From Acts 20 and 22 to Act 60: What You Need to Know About Puerto Rico's Updated Tax Incentives

Puerto Rico's tax incentives, particularly Acts 20 and 22, have long been a significant draw for individuals and businesses seeking favorable tax treatment. These laws were pivotal in attracting new residents and investments to the island. However, recent changes have transformed the landscape. This blog post explains the shift from Acts 20 and 22 to the new Act 60, detailing what has changed and what this means for those considering relocating or setting up businesses in Puerto Rico.

A Brief Overview of Acts 20 and 22

Act 20 (Export Services Act) and Act 22 (Individual Investors Act) were enacted to stimulate economic growth in Puerto Rico by encouraging companies and wealthy individuals to relocate to the island.

- Act 20 provided tax incentives for businesses that export services outside of Puerto Rico. Qualified businesses could benefit from a 4% corporate tax rate, 100% exemption on dividends, and 90% exemption on property taxes.

- Act 22 was aimed at high-net-worth individuals who relocated to Puerto Rico, offering a 100% exemption on dividends, interest, and capital gains. This was particularly attractive to investors and individuals looking to shield investment income from U.S. federal taxes.

Together, these acts created a powerful incentive for individuals and companies to move to Puerto Rico, allowing them to enjoy significant tax savings while contributing to the island's economic development.

The Transformation: Acts 20 and 22 Become Act 60

In 2019, Puerto Rico introduced Act 60—the Puerto Rico Incentives Code—which consolidated multiple tax incentives, including Acts 20 and 22, into one unified framework. While the core benefits of these acts were preserved, several key changes were implemented to address concerns about fairness, compliance, and economic impact.

Key Changes in Act 60

1. Act 20 (Export Services) Modifications:

- The 4% corporate tax rate remains intact for export service businesses, but compliance and reporting requirements have been tightened. This is to ensure that companies genuinely contribute to Puerto Rico's economy by creating jobs and adding value.

- Companies must now hire a minimum number of employees (often five), depending on the sector and the nature of the business. This ensures that the incentive is aligned with Puerto Rico’s broader economic goals, focusing on job creation and local involvement.

- Service areas have been refined, meaning some businesses may no longer qualify for the same tax breaks if their operations don’t align with the revised eligible industries.

2. Act 22 (Individual Investors) Adjustments:

- Act 22, now part of Act 60, continues to provide tax exemptions on dividends, interest, and capital gains, but there are new requirements for beneficiaries. Applicants must show they are genuine residents of Puerto Rico by spending a significant amount of time on the island and contributing to the community.

- Annual charitable donation requirements were introduced, mandating that recipients of the incentive contribute to Puerto Rican charitable causes. This requirement aims to ensure that individual investors are giving back to the local community.

- Stricter residency rules: To qualify, individuals must now prove that Puerto Rico is their primary residence and comply with physical presence requirements, spending at least 183 days per year on the island.

3. Increased Scrutiny and Compliance:

- Both individual and corporate beneficiaries are subject to more rigorous compliance checks. The government has implemented regular audits and monitoring to prevent abuse of the incentives and ensure that recipients are meeting all the required criteria.

4. Fee Adjustments:

- Under Act 60, application fees and annual compliance costs have increased, which has introduced higher upfront costs for those seeking to benefit from these incentives. This change reflects the government’s efforts to maintain the incentives while ensuring they are not being misused.

What Do These Changes Mean for You?

For businesses: The opportunities for reduced corporate tax rates remain attractive under Act 60, especially for export service companies. However, the increased emphasis on job creation and local involvement means that businesses must be more committed to establishing a genuine presence on the island. This might require greater investment in local infrastructure and talent.

For individuals: High-net-worth individuals still enjoy the potential for significant tax savings under Act 60, particularly in terms of capital gains and passive income. However, the increased residency requirements and mandatory charitable contributions mean that applicants must now demonstrate a real connection to Puerto Rico beyond just tax benefits.

Is Puerto Rico Still a Tax Haven?

Despite the changes, Puerto Rico remains one of the most favorable jurisdictions for tax savings for U.S. citizens. The benefits under Act 60, while slightly more restrictive than before, still allow individuals and companies to enjoy substantial tax breaks compared to the rest of the United States. Additionally, Puerto Rico’s political status as a U.S. territory means that residents under Act 60 are still U.S. citizens but do not pay federal income taxes on Puerto Rico-sourced income.

However, with the stricter regulations, it’s clear that the Puerto Rican government aims to ensure that the island benefits from the presence of these businesses and individuals, rather than merely serving as a tax haven.

Conclusion: A Balanced Approach to Tax Incentives

Puerto Rico’s transformation of Acts 20 and 22 into the broader framework of Act 60 marks a shift towards more balanced economic development. The changes ensure that while businesses and individuals can still reap the rewards of low taxes, they are also contributing more significantly to the island’s economy and society.

For those considering Puerto Rico as a destination for business or investment, the potential tax benefits remain substantial, but it’s essential to understand the new requirements and responsibilities that come with them. With proper planning and a genuine commitment to establishing roots on the island, Puerto Rico can still be a powerful opportunity for tax optimization and growth.

For a personalized understanding of how these changes can impact and benefit you or your business, schedule an easy and online consultation. At Sabalier Law, Attorney Alexandra Sabalier provides tailored advice and helps you navigate the new tax landscape effectively. Don’t hesitate to reach out and ensure you’re making the most of Puerto Rico’s updated tax incentives.