The Act 60 tax program in Puerto Rico offers a range of tax incentives for businesses and individuals looking to relocate to the island. As a U.S. territory, Puerto Rico has the unique advantage of allowing its residents to retain their U.S. citizenship while benefiting from a more favorable tax climate. This program is specifically designed to attract investments and stimulate economic growth on the island, creating opportunities for both residents and investors.
Under Act 60, qualified businesses and individual investors can enjoy significant tax benefits, including exemptions from both federal and state taxes on income sourced from Puerto Rico. This not only provides a streamlined tax structure, but also ensures that investors maintain their eligibility for Medicare and Social Security benefits, as they remain U.S. citizens. Companies operating in Puerto Rico can benefit from reduced corporate tax rates, while individuals can enjoy a favorable tax treatment for income derived from their investments within the island.
In order to take advantage of these incentives, businesses and individuals must meet certain requirements and follow a specified application process. By relocating to Puerto Rico and complying with the provisions of Act 60, investors can access these attractive tax benefits while contributing to the economic development of the island.
Understanding Act 60 Tax Program
Differences Between Act 20 and Act 22
Act 60 is a tax incentive program implemented in Puerto Rico to regulate the consolidation of and build upon several tax incentive acts such as Act 20 and Act 22. While both of these acts offer tax benefits, there are some key differences.
Act 22, also known as the Individual Investors Act, offers a tax exemption on local source dividend and interest income, as well as capital gains for individual investors relocating to Puerto Rico. On the other hand, Act 20, known as the Export Services Act, provides a reduced corporate tax rate of 4% for qualifying companies that export services performed in the territory to clients outside of the territory. Act 60 combines these tax incentives and streamlines the process for taxpayers to take advantage of these benefits.
Legislation and Puerto Rico Incentives Code
The Puerto Rico Incentives Code, also known as Act 60-2019, consolidates numerous previously approved incentive acts, harmonizing and standardizing tax incentives applied to income, royalties, dividends, distribution of interest, and profits from capital. This legislation aims to simplify the bureaucratic process and make it more accessible for businesses and individual investors to take advantage of tax incentives in Puerto Rico. Some of the benefits provided by Act 60 are:
- Exemption from taxes on long-term capital gains resulting from investments made after becoming a Puerto Rico resident.
- An attractive 4% corporate tax rate for qualifying Puerto Rican companies that export services performed in the territory to clients outside of the territory.
- Retaining U.S. citizenship while benefiting from both federal and state tax exemptions on income sourced from Puerto Rico.
With Act 60, entrepreneurs and investors can find a more straightforward process to access a range of tax incentives, making Puerto Rico an attractive location for business and investment opportunities.
Eligibility Criteria for Act 60
Investors and Businesses
Act 60 is designed to provide tax incentives to various entities, including investors, corporations, and partnerships. To become eligible for Act 60 tax benefits, investors should establish their tax home in Puerto Rico and meet the necessary residency requirements. For corporations and partnerships, qualifying for Act 60 depends on the business activity, and in some cases, the age of the entrepreneurs. Under Act 135, young entrepreneurs between 16 and 35 years old can receive a 0% income tax rate for up to three years on a net income of $500,000 and a 100% exemption on Business Volume and Personal property tax for three years.
Residency Requirements
To qualify for Act 60 as an individual, one must become a bona fide resident of Puerto Rico. This involves passing four qualifying tests: the presence test, the tax home test, the closer connection test, and the residence test.
- Presence Test: This requires the individual to be physically present in Puerto Rico for at least 183 days of the year.
- Tax Home Test: The individual’s primary place of work or business must be within Puerto Rico.
- Closer Connection Test: The majority of personal, social, and economic ties should be in Puerto Rico.
- Residence Test: One must establish and maintain a primary residence in Puerto Rico to be considered eligible for the tax benefits.
By meeting these requirements and establishing a reliable tax home, individuals can become eligible for tax benefits under Act 60, including exemption from tax on long-term gains accrued as a result of investments made after becoming a Puerto Rican resident. This, in turn, can help the individual escape tax in the U.S., provided the income is sourced in Puerto Rico, as explained here.
Tax Benefits Under Act 60
Individual Investors
Puerto Rico’s Act 60 offers significant tax advantages to individual investors who become residents of the island. One major benefit is the 100% tax exemption on capital gains that result from investments made after becoming a resident. This exemption applies to income sourced within Puerto Rico and can help individuals avoid taxes in the U.S. as well.
Under Act 60, investors can also enjoy tax exemptions on their dividends, ensuring that their income from various investments remains largely protected from taxation. The combination of reduced income tax, capital gains tax exemption, and the 4% fixed income tax rate on eligible income provides them with a favorable tax environment to grow their investments.
Business Owners
Business owners who establish a qualifying business in Puerto Rico can take advantage of multiple tax benefits offered by Act 60. These include a 4% corporate tax rate that results in substantial savings compared to the U.S. federal corporate tax rate. Furthermore, businesses can benefit from a 100% tax exemption on distributions from earnings and profits.
Act 60 also provides a 75% exemption on property tax, which significantly reduces costs associated with real estate holdings in Puerto Rico. The combination of these tax incentives can aid in fostering a more profitable business, ultimately promoting greater economic growth on the island.
Entrepreneurs
Entrepreneurs pursuing innovative ventures in Puerto Rico can greatly benefit from Act 60’s favorable tax regime. The code particularly promotes economic growth by granting businesses a 50% exemption on municipal taxes, allowing for essential municipal services to be obtained at a reduced cost.
In addition, entrepreneurs may be eligible for tax incentives for income derived from royalties, further supporting their endeavors in developing and commercializing new products or services. By enabling a more tax-efficient environment for entrepreneurs, Act 60 assists in the overall growth and development of Puerto Rico’s economy.
How to Apply for Act 60 Tax Program
Obtaining Tax Exemption Decree
To apply for the Act 60 tax program, it is advisable to first seek legal advice to determine eligibility and gather the necessary documentation. The initial step requires filing an application and paying a one-time fee of $750. Once the application is submitted and approved, the investor receives a Tax Exemption Decree.
The Tax Exemption Decree is a contract between the investor and the Puerto Rican government. It grants various tax benefits, such as:
- 100% tax exemption on interest
- 100% tax exemption on dividends
- 100% tax exemption on short-term and long-term capital gains
- 100% tax exemption on gains from crypto-based assets acquired after moving to Puerto Rico
It is essential to maintain proper bookkeeping and record the percentage of business income and expenses related to the Puerto Rican subsidiary, as this helps in determining the taxes under the Act 60 incentives.
Annual Compliance and Donations
Act 60 tax program participants must fulfill annual compliance requirements to maintain their tax benefits. These requirements include:
- Filing an annual report certifying compliance with their Tax Exemption Decree
- Submitting financial statements for the tax year
- Paying an annual fee of $5,000 to the Puerto Rico Treasury Department
In addition to these compliance requirements, individuals must also make annual donations to specific Puerto Rican non-profit organizations. The minimum annual donation is $10,000, divided between at least two approved organizations. This charitable contribution promotes economic growth and supports local communities in Puerto Rico.
In conclusion, applying for the Act 60 tax program involves obtaining a Tax Exemption Decree, seeking legal advice, making the required annual donations, and fulfilling ongoing compliance requirements. By doing so, eligible investors can significantly reduce their tax burden while contributing to the economic development of Puerto Rico.
Key Provisions and Rules
Income Sources and Taxation
Puerto Rico’s Act 60 tax program aims to attract investors and businesses by offering significant tax incentives. The program is especially designed for high-net-worth individuals and companies seeking to reduce their tax burdens. Under Act 60, various income sources, such as interest, dividends, and capital gains, are subject to reduced taxation or exempt from U.S. federal income tax.
In this program, businesses established in Puerto Rico enjoy reduced corporate tax rates compared to U.S. mainland rates. Additionally, Act 60 provides exemptions from various state income taxes, municipal taxes, and other local taxes. The program also offers incentives for investment in real estate and intellectual property, among other assets.
Export Services Tax Incentive
One of the key components of Act 60 is the export services tax incentive, which encourages businesses to establish in Puerto Rico and export services to foreign markets, including the U.S. mainland. Companies that qualify for this incentive can benefit from:
- A 4% corporate income tax rate on export services revenues
- 100% tax exemptions on property tax for certain assets
- 100% exemption on dividend distributions
To be eligible for the export services tax incentive, companies must:
- Be engaged in an eligible service, such as consulting, advertising, software development, or research and development.
- Generate at least 80% of their revenue from exporting services to clients outside of Puerto Rico.
- Comply with annual reporting requirements and maintain necessary documentation.
In summary, Act 60 offers significant tax advantages to individuals and businesses looking to establish a presence in Puerto Rico. The program has various provisions, rules, and incentives aimed at promoting investment and boosting economic growth, making Puerto Rico an attractive destination for both local and foreign investors.
Industries and Services Eligible for Act 60 Incentives
The Puerto Rico Incentives Code, also known as Act 60, aims to stimulate economic growth by offering tax incentives to various industries and services. These incentives primarily focus on promoting investment, innovation, and job creation within the island.
Several industries are considered eligible for Act 60 incentives, including manufacturing, technology, and exportation services. The manufacturing sector, for instance, can benefit from tax exemptions and reduced rates, encouraging the development of local products and fostering economic growth.
Technology companies, including those involved in cryptocurrency, can also take advantage of Act 60 incentives. By offering a competitive tax framework, Puerto Rico aims to attract innovative businesses in the technology and digital sectors, fostering the growth of the local tech ecosystem.
In addition to these industries, Act 60 benefits extend to a wide range of service providers, such as consulting or management services, research and development, and creative services. Eligible businesses can enjoy a 4% fixed income tax rate on eligible income, as well as tax exemptions on capital gains, property tax, and municipal taxes.
Act 60 also covers royalties, addressing their taxation and treatment within the incentive program. The goal of these incentives is to make Puerto Rico a more attractive location for intellectual property development and management.
Some of the eligible services under Act 60 include, but are not limited to:
- Export of goods and services
- Research and development
- Marketing and advertising services
- Telecommunications services
- Consulting and management services
- Banking, financial, and insurance services
By offering these tax benefits and incentives, Act 60 aims to create a sustainable economic environment in Puerto Rico, attracting businesses and investors from diverse sectors, and ultimately leading to increased economic growth and development.
Economic Impact and Controversies
Benefits for Puerto Rico’s Economy
Act 60, the Puerto Rico Incentives Code, aims to promote investment, support small and medium merchants, and address challenges in healthcare and education. By offering various tax incentives, it seeks to attract industries and stimulate economic development on the island.
Some of the benefits for Puerto Rico’s economy through Act 60 include:
- Job creation: Investors and companies attracted by the tax incentives may generate employment opportunities for Puerto Ricans.
- Infrastructure development: Increased economic activities and investment can lead to improvements in infrastructure, such as transportation and utilities.
- Increased revenues: With the growth of businesses and investment, the government’s tax base expands, allowing for increased public sector revenue.
Potential Drawbacks and Criticisms
Despite its intended benefits, Act 60 also faces several criticisms:
- Social inequality: Critics argue that the tax incentives may favor wealthy individuals and corporations, potentially widening the socio-economic gap.
- Lack of reinvestment: There is a risk that some investors may take advantage of the tax incentives without significantly contributing to the island’s economy or development.
- Fiscal impact: Although Act 60 attracts investments, it may lead to reduced revenue from the tax breaks provided, putting pressure on public services such as social security and medicare.
Economic Growth and Impact on U.S. Citizens
As Puerto Rico is a U.S. territory, the economic impact of Act 60 not only affects the island but also U.S. citizens who invest or relocate their businesses there. The tax benefits can encourage mainland U.S. citizens to establish operations in Puerto Rico, potentially expanding their businesses and contributing to the overall economic growth of both Puerto Rico and the United States.
However, the connection to the U.S. tax system and potential revenue loss raises questions about the long-term sustainability of Act 60’s tax incentives for both Puerto Rico and the United States. The controversies surrounding the program reflect the challenges of finding a balance between economic development, social equity, and fiscal responsibility.
