A Comprehensive Guide to Qualifying for Puerto Rico's Act 60 Export Services Tax Incentives

What is Puerto Rico's Act 60?

Nearly nine years ago, in an effort to hasten Puerto Rico's economic recovery, the federal government of the United States began offering generous business tax incentives to eligible entities in the service industry. These eligible entities included accounting firms, advertising agencies, hedge funds, and other consulting firms, among others. In January of 2012, the first version of this law was introduced in the form of Act 20, which was then followed by subsequent versions.

In a nutshell, Act 20 mandated an exceptionally low corporation tax rate of 4% for Puerto Rico companies that operate within the territory's limits, and this rate applies to any and all income earned from customers located outside of the territory's borders. So, the provision of remote service capabilities was the primary criterion for qualification as an eligible firm by which to qualify for the tax reduction that was being offered. To put it another way, the Act inquired as to whether or not a company's proprietor and its workers may do their jobs in Puerto Rico while yet catering to clients located in other countries.

The fact that  Puerto Rico tax residents are not subject to income tax in the United States is one of the key benefits that this law brought to Puerto Rico's economy. This accountability rests squarely on the shoulders of the government of Puerto Rico itself.

Act 20, which governed export services, was repealed and replaced by Act 60 Export Services in January of 2020, which resulted in modifications to the prerequisites for eligibility. You are welcome to have a look at the tax advantages as they are outlined under Act 60 Export Services below in order to gain a better understanding of the ways in which businesses that are now contemplating a transfer to Puerto Rico might profit and benefit from doing so.

An Overview of the Tax Benefits Under Act 60 of Puerto Rico:

An Overview of the Tax Incentives Under Act 60 of Puerto Rico: In accordance with Act 60 of Puerto Rico, eligible businesses that are located in Puerto Rico and generate money from customers located outside of the territory shall be entitled to the following advantages for such income:

1. A tax rate of 4% applicable to corporations
2. A tax exemption of fifty percent for the municipality.
3. An exemption from the local and state property taxes equal to 75%.
4. An exemption from taxes equal to one hundred percent on all distributions made from earnings and profits *
5. For the first five years of their existence, qualifying small and medium-sized firms can claim a tax exemption equal to the whole amount.

Requirements for Establishing Eligibility for Puerto Rico-Based Operations:

To begin, it is important to comprehend that the phrase "operations within Puerto Rico" specifies that regardless of the value or work product of a company, the product in question must have been manufactured on Puerto Rican land.

When an owner of a business has determined whether or not they are eligible based on the location of their company, there is a second set of crucial eligibility factors that should be considered:

1. It is imperative that every proprietor of a company as well as every worker be compensated adequately for the task that they perform.
2. The income received by owners and workers must be subject to taxation at the ordinary income tax rate for Puerto Rico, which can reach as high as 33% in some cases.  
3. The income that is received by owners and workers must be subject to taxation at the ordinary income tax rate for Puerto Rico, which can reach as high as 33% in some cases.  
4. Businesses that fall within the scope of Act 60 are required to undergo independent audits by the Office of Industry Tax Exemption (OITE) at a minimum frequency of once every two years. 
5. Companies that have already been founded and have submitted an application for the Act 20 version of the incentive may also be subject to the audits; however, the specifics of this situation have not been addressed as of yet.
6. Companies that generate more than $3 million per year are expected to directly employ at least one Puerto Rico person who directly participates in business activities clearly connected to its offers. This requirement applies only to businesses that generate more than $3 million per year.
7. Act 60 Export Services Businesses May Not Have a Nexus with Puerto Rico 

It is a common concern among owners of companies to wonder if they may still be eligible for the export services tax incentive even if they serve customers from both within and outside of Puerto Rico. The simple answer to that question is no. According to the statute, a company must not have any kind of connection or linkage with Puerto Rico in order to be eligible for the tax cut. This indicates that the services offered by a company cannot be connected in any manner to the operation of a trade, business, or other activity that takes place inside the borders of Puerto Rico. This condition, at its heart, requires that any client of a business situated in Puerto Rico must be located outside the island.

Business Entities that do not qualify for the Tax Benefits Under Act 60 :

The following entities do not qualify for the tax incentives under Act 60 because it is believed that they "have a nexus" with PR:

1. Any company or organization that has generated revenue by engaging in activities within the island's borders for Puerto Rico customers 
2. When a sale of any property has taken place in Puerto Rico with the intention of using, consuming, or disposing of the property there, and the proceeds from the sale are obtained from money that was already in the island.
3. Companies that have engaged in lobbying efforts regarding the rules, statutes, or administrative responsibilities of the government of Puerto Rico or any of its instrumentalities
4. Companies that have directly advised the Puerto Rican government or any of its instrumentalities on the rules, laws, and/or administrative obligations of the government of Puerto Rico or any of its branches
5. Entities that take part in any activities that are specifically designated by the Secretary of the Department of Economic Development for Puerto Rico

There are roughly two dozen distinct types of companies that meet the requirements to be considered eligible for the Act 60 business program. At Sabalier Law, we assist business owners who have particular issues regarding the eligibility of their business and other conditions for the Export Services tax incentives under Act 60. If you are a business owner and have such queries, schedule a consultation to guide you through your options. We are able to provide you with guidance on how to, for instance, get a tax exemption decree for your business, determine if all or merely a portion of the activities of your business should be relocated, and check that your business, relocation plans, and all other conditions for eligibility are satisfied.