So you want to know about Puerto Rico’s Act 20 and how it can help your business? You’re in the right place. This Act 20 FAQ will go over everything from the basics to the details so you can understand the benefits.
Act 20 is part of Puerto Rico’s effort to attract business owners. It’s for service based businesses and if you qualify you get some amazing benefits. Let’s get into the most common questions people have about Act 20 and how it works.
What is Act 20?
Act 20 is a tax incentive program created by Puerto Rico to attract businesses to the island. The goal is to promote economic development by having companies export services. Under this law companies that qualify can pay as little as 4% in corporate income taxes on income generated from services exported outside of Puerto Rico.
Who can benefit from Act 20?
Businesses that export services from Puerto Rico to clients outside of the island are eligible for Act 20.
- Marketing companies
- Software development firms
- Financial consulting services
- Engineering services
- Other professional services
If you have services that can be exported and you’re willing to move or establish a presence in Puerto Rico this act can save you a lot.
How Does Act 20 Work?
Under Act 20, eligible businesses pay a flat corporate tax rate of 4% on income generated from services exported outside Puerto Rico. Additionally, dividends paid to the company’s owners are 100% tax-exempt in Puerto Rico. However, it’s essential to note that you still have to meet certain requirements to benefit fully, which we’ll cover next.
What Are the Key Requirements for Act 20?
To qualify for Act 20, a business must:
- Incorporate in Puerto Rico – Your business must be registered and operate within Puerto Rico.
- Export Services – Your services must be sold to clients outside Puerto Rico. You cannot benefit from Act 20 if you provide services only to Puerto Rican residents.
- Employees – Your business needs to have at least one full-time employee based in Puerto Rico. Some services may require more employees depending on the type of industry.
- Office Space – The business must have a physical office or space in Puerto Rico where operations are conducted.
Failure to meet these requirements could disqualify you from enjoying the tax benefits of Act 20.
What Are the Benefits of Act 20?
The benefits of Act 20 are attractive, especially for businesses seeking to lower their tax burden. The main benefits include:
- Low Corporate Tax: A flat rate of 4% on income from exported services.
- Dividend Exemption: Dividends paid to the business owners are tax-exempt in Puerto Rico.
- No Federal Taxes: Puerto Rican residents are not subject to U.S. federal taxes on income generated in Puerto Rico.
These benefits make Puerto Rico a highly competitive option for business owners who want to reduce their tax liabilities while maintaining a U.S.-based presence.
How Does Act 20 Compare to Other Tax Incentives?
Puerto Rico has several tax incentive programs, including Act 22 and the Export Services Act. While Act 22 focuses on individual investors, Act 20 specifically targets businesses that export services. Combined, these acts provide a powerful strategy for reducing both corporate and personal taxes.
Can I Combine Act 20 with Act 22?
Yes, many business owners take advantage of both Act 20 and Act 22. Act 22, also known as the Individual Investors Act, allows individuals who move to Puerto Rico to pay zero tax on capital gains and dividend income. When combined, these acts can drastically reduce your overall tax burden. However, it’s essential to meet all the requirements for both laws to maximize your benefits.
What Services Qualify under Act 20?
Any service-based business can qualify under Act 20 as long as the services are exported. Here are some examples:
- IT and software development
- Accounting services
- Legal services
- Engineering consulting
- Call centers
- Marketing and advertising
Any business that can provide services from Puerto Rico and deliver to clients outside the island can qualify.
Act 20 FAQ
Is Act 20 only for Puerto Rican residents?
No. Act 20 is for businesses from all over the world to establish in Puerto Rico. You don’t need to be a Puerto Rican resident to apply for or benefit from Act 20.
How long does it take to apply for Act 20?
It can take several months. You’ll need to file paperwork with the Puerto Rican government and prove your business meets all the requirements. It’s recommended to work with a tax professional familiar with Puerto Rican laws to speed up the process.
Are there other costs associated with Act 20?
Besides the 4% corporate tax rate, your business may still be subject to other local taxes like property taxes or payroll taxes. You’ll also need to have a physical office and hire at least one person in Puerto Rico.
Can I live outside Puerto Rico and still benefit from Act 20?
Yes. While your business needs to be based in Puerto Rico, you don’t have to live there. Many business owners split their time between Puerto Rico and other places.
Can I transfer an existing business to Puerto Rico?
Yes, existing businesses can move to Puerto Rico and apply for Act 20. Just make sure the business meets all the requirements once established in the island.
Conclusion
Act 20 FAQ is a once-in-a-lifetime opportunity for businesses to reduce their corporate tax rate and grow in a tax haven. With a flat 4% corporate tax rate on export services, this is a no-brainer for service-based businesses. If you’re considering moving your business or establishing a new one, Puerto Rico’s business-friendly environment and Act 20 benefits are worth looking into.
By learning more about Act 20 you can position your business to save big on taxes and contribute to Puerto Rico’s growth.
Contact a tax professional to make sure you meet all the requirements and get the most out of it. Here’s the Puerto Rico Department of Economic Development and Commerce website.
