Tag Archive for: Puerto Rico Act 22

Puerto Rico Act 22 and Act 20 Residency in 2017 after Hurricane Maria

Puerto Rico residents are receiving relief in all forms. For example, Banco Popular has put a hold on lease and mortgage payments for 3 months and others are following suite.  Moreover, the IRS issued a letter ruling regarding to residency in the territories and meeting physical presence test under section 937(a).

Section 937(a) of the IRC describe how an individual considered a “bona-fide resident” of US territory if he or she meets certain tests. The most common test is if you spend  at least 183 days on the island.

Most Puerto Ricans pay income tax to the local government. So, this rule means that they don’t need to pay the US government, just Puerto Rico. The tax rate in PR is about the same as the Federal rate.

Then, in 2012, Puerto Rico passed Acts 20 and 22. Under Act 20, if you operate a qualifying business from Puerto Rico, you pay only 4% corporate income tax. Under Act 22, if you move to the island, become a resident, and buy a home there, you pay zero in capital gains tax. Act 22 is only available to new residents.

These tax laws are possible in Puerto Rico because of its unique status as a Territory. If Puerto Rico were to become a State, these tax benefits would disappear.

So, for Act 20 and 22, becoming a resident of Puerto Rico means you pay no US Federal taxes on territory sourced income. To meet these test and qualify for tax free status, you must not have a tax home or closer connections in the US. Also, as stated above, you should spend 183 days a year in Puerto Rico.

Before the hurricane, you could count up to 14 days of international travel towards your 183 day requirement in Puerto Rico. If you traveled 40 days abroad, you could count only 14 for Puerto Rico and the rest would be days in the United States (a bad thing).

Due to the catastrophic damage caused by Hurricane Maria, and previously by Irma, the usual 14 day absence period will be extended to 117 days up until December 31, 2017. This gives the resident an exception to the 183 required days.

NOTE that this exception currently only covers tax year 2017! It is not extended into tax year 2018 unless a new letter ruling is issued.

In this Notice the IRS has addressed several issues related to compliance with the presence test for a bona fide resident in a possession (26 CFR 1.937-1). This section lists all the requirements that a resident needs to comply with to satisfy the presence test for a taxable year:

  1. “Was present in the relevant possession for at least 183 days during the taxable year.” Notice 2017-56 has just established an exception due to the hurricane, extending the 14 day absence period to 117 days.
  1. “Was present in the relevant possession for at least 549 days during the three-year period consisting of the taxable year and two immediately preceding taxable years, provided that the individual was also present in the relevant possession for at least 60 days during each taxable year of the period.” Even though the 14 day absence period has been extended to 117 days, I strongly recommend the 549 days are fully completed.
  1. “Was present in the United States for no more than 90 days during the taxable year.” Even though the extension of the absence period should permit the additional days spent in the US, the Notice doesn’t address this particular requisite.
  1. “During the taxable year had earned income in the United States, if any, not exceeding in the aggregate the amount specified in section 861(a)(3)(B) and was present for more days in the relevant possession than in the United States;”. Again, the IRS notice makes no reference to this requisite.
  1. “Had no significant connection to the United States during the taxable year.”

You can take advantage of the extension of the absence period if you have yet to complete the 183 days in Puerto Rico. But be very careful with the compliance of the other presence requirements, specially the earned income and the significant connection to the US. As an example, this last one should take into consideration that you have no principal place of residence in the US, or at least have no homestead exemption.   

For more information on the tax holidays available in Puerto Rico, see: A Detailed Analysis of Puerto Rico’s Tax Incentive Programs

For the latest version of Puerto Rico’s Act 20, see: Puerto Rico Eliminates 5 Employee Requirement

And for information on post hurricane plans, see: What’s Next for Puerto Rico After Hurricane Maria?

I hope you’ve found this article to be helpful. For more information on setting up your business in Puerto Rico, please contact us at info@premieroffshore.com or call (619) 483-1708. 

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

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

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 after hurricane

What’s Next for Puerto Rico After Hurricane Maria?

Puerto Rico suffered the worst hurricane to hit the island in 100 years on September 20, 2017. Hurricane Maria destroyed Puerto Rico. So what’s next for the territory of 3.5 million US citizens? Where does Puerto Rico go from here and what about it’s unique tax incentive programs?

The US territory of Puerto Rico was first grazed by Hurricane Irma, which knocked out power for 1.5 weeks. Then, about 2 weeks after Irma. Maria absolutely obliterated the island. Now comes a long and difficult rebuilding effort. “It’s in very, very, very perilous shape,” Trump told reporters Thursday during a meeting with the president of Ukraine. “It’s very sad what happened to Puerto Rico.”

“Their electrical grid is totally destroyed and so many other things, so we’re starting the process now,” Trump said. The death toll in Puerto Rico is at 15 now, but it’s expected to go higher, possibly much higher, as crews spread out through the island. Click here for video.

As of this writing, 85% of government offices have not reported in to the Governor, the island is totally without power, and most don’t have cellular service. See: Puerto Rico Updates: In Puerto Rico, the Storm “Destroyed Us.”

Trump also tweeted Puerto Rico Gov. Ricardo Rosselló, saying: “We are with you and the people of Puerto Rico. Stay safe.”

I’m writing to you from Cancun, Mexico. I left Puerto Rico two days before the storm hit. I went to the airport and asked for the first ticket to anywhere, so here I am. I plan to be here for a few weeks at least, possibly a lot longer.

The most dramatic picture’s I’ve seen of Puerto Rico are here: Hurricane Maria flooding, damage

Many smaller towns in Puerto Rico were totally destroyed. What the winds left standing, the floods and mudslides took. The capital, San Juan, is still there and avoided the floods. Buildings in San Juan are built to a much higher standard than elsewhere, and mostly stood up to Maria.

Now that the storm has passed, the time for assessment and rebuilding is here.  Most of our client’s buildings, in the Golden Mile and Condado areas of San Juan, are intact and operating on generator power. Many will be returning to work by October 1st.

As we look to the future, it’s a lack of electric power and water that will slow business and those attempting to make a life in this new reality. Until power is restored, big buildings will operate on generators, but the vast majority of the island will be in the dark.

And, throughout Puerto Rico, water is pushed along by electric power. No electricity often means no fresh water. You can expect many of the cisterns to run dry in a week or so. A long term lack of water, electricity, and a devastated tourist industry, will make life in Puerto Rico very challenging.

Ricardo Ramos, director of government-owned Puerto Rico Electric Power Authority, told CNN the island’s electrical infrastructure had been “destroyed” and will take months to restore. U.S. utility crews from the mainland were headed to Puerto Rico to help with the effort.

More than 95% of the island’s wireless cell sites were not working, the U.S. Federal Communications Commission said. See: Puerto Rico’s power grid ‘destroyed’ by Hurricane Maria, leaving millions cut off. As far as I can tell, only San Juan has cel service.

Ramos also said that residents “need to change the way they cool off. For entertainment, buy a ball and a glove and change the way you entertain your children.” Locals will need to go old school for some time… possibly for several months.

Keep in mind that Puerto Ricans are US citizens. They can pick and move to United States at any time. A major exodus to Florida and Texas will further deplete the islands tax base, as will a drop in tourism (November to January are key months for the industry). All of these issues are going to compound on each other and make the recovery all the more challenging.

Against this backdrop, President Trump approved a disaster declaration for Puerto Rico, making federal funds available to people and cities on the island. And in this lies Puerto Rico’s long term salvation… hopefully.

As a resident, Act 20 business owner, and someone researching and writing on Puerto Rico daily, I can tell you that the power grid is the territory’s greatest weakness. Power goes out once or twice a week. A light breeze or a little rain and the power’s out.

The hope is that FEMA and the United States will allocate enough disaster relief to build a new power grid, and not just duct tape the current one back together. We’re rooting for the storm in some ways, such that it was strong enough to totally destroy the current system.

We’re also rooting for President Trump and the US Congress. While there was no appetite to bail out Puerto Rico from its financial crisis, there may be enough political wind behind the sails of the recovery to blow a pile of cash to Puerto Rico. If that’s used to rebuild the power system, businesses and residents alike will benefit.

The question is, will President Trump come to the aid of Puerto Rico or will this be his Katrina?

In the long term, I’m hopeful that the US government will do the right thing and that FEMA dollars will go to rebuild infrastructure, not just keep the island alive. A rebuilding of the power grid will go a long way to  improving the island’s future and could be a bright spot in these dark days (no pun intended).

In the short term, expect areas like Condado and Isla Verde to be back within 60 days. Business districts, especially Hato Rey and the Golden Mile, will be functional in 30 days. Other business areas, such as Guaynabo, were harder hit and will have a longer road.

This timeline assumes that gasoline and diesel fuel are available for the generators. It also assumes that clean water is available, which is not certain today because of the dam failure.

I also expect Puerto Rico’s government to redouble its efforts to bring jobs and retain residents. New jobs will prevent flight to the mainland and bring good press to the government. Now is the time to join arms with the government and show that Act 20, 273 and 22 residents are a vital part of the community and a part of the solution to making Puerto Rico stronger than ever.  

Those who show up and put up now are sure to see the benefits down the road. I’m encouraging my clients to pitch in, get involved, and post statements of support for Puerto Rico. If the people know their jobs are there for them when this is over, and that companies are committed to the island, moral will improve.

We all need to be a part of the solution. Supporting the government and the people of Puerto Rico will be good for the island and good for business.

Remember that the tax incentives offered by Puerto Rico can’t be matched by any country on earth. Only the US territory can offer corporations a tax rate of 4%. Only Puerto Rico can eliminate capital gains tax for new residents under Act 22. Only Puerto Rico sourced income is exempted from the US tax code under Section 933.

We need to preserve and expand these tax benefits by supporting Puerto Rico’s government. It’s time to invest in our international tax plan through hard work and community involvement.

I hope you’ve found this article helpful. For more information on how you can help, or to talk about how to bring jobs to Puerto Rico, you can reach me at info@premieroffshore.com or call us at (619) 483-1708.

IRS Targets Bitcoin

The US Government is Targeting Bitcoin

The US government has launched an all out war on Bitcoin and battles are raging on several fronts. The purpose of this war is to either kill Bitcoin so that the dollar remains dominant or, failing that, to control Bitcoin such that the government maximized taxable income and eliminates your ability to transact in private.

It’s early days yet in the war on Bitcoin. But, the writing’s on the wall. The only way for you to salvage some level of privacy is to move your Bitcoin offshore. Set up an offshore company and hold your crypto account in the name of the company.

Here are the 4 primary lines of attack the US government has on Bitcoin today. You can rest assured that new agencies will jump into the fray once they find a way to take what’s yours.

  1. IRS taxing bitcoin as a capital asset and not a monetary instrument.
  2. The SEC treating bitcoin as cash so they can regulate ICOs.
  3. Applying civil asset forfeiture rules to Bitcoin.
  4. Requiring you to report your Bitcoin every time you enter or exit the United States.

Let’s start with the IRS. The Service recently declared that Bitcoin and cryptocurrency are assets, not cash and not currency. This means that, when you exchange Bitcoin for FIAT currency, you must pay tax on the gain.

If you held the Bitcoin for less than a year, you pay short term capital gains tax at your standard rate. This is probably around 35%. If you held the Bitcoin for more than a year, you pay the long term capital gains rate on your profit, which is probably 23.5% (20% if Trump repeals Obamacare taxes). These are the Federal rates and your State will also tax the gain.

Had the IRS classified Bitcoin as a currency, they wouldn’t be able to tax you when you convert Bitcoin to dollars. By calling Bitcoin an asset, the IRS can tax the conversion (or more properly, the sale of the asset).

  • Only currency investments are taxable, such as FX traders, and not basic conversions. That is to say, if you buy foreign currency as an investment, then the gains are taxable.

Then there’s the Securities and Exchange Commission (SEC). If the regulator had determined Bitcoin to be an asset, rather than a cash or cash equivalent, they might not have had jurisdiction to control ICOs. For the reasons why this might have been the case, see: Crowd Sale vs ICO – What’s Legal?

Suffice it to say, if Bitcoin were an asset, all ICOs might have been considered crowd sales and thus outside the purview of the SEC. Of course, this is unacceptable… all investments must be watched over and controlled by our government – so, Bitcoin is cash to the SEC.

To those of us who write on these topics, both of these lines of attack were obvious. Each US agency will define Bitcoin in whatever way allows them to exert control and levy fines to generate more income. That’s the nature of the beast… to a hammer, everything looks like a nail.

Here’s the regulation of Bitcoin that no one saw coming:

Introduced last month, the Combating Money Laundering, Terrorist Financing and Counterfeiting Act of 2017, will force you to report your Bitcoin each time you leave or enter the United States. That’s right, you will be required to fill out a form telling the government how much Bitcoin and cryptocurrency you have each and every time you cross our border.

When I first saw comments on this legislation, I didn’t believe it. I’ve been writing about government overreach since 2000 and still thought this must be an error. It took me days, and a lot of research, to accept that this level of insanity was possible.

When you cross a US border with $10,000 or more in cash or cash equivalents (diamonds, coins, checks, letters of credit, etc), you must report to the government by filling out a form. Of course, filing this form will likely subject you to scrutiny at the airport and unwanted attention from the IRS later.

In most cases, the government has been reasonable in applying this rule. For example, if you’re traveling with collectable coins, you only report if the face value of those coins is over $10,000. So, reporting was generally for those transporting cash and very rarely intruded into the lives of everyday Americans.

The new rules targeting Bitcoin basically allege that cryptocurrency is always with you. Unlike an offshore bank account, where cash is held outside of the US and must be reported once a year, Bitcoin is literally travels with you inside of your laptop. Regulators believe that Bitcoin is stored in your laptop, phone, hard drive, or USB storage device, and is thus crossing the border with you.

This claim that Bitcoin is always with you is key to the government’s attempt to force reporting. If Bitcoin, which is cash or cash equivalent and not an asset in this case, travels with you, the government can force you to report. If it’s cash sitting on the blockchain, and all you have on your laptop are the codes to access that “cash,” no reporting can be required.

That is to say, you don’t need to report how much you have in your bank accounts simply because you’re username and password to access those accounts is stored on the laptop. You can only be required to report what you are physically carrying with you carrying when you cross the border.

And the same law that requires you to report your Bitcoin allows the government to take it from you. Bitcoin will become subject to the asset forfeiture laws. The government can seize your Bitcoin if 1) you fail to report it, or 2) you report it and they believe you obtained it illegally.

Note that I said, they “believe.” The government can take your Bitcoin and then force you to prove how you earned it. The burden of proof falls on you in a civil asset forfeiture case (YouTube video by John Oliver)… and you must be willing to spend big money on lawyers to have any chance of success.

What can you do to protect your Bitcoin?

These are all the ways the US government is targeting Bitcoin. And the only thing you can do to protect your coins is to move them out of the United States and out of the government’s reach. Remember that the US government can seize any cryptocurrency “stored” in a US exchange by issuing a levy or seizure order.

The US government can’t easily seize assets held outside it’s borders. For example, the IRS can levy any bank or brokerage in the US, and any institution that has a branch in the US. So, if you have cash in a bank in Panama, and that bank has a branch in the US, you’re at risk.

The solution is to form an offshore corporation or trust to hold your wallet. Then use only Bitcoin firms located out of the United States… those without ANY ties to the US and can’t be intimidated by Uncle Sam.

The same goes for buying Bitcoin in your retirement account. First, form an offshore IRA LLC. Then move your account into an international bank that doesn’t have a branch in the United States. Then setup an offshore wallet and buy your coins.

I should point out that buying Bitcoin in your IRA is one way to beat the IRS at their own game. Because crypto is an asset, you pay capital gains tax on each and every transaction. However, if you buy Bitcoin in your IRA, you defer or eliminate capital gains tax. Because cryptocurrency is an asset, you can buy and sell it inside an IRA.  For more, see How to move your IRA offshore in 2017.

The fact that Bitcoin is an asset also means you can take advantage of the tax benefits available in the US territory of Puerto Rico. Basically, if you move to Puerto Rico, spend 183 days a year on the island, and qualify for Act 22, all crypto gains on coins acquired after you become a resident will be tax free. See: Move to Puerto Rico and Pay Zero Capital Gains Tax.

I hope you’ve found this article on how the government is targeting Bitcoin to be helpful. For more information on taking your IRA offshore, setting up an asset protection structure, or moving to Puerto Rico, please contact us at info@premieroffshore.com or call (619) 483-1708. We’ll be happy to assist you to protect your coins and keep more of those crypto profits.

Puerto Rico Employee Requirements

Puerto Rico Employee Requirements

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.


(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

A Detailed Analysis of Puerto Rico’s Tax Incentive Programs

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.


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.

stop paying capital gains tax

3 Ways to Stop Paying Capital Gains Tax

Here’s how to stop paying capital gains on your stock transactions. You can legally stop paying capital gains tax tomorrow by following these simple steps. If you’re tired of the IRS taking 20% of your stock gains, here’s how to cut out Uncle Sam.

First, this article is not about how to reduce or defer capital gains tax. This is how to stop paying the IRS immediately and forever. You already know that you can defer gains by investing through your IRA or by taking losses against gains to reduce taxes.

Also, this post is not about the usual US tax tools that so many write about. If you want the same old boring ideas, read Forbes. If you want to pay zero capital gains tax, stick with me.

Since this website is Premier Offshore, let me remind you that we US citizens are taxed on our worldwide income no matter where we live. Moving offshore does not reduce your US capital gains tax. If you sell stocks or foreign real estate while you’re a resident of a foreign country, you must pay Uncle Sam 20% (less taxes paid to the foreign country).

Here are the 3 ways to legally stop paying capital gains tax:

  1. Give up your US citizenship (expatriation),
  2. Setup an offshore life insurance policy to hold your investments, or
  3. Move to the US territory of Puerto Rico.

I’ll go through each of these in turn and show you how to stop paying capital gains tax.


I won’t spend much time on giving up your US citizenship. This is one of those things that many talk about but few actually do. We love to hate the IRS, but not many of us (myself included) have the guts to burn our blue passports.

Giving up your US passport is expensive and time consuming. If you’re net worth is $2 million or more, you’ll need to pay capital gains tax on all of your appreciated property. This exit tax locks in most high net worth individuals.

And you’ll need a second passport in hand before you renounce your US citizenship. While this seems obvious, about 50% of the calls I get to expatriate don’t have a second passport. It’s impossible to give up your US citizenship and become “stateless.”

If you want to buy a second passport, you can get one from Dominica for about $120,000. If you prefer an investment, you can invest $500,000 to $550,000 in St. Lucia government bonds, and pay $50,000 in fees.

If you want to prepare an exit strategy, and have a few years, you can earn citizenship by becoming a resident of a foreign country. For example, if you’re from a top 50 country (such as the United States), you can invest $20,000 in Panama’s green initiative and receive legal residency. You can apply for citizenship and a passport after 5 years of residency.

The bottom line is that, if you give up your US citizenship, you can stop paying US capital gains taxes once that process is complete. Getting to that point will be a long road if you don’t already have a second passport.

Offshore Life Insurance

Any investment made inside a life insurance policy is either tax deferred or tax free. If you close out the policy during your life, you’ll pay tax on the distribution, therefore it’s tax deferred. If you hold the policy until your death, then the gains pass to your heirs tax free (considering the step-up in basis they receive).

An offshore private placement life insurance policy provides you with maximum asset protection and a nearly unlimited capacity for tax free or tax deferred growth. A life policy has no investment cap, income limitation, or distribution requirement. A private placement policy is basically an unlimited ROTH IRA or defined benefit plan that can pass to your heirs tax free.

You can invest millions of after tax dollars into a US compliant offshore life policy and pay zero capital gains on the appreciation. In fact, the minimum investment for these policies is often $1 to $2.5 million.

I also note that you can borrow against most offshore life insurance policies. This means you can access the cash in times of need without incurring a tax cost.

But, offshore life policies are expensive. If you can create a large enough policy, and you generate solid returns, they can be a very valuable tool.

Move to Puerto Rico

Moving to Puerto Rico is the easiest way to stop paying capital gains tax. Move to this US territory today and stop paying capital gains tax immediately! You don’t need to give up your US passport and you don’t need to buy an expensive life insurance policy.

Here’s what you need to do to stop paying capital gains tax by moving to Puerto Rico:

  1. Move to Puerto Rico,
  2. Break as many ties with your home state as possible,
  3. Spend 183 days a year in Puerto Rico,
  4. Sign up for and be approved for Act 22,
  5. Buy a home in Puerto Rico within 2 years of receiving your Act 22 decree, and
  6. Donate $5,000 a year to a charity in Puerto Rico (new as of July 11, 2017).

Do these things and you can stop paying capital gains tax to the United States immediately.  You pay zero capital gains tax on assets acquired after you move to Puerto Rico.

Note that this tax deal is available on passive gains that can be categorized as Puerto Rico sourced income. In most cases, this is gains on stocks. It does not apply to US real estate or US rental profits. These are always US source income.

And only Puerto Rico can make you this offer. As I said above, when you move to a foreign country, you pay US tax on your worldwide capital gains. You won’t be double taxed because of the foreign tax credit, but the IRS always wants it’s cut.

Because of its unique status as a territory, Puerto Rico sourced income is not taxed by the United States. That is, residents of Puerto Rico pay tax to their local government and not the IRS. See IRC Section 933.

This means that Puerto Rico is free to charge it’s residents whatever tax rates it wishes. Because of it’s pending bankruptcy, the government is making you an offer you can’t refuse: move to Puerto Rico and pay zero capital gains tax on assets acquired after you become a resident.

So, if you want to stop paying capital gains tax, and don’t want to give up your US citizenship or buy an expensive life insurance policy, consider moving to Puerto Rico.

And Puerto Rico’s offer doesn’t stop with Act 22. You can also move a business to Puerto Rico and cut your corporate rate to 4%. Under Act 20, you pay only 4% on Puerto Rico sourced business income. For more on Act 22 and 20, see: Changes to Puerto Rico’s Act 20 and Act 22.

To qualify for Act 20, your business should be providing a service from Puerto Rico to people or companies outside of the island. Act 20 companies are usually online businesses or other portable businesses that can be easily re-domiciled to Puerto Rico.

Just about any portable business can qualify for Puerto Rico’s Act 20. Even one man internet marketers or one woman sales sites can get the 4% rate. This is because the government just changed the law to allow for one person businesses. See: Puerto Rico Eliminates 5 Employee Requirement.


If you’re just done with the US and it’s tax laws, consider buying a passport and dumping Uncle Sam. If you don’t want to move out of your state, and you have a few million dollars to invest, set up an offshore life policy to eliminate capital gains tax.

If you’re willing to spend 183 days a year in Puerto Rico, moving to the island under Act 22 is the easiest and best way to stop paying capital gains tax immediately.

For more information on any of these options, please contact us at info@premieroffshore.com or call us at (619) 483-1708 for more information.