for US tax purposes is known as the physical presence test. The easiest way to satisfy this test by spending at least 183 days a calendar year on the island.

If you can’t hit 183 days (for example, you are starting your residency in November), then you need to qualify for Puerto Rico residency using the 3 year test. You are a tax resident of Puerto Rico if you spend a minimum of 60 days in Puerto Rico during each tax year and at least 549 days over 3 consecutive years.

Once you establish residency in Puerto Rico, and break ties with the United States, there are other tests you can use to ensure you are classified as a tax resident of Puerto Rico in future years.  

You can qualify as a resident of Puerto Rico if any of the following is true:

  1. You were present in the United States for no more than 90 days during the tax year.
  2. You had earned income in the United States of less than $3,000 and spent more days in Puerto Rico than you did in the United States during the tax year.
    1. Earned income is pay for personal services performed such as wages, salaries, or professional Fees. This amount does not include capital gains.
  3. You had no significant connection to the United States during the tax year.

Important Note: If you are moving to Puerto Rico from the United States, you must first qualify under the 183 day test or the 3 year test described above. Then, once residency is established, you can use these less restrictive tests.

Foreign Persons: If you are not a US resident or citizen, and are applying for an E-2 or EB-5 visa from Puerto Rico, you can use any of these tests to prove you are a tax resident of Puerto Rico. For example, so long as you are in the US less than 90 days of the year, it doesn’t matter how much time you spend in Puerto Rico.

The key to the Puerto Rico tax deal is to understand who is a tax resident of Puerto Rico. To determine who is a resident of Puerto Rico, we must consider what it means to be “present” in Puerto Rico and the United States.

You are considered to be present in the United States on any day that you are physically
in the US at any time during the day. So, if you make a quick trip to Miami to buy a new laptop, that is a day in the United States.

Connecting through a United States airport to a foreign country is usually not a day in the US. If you don’t leave the airport, you are not in the United States. If your flight is delayed, and you are in the airport for more than 24 hours, it will be counted as a day in America.

And, beginning this year (with tax year 2016), some days spent in a foreign country will be considered days in Puerto Rico for tax purposes. Under this new rule, you can count up to 30 days abroad as days in Puerto Rico. For more information, see IRS publication 570, page 4. Note that this 30 day bonus does not count for the 60 day rule when you are using the 3 year calculation described above.

You must also have more connections to Puerto Rico than the United States to qualify as a tax resident of Puerto Rico.You will be considered to have a closer connection to Puerto Rico than the United States if you have developed more contacts with the Puerto Rico and broken your ties to America.

The facts and circumstances around your move to Puerto Rico will be reviewed carefully if you’re spending a lot of time in the US, your wife and children are living in the US, etc. If you have significant tax free income in Puerto Rico, you should consider your US connections carefully. I expect audits on this issue to increase significantly in the coming years.

Ties to the US vs Puerto Rico for residency purposes include, but are not limited to:

  • Where is your permanent residence – note that Puerto Rico’s Act 22 requires you to buy a home on the island and that this must become your permanent home.
  • Where your spouse and children are living.
    • Note that US states will also try to tax your Puerto Rico income if your spouse is living outside of Puerto Rico. For example, if your wife is living in California, that state will consider half of your income CA source income to him or her under its community property rules.
  • The location of personal belongings, such as automobiles, furniture, clothing, and jewelry owned by you and your family.
  • The social, political, cultural, professional, or religious organizations that you belong. You should be cutting relationships with the US and joining clubs in Puerto Rico.
  • Where most of your banking activities take place. I suggest banking for a Puerto Rico company should be in Puerto Rico or offshore. We can open accounts in Switzerland elsewhere for Puerto Rico companies.
  • Where you have a driver’s license and where you vote. Both of these should be in Puerto Rico.
  • The location of charitable organizations to which you contribute.
  • Where you list as your residency in official government and legal documents. For example, the address you list on contracts, loan applications, and government documents such as Form W­8BEN or Form W­9, Request for Taxpayer Identification Number and Certification.

In an audit, your connections to Puerto Rico will be compared to your connections with the United States and foreign countries. They will also review your bank statements, airline history, and credit / debit cards to determine how many days you spent in the United States vs Puerto Rico.

When structured carefully, incorporating and operating from Puerto Rico will cut your US tax rate from 40% to 4% overnight and eliminate tax on capital gains for assets purchased after you move to the island. The key to this tax plan is proving you are a resident of Puerto Rico. Remember that the burden of proof is on you.

EDITORS NOTE: On July 11, 2017, the government of Puerto Rico did away with the requirement to hire 5 employees to qualify for Act 20. You can now set up an Act 20 company with only 1 employee (you, the business owner). For more information, see: Puerto Rico Eliminates 5 Employee Requirement

I hope you have found this article on who is a resident of Puerto Rico for US tax purposes to be helpful. Please contact me at info@premieroffshore.com or call (619) 483-1708 for more information on how to qualify for the tax benefits offered by Puerto Rico.

eb-5 visa
Christian Reeves

Coming to America Tax Free with the EB-5 Visa and Puerto Rico

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If you are thinking about coming to America, get ready for high taxes on your worldwide income. In this article, I will explain how to become a US citizen using the EB-5 Visa and Puerto Rico to pay near zero US taxes.

The US taxes its citizens, as well as green card holders and residents, on 100% of the money they make from all sources around the world. If you are living in the United States, America wants her share… and that share is often over 40% of your total earnings.

If you are operating a successful business from Hong Kong, and you move to the US, all profits of that Hong Kong business become taxable. If you move to America and then sell your home in Singapore, you will pay US tax on the capital gains realized.

There is one, and only one, way to get US citizenship without paying these taxes. That is to come to America tax free with the EB-5 Visa from Puerto Rico.

Because Puerto Rico is a US territory, US Federal immigration laws apply but US tax laws do not. The tax laws of Puerto Rico supersede the US tax rules for residents of the island. Because of this hybrid legal system, you can immigrate to the United States through Puerto Rico using the EB-5 visa and qualify to live tax free under Puerto Rico’s tax laws.

  • Resident: A “resident” of Puerto Rico is someone who spends at least 183 days a year on the island. Travel between Puerto Rico and the US is a domestic flight with no immigration checkpoint.  As an EB-5 visa holder, you may spend the rest of your time (180 days a year) in any part of the US you choose.

Once the EB-5 visa process is complete, you will be a US citizen with all of the rights and privileges of someone born in the US and who pays 40%+ in taxes. You will have a US passport and the right to live and work anywhere in the country.

The same is true of children born in Puerto Rico. Anyone born in Puerto Rico is a US citizen at birth, just as they are if born in a State. The only difference between Puerto Rico and the US in this case are its tax laws.

Here is a description of the EB-5 Investor Visa, a summary Puerto Rico’s tax laws, and how to maximize the benefits of both to become a US citizen tax free.

What is the EB-5 Investor Visa

The EB-5 investor visa is a path to US citizenship. Unlike many other US immigration programs, the EB-5 visa has no waiting lists, quotas, or lottery. The terms are simple – make the investment, wait five years, and become a US citizen by going through the naturalization process. If you follow the steps, citizenship and a US passport are guaranteed.

The investment required for the EB-5 investor visa is far higher than any other program. You must invest in a business that creates at least 10 new jobs and maintains those jobs for about 6 years (the total time to complete your citizenship process).

The amount of money you are required to invest will depend on where the business is located. Most cities in the US require an investment of $1 million. If you set up the business in a distressed region of the country, the investment is reduced to $500,000.

Basically, all of Puerto Rico is designated as a distressed region for the EB-5 investor visa. Any business created on the island will qualify for the discounted investment amount of $500,000.

Of course, you will need to keep the business operating and profitable for at least 6 years with 10 employees. If you can do that with $500,000 in capital, great. If it requires more, then you will need to invest more.

What is Puerto Rico Act 20 and 22

When the EB-5 investor visa is combined with the tax benefits of Puerto Rico, you may be able to immigrate to the United States, obtain a green card, and finally citizenship with a US passport, all without paying a dollar in tax.

In order to accomplish this feat, we combine the EB-5 Investor Visa with Act 20 and Act 22 in Puerto Rico. I will briefly summarize them here.

Act 20 is the business tax holiday that gets you a 4% corporate tax rate on any profits earned by your Puerto Rico company. The requirements are simple:

  1. The minimum number of employees required for Act 20 business is 5. However, to qualify for EB-5, you need 10. So, we setup an Act 20 company with 10 employees.
  2. The company must be providing a service from Puerto Rico to persons or companies outside of Puerto Rico. Internet marketing, call centers, import / export, sales teams, and any online business are good candidates for Act 20. Retail businesses, franchises and restaurants do not qualify for Act 20. They do qualify for the EB-5 visa, but not for the tax deal.

For more detailed information on Puerto Rico’s Act 20, see: How to Maximize the Benefits of Puerto Rico Act 20

Act 22 is the personal tax holiday. A legal resident of Puerto Rico, who purchases a home, spends at least 183 days a year on the island, and signs up for Act 22, will pay zero capital gains tax and zero tax on dividends from his or her Puerto Rico company.

When you combine Act 20 with 22, you get a corporate tax rate on profits of 4% and zero tax on distributions of dividends from those profits. The only tax paid is the 4% corporate rate.

I also note that salaries in Puerto Rico are lower than anywhere in the US and that they might be going lower. Minimum wage is $7.25 and a recent House bill exempts Puerto Rico from increases in the Federal minimum wage for the next 5 years.

For more information on recent legislation, see: Good News from Congress for Act 20 Business in Puerto Rico

How to Combine the EB-5 Investor Visa with Puerto Rico Act 20 and 22

In order to combine the immigration benefits of the EB-5 investor visa with the tax benefits of Puerto Rico, we can setup an internet business or other service based company for you on the island.  That company will have 10 employees and qualify under Act 20 and EB-5.

For example, the business might provide content, design, advertising, and SEO services to persons and companies outside of Puerto Rico. Alternatively, the business might import goods from China and sell them to a distributor in the US (may operate as a wholesaler but not a retailer).

For a complete list of services that qualify for Act 20, please send an email to info@premieroffshore.com.

You may fund the business with $500,000 to $1 million in capital. Remember that the business must be self sufficient for at least 6 years and that your investment should cover costs until break-even. Your business plan must show a stable and profitable business will be operating from the United States with at least 10 employees.  

As I said above, profits of this business will be taxed at 4%. Dividends to you, a resident of Puerto Rico, will be tax free.

What if you Don’t Want to Live in Puerto Rico?

You are not required to live in Puerto Rico to qualify for Act 20 or for the EB-5. Only Act 22, the personal tax holiday, requires you be a resident of the island.

If you immigrated to the US with an EB-5 investor visa, and setup an Act 20 company, but did not live in Puerto Rico, you would pay 4% in tax on Puerto Rico sourced income. You could then hold net profits from Puerto Rico sourced income in the corporation tax deferred.

If you are living in the US, you would pay US tax on any dividends or distributions from that Puerto Rico company. You would also pay US tax on income from your investments outside of the US.

So, Act 20 will get you tax deferral in your EB-5 business. Act 22 gets you tax free distributions from that EB-5 business. Act 22 also cuts your US tax rate to zero on capital gains on assets acquired after your move to Puerto Rico.

How to Use an E-2 Visa to Expedite an EB-5 Visa Application

The EB-5 visa process is a long one. Remember that it comes with guaranteed US citizenship and green card.  As such, the process is demanding.

It will take well over a year to have your EB-5 visa approved. If getting into the United States as quickly as possible is important to you, then you might apply under the E-2 visa program first.

We can setup an Act 20 business with an E-2 and get your temporary visa in 30 to 90 days. This gets you and your family into the country.

You then operate the business with 5 employees under E-2 until your EB-5 is approved. When you get your green card under the EB-5, you hire 5 more employees for a total of 10. This is because the E-2 and Act 20 require 5 employees. When you are ready to upgrade to the EB-5, you can add 5 more for a total of ten employees in Puerto Rico.

Note that the E-2 visa is only available to those from treaty countries and has different requirements from the EB-5. For more information, see E-2 Treaty Investor Visa

How I can Help

We can assist you from start to finish in setting up an EB-5 and Act 20 compliant business in Puerto Rico. This includes writing the business plan, financial analysis, and everything related to applying for the EB-5.

Next we will incorporate your business, lease office space, hire and train employees, and get the business operating. This will include an Act 20 contract with Puerto Rico that will guarantee your tax holiday for 20 years.

We provide a turnkey solution in Puerto Rico that will maximize the benefits of the EB-5 and tax benefits of Puerto Rico. For more information, you can reach me directly at info@premieroffshore.com or by calling (619) 483-1708.

act 20 business in puerto rico
Christian Reeves

Good News from Congress for Act 20 Business in Puerto Rico

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Good news out of Washington for Act 20 businesses in Puerto Rico. It appears that the US has decided to allow Puerto Rico to reorganize its debts in some manner… not formal bankruptcy, but a restructuring with court oversight.

The rules would be similar to Chapter 9 for municipal bankruptcies, with a few sections more favorable to creditors. The House was careful to avoid the term “bankruptcy,” and to avoid the stigma of a bailout. No cash is being sent to help Puerto Rico, only new rules.

The bill has two main provisions:

  • It creates a seven-member fiscal oversight board with members appointed by the president and congressional leaders that will have to approve Puerto Rico’s future fiscal plans.
  • It allows the island to legally pay less than 100 percent of what is owed on old debts.

This appears to be a one time deal. Had Puerto Rico been granted bankruptcy protection, they could have used it for future debt. Puerto Rico gets special consideration one time and then returns to its status as a Territory, along with the US Virgin Islands and Guam.

This is big because it means that Puerto Rico won’t lose its special tax status. It also means that the island won’t be torn asunder by its $70 billion debt, an amount approximately equal to 68% of Puerto Rico’s gross domestic product. The island defaulted on $2 billion of these obligations May 1, 2016 and says it’s unable to pay upcoming installments.

The reason Congress must act is that Puerto Rico is barred from the US bankruptcy courts. Because it’s not a State, Puerto Rico can’t declare bankruptcy like so many US cities and municipalities have done. Without intervention from Washington, the only option would have been years of court battles and uncertainty.

For an example of what could have been, consider Argentina. They defaulted in 2001 and 2010 on their bond obligations. The case was fought in the US courts for over a decade, finally being resolved in 2015. For many of those years Argentina was unable to borrow from the world markets, which put its economy in turmoil.

We were beginning to see signs of this in Puerto Rico. On May 4, 2016, Puerto Rico bondholders sued the Development Bank to stop payments of salaries and other distributions. They sought to freeze all transactions on the Island until they got paid… essentially holding the Puerto Rico economy hostage until their demands were met.  Exactly what the vulture funds did to Argentina.

With decisive action from the US Congress, these issues will be resolved in an orderly manner. Bondholders will take a haircut – and probably a substantial one to the tune of 70% – but business will go on  and money will flow.

This offers stability to Act 20 companies who hold bank accounts on the island. When you have a disorderly, hostile, and litigious situation, you are concerned about the reliability of local banks. Will the government seize funds in those accounts as they did in Cyprus? You never know  and don’t want to put your money at risk by keeping substantial sums in Puerto Rico banks.

Fortunately for Americans operating in Puerto Rico, your Puerto Rico company can open a bank account anywhere in the United States. You can take your PR company documents to your local Wells Fargo or Bank of America and open an account in a few minutes – something that is not possible with an offshore corporation.

But, now that the banking risk has passed, I suggest clients hold their operating capital and retained earnings in Puerto Rico. This minimizes your contact with the United States and can be a positive factor in an audit.  I am now recommended Scotiabank in Puerto Rico as the best business bank available to Act 20 companies.

This is all good news for Act 20 companies. As is the fact that Act 20 and 22 were not mentioned in the House bill. There is no attempt to put an end to these tax holidays. In fact, the US Treasury suggested that Puerto Rico should be required to do more to increase investment in the region, a suggestion that the House failed to include.

EDITORS NOTE: On July 11, 2017, the government of Puerto Rico did away with the requirement to hire 5 employees to qualify for Act 20. You can now set up an Act 20 company with only 1 employee (you, the business owner). For more information, see: Puerto Rico Eliminates 5 Employee Requirement

Even better news is the minimum wage moratorium included in the House bill. While US tax laws don’t apply to Puerto Rico, Federal minimum wage does. This is why the minimum salary in Puerto Rico is currently $7.25.

While Federal minimum wage is, by definition, the lowest wage allowed in the nation, it appears to be going up under Mr. Obama.  Any increase of the Federal wage is sure to be far lower than the 13 states and cities, including California, New York and Washington, D.C., who have passed $15 per hour minimum wage laws to be phased in over the next few years.

The moratorium contained in the House bill exempts Puerto Rico from increases in the Federal minimum wage for the next 5 years. So, no matter what the US does with salaries, they will be locked in at $7.25 for the next 5 years in Puerto Rico.

  • Technically, the oversight board (not the government of Puerto Rico) has the ability to lower its wage below the Federal minimum wage. Don’t expect it to drop below $7.25 without riots in the streets.

The bill also exempts Puerto Rico from Obama’s overtime rules. Combine this with a fixed minimum way, and you, the Act 20 business owner, see some cost savings and permanence in the House bill.

Add to this the fact that Act 20 comes with a 20 year guarantee on its 4% tax rate, and you have a uniquely low cost and stable situation in Puerto Rico.

If you’ve read this far in the article and have no idea what Act 20 is, I think you for your perseverance. Allow me to briefly summarize the offer here.

Act 20 is a statute in Puerto Rico that allows you to operate a business on the island with a minimum of 5 employees and pay only 4% in tax on corporate profits on Puerto Rico sourced income.

That business should be providing a service from Puerto Rico to persons and/or companies outside of Puerto Rico. Good candidates are internet marketing, loan servicing, import of goods for sale in the US, sales, website design, and just about any other portable service business.

Net profits of the business can be held in the corporation tax deferred. If the owner of the company moves to the island and qualifies under Act 22, he or she may withdraw profits as tax free dividends.

If your net profits are $500,000 or more, and you need 5 employees, you will find that the tax deal offered in Puerto Rico is far superior to anything available offshore. If your profit is less than $500,000, then you might get a better deal in a zero tax offshore jurisdiction like Cayman. For an article on this topic see Puerto Rico Tax Deal vs Foreign Earned Income Exclusion.

If you can’t use 5 employees in Puerto Rico, then stick with Panama, Cayman Islands and other jurisdictions. The purpose of Act 20 is to increase employment on the Island, so the minimum number is non-negotiable. For more information on Cayman, see Move Your Internet Business to Cayman Islands Tax Free.

I hope you have found this article helpful. For more information on moving your business to Puerto Rico, please contact me at info@premieroffshore.com or call (619) 483-1708. I will be happy to structure your business and negotiate an Act 20 license with the government of Puerto Rico on your behalf.

tax benefits of puerto rico
Christian Reeves

How to Maximize the Tax Benefits of Puerto Rico

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The tax benefits of Puerto Rico for Americans are incredible. Puerto Rico is by far the best deal available if you’re willing to move you and your business to the island for a few years. Even if you move only the business, while you remain in the United States, the offer is hard to pass up. Here’s how to maximize the tax benefits of Puerto Rico.

First, here’s a summary of the tax benefits  of Puerto Rico.

Act 20 is the business tax holiday offered by cash strapped Puerto Rico. Under Act 20, a service business with 5 employees on the island will pay only 4% tax on Puerto Rico sourced income. Good candidates include businesses (or divisions of a business) which provide sales and support, internet marketing, graphics design, product research, financial advisory, loan servicing, website and network design and support, call centers, and almost any other “portable” business.

The catch is that you must have 5 full time employees in Puerto Rico. These workers can be at any salary or skill level, but they must be working full time and creating Puerto Rico sourced income. The purpose of Act 20 from the government’s perspective is to offer training and jobs to its people.

It’s possible for the owner of the Puerto Rico business to live in the United States and operate the business remotely. In that case, you (that owner) will draw a salary at fair market value from the Puerto Rico corporation and pay tax in the US on your income.  Only profits attributable to the workers in Puerto Rico is Puerto Rico sourced income.

If the owner of the business is living in the US, you get to defer US tax on the profits of your Puerto Rico company (less the 4% tax paid to Puerto Rico). When you take the money out of the company you will pay US tax on the dividend. If you are a resident of Puerto Rico, you won’t pay tax on that dividend.

Act 22 is the personal tax holiday. If you move to Puerto Rico, become a legal resident, buy a home there, and sign up for Act 22, all dividends from a Puerto Rico corporation to a resident of Puerto Rico are tax free. In addition, you will pay zero tax on capital gains. That’s right, the tax rate on assets acquired after you move to Puerto Rico will be zero.

Those are the basics and there are a number of additional Puerto Rico tax holiday programs that are beyond the scope of this article. For example, Act 73 covers IP development and holding companies. Using this statute, you can get to a tax rate of 4 to 8% on income from IP. Also, a number of tax credits are available.

For an article on this, which briefly compares Act 73 to Act 20, see PWC Summary of Puerto Rico Tax Credits and Incentives. Also, here’s an article about Microsoft using Puerto Rico for IP  (from 2013) and another on Puerto Rico and the Pharmaceutical Industry.

Then there’s Act 273 that allows you to setup an “offshore” bank in Puerto Rico and pay only 4% in tax on profits. This is by far the lowest cost offshore banking license available. For more information, see Puerto Rico Offshore Banking License.

This is all to say that Puerto Rico is working hard to become the offshore center for American entrepreneurs. If your business provides a service or is portable, you should give Puerto Rico a look.  

Here’s how to maximize the tax benefits of Puerto Rico.

To truly maximize the tax benefits of Puerto Rico, you need to move you and your business to the island. If you can combine Act 20 with Act 22, you will have a tax deal unmatched by any other jurisdiction.

You will pay only 4% on your business profits (Puerto Rico sourced active business income) under Act 20. Then you will then withdraw those profits as a tax free dividend at the end of the year under Act 22.

So, Act 20 gets you tax deferred profits held in a Puerto Rico corporation. Act 22 allows you to take those profits out of the corporation tax free.

EDITORS NOTE: On July 11, 2017, the government of Puerto Rico did away with the requirement to hire 5 employees to qualify for Act 20. You can now set up an Act 20 company with only 1 employee (you, the business owner). For more information, see: Puerto Rico Eliminates 5 Employee Requirement

Above I said that the tax benefits of Puerto Rico are unmatched by any other jurisdiction. The reason for this is simple: even fiscal paradises like Cayman and Panama with zero tax rates can’t come close to duplicating the benefits for Americans available in Puerto Rico.

Yes, I know that a 0% tax rate in Panama and Cayman Island is less than 4%. But, because Puerto Rico is a US territory, it can offer a deal on dividend distributions that foreign countries can can’t match.

So long as you are a US citizen you will pay US taxes… unless you live in Puerto Rico.

An American living in Cayman or Panama will pay US taxes on all capital gains and dividends received. They will also pay US tax on any salary earned over the Foreign Earned Income Exclusion Amount of $101,300. They won’t pay tax to Panama or Cayman, but they will owe the IRS big time if they make more than $100,000 a year.

That same person living in Puerto Rico will pay tax on any salary earned, 4% on business profits, and then be eligible to withdraw those retained earnings from the corporation as a tax free dividend.

Let’s say you have a business with net profits of $2 million. You can set up in Cayman or Panama and take out a salary of $100,000 per year tax free. The rest of the money will stay in the corporation tax deferred. When you withdraw the $1.9 million, you will pay US tax at about 40% (Fed and State), or $760,000. You get tax deferral by operating offshore, but, one of these days, you must pay the piper.

If that same business were operated from Puerto Rico under Act 20 and Act 22, you would pay PR tax on your salary of $100,000 at about 30%. Then 4% corporate tax on $1.9 million for a total of $106,000. Your net effective rate is 5.6% and goes down towards 4% as income increases.

To sweeten the pot further, Puerto Rico’s Act 20 comes with a 20 year guarantee. Considering how the political winds are blowing against offshore tax structures, a guarantee from a US territory is very valuable.

As I said above, Puerto Rico requires 5 full time employees. If you don’t need that many people, or your profits are closer to $100,000 than $1 million, then a tax free jurisdiction offshore might be more efficient. Here’s an article on Moving Your Internet Business to Cayman Islands Tax Free.

I’ll close by considering how you might carry the tax benefits of Puerto Rico forward once you leave the island.

Ok, you’ve setup your business with 5 employees in Puerto Rico under Act 20. You also took the plunge and moved to Puerto Rico under Act 22. A few years have passed and corporation has $5 million dollars in retained earnings.

You’ve had enough of island life and this business venture has run its course. It’s time to stop the carnival, take your winnings, and return to the US of A.

As I said above, you can take out that $5 million in retained earnings tax free. This is because you are living in Puerto Rico, qualify under Act 22, and the dividends are coming from a Puerto Rico company. The only tax paid was 4% to Puerto Rico for the right to operate your business from their jurisdiction.

You can now return to the US with your $5 million in hand with no taxes due to the IRS. The money is free and clear.

Of course, once you move back to America, giving up your Act 22 status, any interest or capital gains you earn from this $5 million in savings will be taxable by the Feds and your State.

There is one way to carry forward the benefits of Puerto Rico…

Invest some of that $5 million in to a single pay premium offshore life policy before you abandon Puerto Rico.

By moving your savings earned under Act 22 in Puerto Rico in to a tax deferred single pay premium life insurance policy you can continue to defer US tax on any capital gains generated by that money. Basically, you can create a multi-million dollar tax deferred savings account or a massive defined benefit plan without any of the retirement account rules.

Your cash will grow tax deferred inside the life insurance policy, just as it did in Puerto Rico. If you need to use some of that money you can borrow against the policy. Of course, your focus should be on building a tax preferred investment portfolio.

Should something happen to you, this life insurance policy will pass on to your heirs tax free (with a step-up in basis). In this way, it’s possible for you to provide a family legacy without ever paying more than 4% in US taxes.

I hope you have found this article on maximizing the tax benefits of Puerto Rico helpful. Please note that we at PremierOffshore.com are not investment advisers nor do we sell insurance products. I will be happy to introduce you to an expert in this area.

For more information on moving you and/or your business to Puerto Rico, please contact me at info@premieroffshore.com or call (619) 483-1708. I will be happy to work with you to build a tax efficient operation in Puerto Rico.

Puerto Rico Bank License
Christian Reeves

Lowest Cost Offshore Bank License is Puerto Rico

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Want to setup an offshore bank? Looking for an international banking license? Obtaining an offshore bank license and negotiating offshore correspondent accounts have become extremely difficult in every jurisdiction except one. The lowest cost offshore bank license is Puerto Rico. Yes, the US territory of Puerto Rico is the best island in the Caribbean to negotiate an offshore bank license.

Puerto Rico is the lowest cost offshore bank license available anywhere in the world. And, it comes with the ability to get US correspondent banking relationships more efficiently than other offshore bank licensing jurisdictions.

Let me first clarify two terms.

When I write about an offshore bank license, I mean a banking license that allows you to do all types of international banking business. The only limitation is that you can’t accept clients from the issuing jurisdiction. So, an offshore bank licensed in Puerto Rico can accept clients from anywhere in the world (including the United States) except Puerto Rico. Likewise, an offshore bank licensed in Panama can accept clients from anywhere but Panama.

And, when I say Puerto Rico is the lowest cost offshore bank license jurisdiction, I mean the lowest set up, capital, and operating cost by a long shot. I mean that an offshore bank license in Puerto Rico can be had for a fraction of the cost and capital of any other jurisdiction.

To give you an idea of the cost difference, it would require 10 times the capital of Puerto Rico to set up in the country of Belize. The cost of operating in Cayman would be 17 times higher than the cost of operating in Puerto Rico.

  • The annual fee for the international banking license in PR is $5,000. This compares to $85,365.85 in Cayman. The cost of labor and all other services are dramatically higher in Cayman than Puerto Rico.

Puerto Rico has been aggressive in courting financial service, hedge fund, and banking companies since 2013. Their Act 20 which any US business to move to Puerto Rico and pay only 4% in tax. They also approved Act 22 which cuts the capital gains rate to zero for any American who moves to Puerto Rico and spends at least 183 days per year on the island (becoming a legal and tax resident of Puerto Rico).

An offshore bank licensed in Puerto Rico under Act 273 receives the same  4% tax rate. This tax holiday is guaranteed for 15 years. Also, full property and municipal license tax exemptions, 6% income tax rate on distributions to PR resident shareholders and a 0% tax rate on distributions to non-PR resident shareholders, are available to offshore banks licensed in Puerto Rico.

  • This article focuses on Act 273 and not Act 20  and 22. When doing your research, note the distinction between 273 for banks and 20 / 22. For example, Act 273 guarantees you a 4% rate for 15 years where Act 20 guarantees you the same for 20 years. Act 273 requires 4 employees where the latest version of Act 20 requires 5 employees.

Here’s a summary of the offshore bank license options in Puerto Rico:

Puerto Rico Full International Banking License – Requires capital of at least $300,000 to held by the central bank or in a bond (as stated in the Act: $300,000 financial guarantees acceptable to OCFI). Authorized shares are to be at least $5 million. Of this, only $250,000 must be paid-in.

Puerto Rico Restricted International Banking License – Capital held by the central bank or in a bond of $300,000 (as stated in the Act: $300,000 financial guarantees acceptable to OCFI). The authorized capital stock or the proposed capital, as the case may be, shall not be less than $500,000, out of which at least $50,000 shall be paid in full at the time the license is issued. This can also be referred to as a captive license.

In most cases, a full international banking license is required. Of the many banks licensed in Puerto Rico, only 1 has a restricted license.

A full international license in Puerto Rico allows you to provide financial services to other international financial institutions or to persons outside of Puerto Rico.  “Financial services” are any service which is generally accepted in the banking industry of the United States and Puerto Rico including:

  1. Accept deposits and borrow money from non-residents of PR.
  2. Accept deposits and borrow money from certain government institutions
  3. Place deposits in any PR bank and foreign banks organized in PR.
  4. Make loans to non-residents of PR. Issue letters of credit to non-residents or PR.
  5. Issue letters of credit for export activities to both PR resident and non-residents.
  6. Discount money orders and bills of exchange to non-PR residents.
  7. Invest in securities and stocks as well as PR government bonds exempt from tax
  8. Carry transactions in any currency and gold or silver and foreign currency trade.
  9. Underwrite and trade notes and debt instruments issued by a non-PR residents
  10. Engage in trade financing of import  and export of raw materials and finished goods.
  11. Act as a fiduciary, executor, administrator, registrar of stocks and bonds, custodian, trustee, agent and any other fiduciary capacity with non-residents of PR after obtaining a special permit from the government.
  12. Acquire and lease personal property on behalf of non-PR residents.
  13. Buy and sell security outside of PR on behalf of non-PR residents.
  14. Act as a clearinghouse of instruments of foreign persons
  15. Organize and manage international financial entities not related to residents of PR.
  16. Lend or guarantee loans originated in some governmental institutions.
  17. Purchase sub-standards non-performing loans from a PR bank.
  18. Establish branches outside PR in the continental USA or in other foreign country.
  19. Provide the following services:
    • Asset management.
    • Management of alternative investments.
    • Management of private capital.
    • Management of hedge funds
    • Management of pools of capital
    • Administration of trusts
    • Management of escrow  funds for non-residents of PR.

An offshore bank licensed in Puerto Rico gives you access to the US market and a wide range of corresponding banks.  In addition to the usual suspects, corresponding bank options include:

  • Scotiabank *
  • FirstBank Puerto Rico
  • Banco Popular de Puerto Rico
  • Banco Popular North America (US Bank at https://www.popularcommunitybank.com/)
  • Centennial Bank (a US bank in FL https://www.my100bank.com/)

    * Scotia has a partnership deal with Bank of America that can be leveraged.

Puerto Rico is the second largest offshore banking jurisdiction in the Caribbean after Cayman Islands. The Cayman Island has decades more history, 40 of the top 50 banks in the world, and a total of 196 banks licensed as of the end of June 2015.

This compares to about 50 offshore banks operating from Puerto Rico. That’s more than all of the other Caribbean islands combined… not counting Cayman, of course.

So, next time you hear about offshore banking jurisdiction “hotbed” like Belize with 6 banks, all combined holding less capital than one bank in Puerto Rico, you will have some sense of scale.  

Here is a partial list of the active banks in PR.

  • Pfizer International Bank – Int. License
  • Santander Overseas Bank – Int Lic.
  • Bank of Nova Scotia – General
  • Chase Manhattan – Int Lic
  • Citibank – General, but operate as an international bank
  • Popular Bank – General & Int. Lic ( publicly traded, operated in PR for 120 years, 52 yrs in US)
  • Puerto Rico International – Int. Lic
  • Metro America Int – Int Lic
  • Amtrade International Bank of Georgia – General
  • Charles Schwab Bank – General
  • BNC International – Int Lic
  • FirstBank International – Int Lic
  • Santander Overseas – Int Lic
  • WesternBank – Int Lic
  • OBT International – Int Lic
  • SB Pharmco (owned by Glaxo) – Int Lic
  • Bank of Southeast Europe – Int. Lic.
  • First Bankcorp – Int Lic
  • Oriental Bank – This is one of the larger local banks
  • VS International – Int Lic
  • Face Bank – Int Lic
  • BST – Int Lic
  • BBO Private – Int Lic
  • Paramount International – Int Lic
  • Bancredito Int – Int Lic
  • Italbank – Int Lic
  • Activo – Int Lic
  • ARCA – Int Lic
  • Nodus – Int Lic
  • Andcapital – Int Lic
  • Elite International – Inc Lic

For more information, please review my articles on offshore bank licensing and operation. I’ve been working in offshore banking for over a decade, so there are a few older posts floating around the web. My recent articles on the topic are:

I hope you have found this review of offshore bank licenses in Puerto Rico helpful. If you would like to setup a licensed bank in Puerto Rico, please contact me for a confidential consultation at info@premieroffshore.com or call (619) 483-1708.

Puerto Rico Tax Deal
Christian Reeves

Puerto Rico Tax Deal vs Foreign Earned Income Exclusion

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The Puerto Rico tax deal is the inverse of the Foreign Earned Income Exclusion. Here’s why:

  • With a Puerto Rico tax contract you can live in the US, your first $100,000 or so in salary is taxable, with rest deferred at 4%.
  • If you live offshore and qualify for the FEIE, your first $101,300 is tax free in 2016 and the rest is taxable in the US as earned.

The FEIE is intended for those living abroad and operating a business that earns $100,000 to $200,000 max. The Puerto Rico deal is intended for those who live in the US or PR and net $400,000 or more.

This article will compare and contrast the Foreign Earned Income Exclusion with the Puerto Rico Tax Deal. There are still deals out there for Americans if you know how to work the system.

Here’s how the Foreign Earned Income Exclusion works:

If you live abroad and work for someone else, or have your own business, the Foreign Earned Income Exclusion is the best tool in your expat toolbox. The FEIE allows you to exclude up to $101,300 in salary in 2016 from your US taxes.

This salary can come from your own offshore corporation or from your employer. So long as the company is located outside of the US, and you qualify for the Exclusion, you’re golden.

If a husband and wife are both working in the business, they can each earn $101,300 in salary tax free for a total of $202,600. Take out more, and the excess is taxable in the US at about 40%.

Likewise, if you work for someone else, the amount you earn over the FEIE is taxable in the United States. If you work for yourself, and hold earnings in an offshore corporation, you can usually defer tax on these retained earnings.

To qualify for the Foreign Earned Income Exclusion, you must be 1) outside of the US for 330 out of any 365 days, or 2) be a legal resident of a foreign country, file taxes in that country, and travel to the US only occasionally for work or vacation.

  • What qualifies you a resident of a foreign country is a complex matter. For a more detailed article on the FEIE, see: Foreign Earned Income Exclusion Basics
  • The above assumes you are living in a low or no tax country and does not consider the Foreign Tax Credit.

The Foreign Earned Income Exclusion is an excellent tax tool for those willing to live and work outside of the US. If you wish to spend more than a couple months a year in the US, or to take out a salary of more than $101,300, the FEIE might not be your best bet.

Here’s how the Puerto Rico Act 20 tax deal works:

If you incorporate your business in Puerto Rico, you can qualify for an 4% corporate tax rate. That is to say, you can live in the US, operate your business through a Puerto Rico company, and get tax deferral at 4%.

In order to qualify, you must hire at least 5 full time employees in Puerto Rico and provide a service from the island to businesses or individuals outside of PR. Popular examples are affiliate marketers, website developers, investment funds, phone and online support providers, and any other business that is portable or operates via the internet. Really, any company that can put a division in Puerto Rico can benefit from Act 20.

  • If you don’t need 5 employees, we might create a joint venture that allows partners to share employees in one corporation that benefits the group.
  • EDITORS NOTE: On July 11, 2017, the government of Puerto Rico did away with the requirement to hire 5 employees to qualify for Act 20. You can now set up an Act 20 company with only 1 employee (you, the business owner). For more information, see: Puerto Rico Eliminates 5 Employee Requirement

If you, the business owner and operator, live in the US, you must take a “fair market” salary that’s taxable and reported on Form W-2. This might be around $100,000, but the exact amount will depend on many factors. The remaining net profits of the income attributable to the Puerto Rican company will be taxed at 4%.

This is basically the inverse of the Foreign Earned Income Exclusion. With a Puerto Rico contract, you pay tax on your fair market salary and defer the balance at 4%. With the FEIE, the first $100,000 (or $200,000 if married and both are working in the business) is tax free and the excess is taxable at ordinary rates.

I note that the Act 20 offer is a better deal than the multinationals have in Europe. Most of them are paying about 12.5% for tax deferral. Even at 12.5%, their tax contracts are under constant attack by the US and the EU. If you want to out maneuver Apple, and get an offshore tax deal blessed by the US government, move your business to Puerto Rico!

So, what’s different about Puerto Rico? As a US territory, it’s tax code trumps the Federal Code… or, more properly put, PR’s tax code is on equal footing with the US Federal code.

This is not the case in a foreign jurisdiction. So long as you hold a US passport, you’re subject to US taxation. The IRS doesn’t give a damn about the laws of your new country. They want their cut.

The US code is clear when it comes to Puerto Rico: Income earned in a Puerto Rican corporation, or as a resident of Puerto Rico, is exempt from US taxation. See: 26 U.S. Code § 933 – Income from sources within Puerto Rico.  

The code as applied to foreign jurisdictions is incredibly complex. Try reading up Controlled Foreign Corporations, Passive Foreign Investment Company rules, and Sub Part F of the code.

I suggest a Puerto Rico tax contract is best suited to firms with at least $400,000 in net profits that can benefit from (or, at least, break-even on) three employees in Puerto Rico. 

In contrast, the FEIE is great for those who wish to live outside of the United States and earn a profit of of $100,000 to $200,000 from a business. Additional tax deferral is available to business owners who live abroad operate through an offshore corporation.

I hope you have found this article on the Foreign Earned Income Exclusion vs. the Puerto Rico Tax Deal helpful. For more information, please send an email to info@premieroffshore.com or give me a call at (619) 483-1708. 

Offshore Tax Planning Puerto Rico
Christian Reeves

Blood in the Streets Offshore Tax Planning

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You’ve heard the adage of investing when there’s blood in the streets… to buy when all hell is breaking loose and the market is at bottom. Well, now is your opportunity for some offshore tax planning while there’s blood in the streets. An offshore tax planning opportunity that will cut your corporate rate to 4%!

  • Baron Rothschild, an eighteenth century British nobleman, is reputed to have said, “The time to buy is when there is blood in the streets.” Those words are so true today in Puerto Rico and their offshore tax planning deal.

If you have not been reading the papers lately, PR is broke and the Federal Govt doesn’t want to bail them out. Specifically, the GOP says no way to a Puerto Rico bailout.

So the Feds have allowed Puerto Rico to create a Tax Incentive Strategy to try and bail out PR by offering a 20 year deal where companies only pay 4% on their retained earnings.

Yes you read that correctly only 4% – that is lower than what many very large corporations are presently paying to Ireland 12.5%. It’s the best offshore tax planning deal available to US citizens.

If you’re a small to medium sized internet business, or one that can spin off a division like marketing, call center, or similar group, here’s your chance to pay only 4% on your profits. Here’s how to make an offshore tax planning deal with a desperate government to defer tax offshore like the Apples and Googles of the world.

In fact, you can negotiate a offshore tax planning deal far better than the big guys. Most of their tax contracts in Ireland and Luxembourg are at around 12.5%.

The US government is offering you an offshore tax planning contract that allows you to live in the United States and cut your corporate tax to 4%. No need to move abroad, uproot your family, etc. It’s akin to the offshore tax planning tool generally referred to as a corporate inversion. These inversions have become all the rage where the business operations are outside of the U.S. but the headquarters and business executives remain here.

Here’s how this unique offshore tax planning opportunity works:

The U.S. territory of Puerto Rico is broke. The island is essentially bankrupt – owing creditors over $70 billion with no chance of repayment and a US bailout seems unlikely. But, as territory, PR is prohibited from declaring bankruptcy. As of December 1, 2015, they are out of cash.

Puerto Rico’s laws are a mixture of US Federal statutes and local ordinances. And that is where your opportunity exist: Income earned in a Puerto Rican corporation or as a resident of Puerto Rico is exempt from U.S. taxation. See: 26 U.S. Code § 933 – Income from sources within Puerto Rico.  

In order increase employment, motivate investment, and benefit from it’s unique position in the US code, the island offers two tax deals:

1. Start a business in Puerto Rico with at least 5 employees, apply for an Act 20 tax contract, and receive a 20 year agreement with a corporate tax rate of 4%.

or

2. Move to Puerto Rico, be approved for an Act 22 contract, and pay $0 capital gains tax on assets purchased after you become a resident and sold during your time on the island.  

Act 22 requires you to live in Puerto Rico for at least 6 months of the year. Act 20 does not. In this article I’ll focus on the Act 20 offshore tax planning contract for business owners.

If you don’t require 5 employees, we can create a joint venture company that will share costs and benefit the group. For example, if 2 partners come together in a “captive” internet marketing firm, they could license one business under Act 20. Different classes of stock and separate bank accounts could protect each partner’s interests.

To qualify under Act 20, your business should be providing a service in Puerto Rico to corporations or individuals outside of Puerto Rico. Internet marketers, website developers, investment advisors, hedge funds, call centers, and any other type of “portable” business are good candidates.

  • No matter your industry, if you can spin-off a division into a Puerto Rico corporation, you can benefit from an Act 20 contract. For example, I recently assisted a manufacturing company setup a web marketing group on the island.

Next, you need to hire at least 3 full time employees in Puerto Rico. These workers must be earning the minimum wage (currently $7.25) or better, be W-2 employees and not independent contractors, come into the office each day, and work at least 40 hours per week (full time).

Then, you, as the owner and operator of the business, must draw a fair market salary from the Puerto Rican company. This salary is taxable in the U.S. because it’s earned from work you did while living in the States.

The remainder of the income you earn in Puerto Rico is taxed at 4%. In other words, net profits in excess of your salary are taxed at 4%. You may retain these profits in your Puerto Rican corporation indefinitely tax deferred… an absolutely amazing offshore tax planning deal!

This gets you to a similar place as the Microsofts of the world… low cost offshore tax deferral. In fact, you’ve out maneuvered these giants by securing a deal at 4% rather than the typical 12.5%.

Puerto Rican profits must be left in the corporation, or can be moved to an offshore subsidiary. They can be used to grow the business and generally managed as corporate capital. You may not borrow against them or otherwise personally benefit from these retained earnings. They belong to the corporation until taken out as a distribution or dividend.

Now, here’s where things get really interesting in the Puerto Rico offshore tax plan:

With a typical offshore tax plan, profits are locked in the corporation. When taken as a dividend or distribution, they come out at ordinary income rates. Lower qualified dividend rates do not apply to distributions from a foreign corporation.  

Puerto Rico provides a path to tax free dividends not available in other offshore tax plans. If you decide to move to Puerto Rico after a few years of operating the business, and qualify as a resident under Act 22, dividends from your Puerto Rican corporation will be tax free.

Of course, you’re not required to move to Puerto Rico to cut your corporate tax rate to 4%. You may leave the money in the company tax deferred, take it out years or decades later and pay the tax, or continue to use it to grow the business.You can hold the Act 22 card in your back pocket should you decide to play it.

We can assist you to implement the Puerto Rico offshore tax plan in two ways.

  1. We can setup your corporate entity, negotiate an Act 20 contract in Puerto Rico, and write a custom a game plan / opinion letter on how to operate your Puerto Rican business in compliance with PR and US tax laws.

or

  1.   Provide a turnkey solution in Puerto Rico with office space, employees, etc. to maximize the benefits of your offshore tax plan.

Our turnkey solution includes analysis, tax and business planning, tax opinion letter with “action plan,” Act 20 application and negotiation, Act 20 license, and opening a PR bank account. It also includes sourcing and negotiating an office lease, hiring 3 qualified employees, 12 months of employee management, and 12 months of tax and business consulting service.

  • We will locate and hire 5 employees to your specifications. You can interview them by Skype or in person. We will also replace these employees if they resign or are not pulling their weight, manage their time, and handle all office and employment matters.
  • Our turnkey solution is intended to cover all first year costs related to setting up shop in Puerto Rico except salary, payroll taxes, and office rent.

I hope you have found this article on the offshore tax planning benefits of Puerto Rico helpful. For more information, please send an email to info@premieroffshore.com or give me a call at (619) 483-1708. 

For more information, you might read my post comparing the Puerto Rico tax deal with the Foreign Earned Income Exclusion.