Doing Business In Puerto Rico: A Secure And Tax-efficient US Jurisdiction Like No Other

• Published date: 14 October 2022
• Subject Matter: Tax, Income Tax, Property Taxes
• Law Firm: TMF Group BV
• Author: TMF Group

The jurisdiction of Puerto Rico is something of a hybrid. From afar, it looks very much like the 51st state of the USA. Closer up, you discover it has the fiscal independence of a separate jurisdiction. Incoming corporate and individual investors can benefit from an attractive mix of strong US legal safeguards, a highly skilled workforce and exceptionally low taxes.

Puerto Rico is a US territory - not a full-blown state - but you could be forgiven for not realising.

The island's 3.3 million people are US citizens with US passports. They earn and spend US dollars. Their head of state sits in the White House. They take their disputes through the US federal court system. Investors benefit from all the same legal protections and remedies as the US mainland, including those governing intellectual property rights.

Incorporation also bears similarities to the processes followed in the US. Puerto Rico's General Corporation Law is closely modelled on Delaware's equivalent. The interplay of local and US corporate entities is smooth and simple.

'No taxation without representation!'

Puerto Rican residents have no vote in US presidential elections. But their territory status also means the island retains the right to set its own taxes and manage its own public finances.

Keen to attract long-term investment and employment, Puerto Rico makes aggressive use of its fiscal independence to offer generous tax incentives to certain categories of inbound investor.

Generous standard benefits

Before 2020, two separate tax laws incentivised two key groups: Act 20 provided for exporters of international services; Act 22 covered wealthy individuals prepared to become 'bona fide' island residents.

Since 1 January 2020, all incentives have been streamlined and extended by Act 60-2019. A single legal and administrative framework, known simply as the Incentives Code, makes Puerto Rico a prime investment location for three particular types of investor:

• exporters of international services,
• innovation-led manufacturers, and
• high-net-worth individuals.

To benefit from the Code, a company or individual must first apply for a 'tax exemption decree' from the Department of Economic Development and Commerce. For those who meet the eligibility criteria, standard benefits include:

• a fixed 4% income tax rate
• distributed profits and dividends 100% exempt from income tax
• 75% exemption from property taxes
• 50% exemption from municipal taxes
• tax credits on R&D expenditure up to 50%
• standard decree...