Puerto Rico Tax Incentives

Aggressive Tax Incentives for Attracting Business

Puerto Rico offers a highly attractive incentives package that includes a fixed corporate income tax rate – one of the lowest in comparison with any U.S. jurisdiction – various tax exemptions and special deductions, training expenses reimbursement and special tax treatment for pioneer activities.

Export Services Act, Act 20:

The Export Services Act (Act 20 of 2012) was developed to establish Puerto Rico as an international export services center. This act encourages local service providers to expand their services outside of Puerto Rico, promote the development of new businesses and stimulate the inbound transfer of foreign service providers to Puerto Rico.

4% corporate tax rate, which may be reduced to 3%

100% tax exemption on dividends or profit distributions from export services businesses

100% exemption on property taxes for certain export service businesses services

Decree of 20 years, renewable for an additional 10 years, guaranteeing these rates

Individual Investors

The new Individual Investors Act (Act No. 22 of 2012) seeks to attract new residents to Puerto Rico by providing a total exemption from Puerto Rico income taxes on all passive income realized or accrued after such individuals become bona fide residents of Puerto Rico.   To qualify, the new resident must not have been a resident of Puerto Rico at any time from January 16, 1997 through January 16, 2012.

The incredible benefits of this Act are as follows:

100% tax exemption on interest and dividend income for new residents of Puerto Rico

100% tax exemption on all long-term capital gains accrued after becoming a new resident

Act 73 of May 28, 2008, known as “Economic Incentives for the Development of Puerto Rico Act,” makes industry operations in Puerto Rico highly profitable while stimulating additional economic development.  Key provisions include:

• 4% or 8% fixed income tax rate
• 2% or 12% withholding tax on royalty payments
• “Pioneer” industries are subject to an income tax rate of 1% or 0% in cases where the intangible property was created or developed in Puerto Rico
•  Minimum combined tax rate of 3% if at least 50% of the exempt business shareholders are residents of Puerto Rico
• Minimum combined tax rate of 1% for small or medium-size business (average gross income of $10 million or less during the previous three years)

The Tax Incentives – Act 73 also allows companies to take a tax credit on their corporate income tax return.  Tax credits allow for:

• Job creation tax credit of $1,000, $2,500 or $5,000 depending on the physical location of the business operations
• 50% income tax credit of qualified R&D expenses
• 50% income tax credit for investment in machinery and equipment for the production of energy using renewable resources
• 25% income tax credit for the purchase of locally manufactured products
• Up to 10% credit to reduce the electric energy cost of the industrial exempt business

Act 273

Another important legislation that was conceived as a complimentary one to Acts 20 and 22 was The International Financial Center Regulatory Act (Act 273 of 2012).

This law was enacted with the objective of  making Puerto Rico an international banking and financial center by providing tax incentives for new banking and financial activity in Puerto Rico that is done for clients outside of Puerto Rico.  The tax incentive offer is mainly a four (4)% income tax rate for new banking and financial businesses established in Puerto Rico under qualifying circumstances.

Municipal and Property Tax Incentives

• 90% exemption from personal and real property taxes
• 60% exemption from municipal license taxes (75% for small and medium-size businesses)
• 100% exemption from state and local sales and use tax on raw material

Basic Incentive for Job Creation

Companies that are promoted by PRIDCO, including both local and non-local businesses that meet their commitments related to job creation and retention, receive a basic incentive payment for each employee hired. The incentive is $400 per employee for new businesses and $250 per employee for existing business expansions. The company will receive an orientation from PRIDCO and must submit, within a year from the promotion date, certain information for evaluation.

Incentive for Job Creation and Location

In addition to the basic incentive above, companies that are promoted by PRIDCO can receive a location-based incentive for job creation outside of the San Juan metropolitan area.  This incentive will be available for local and non-local businesses, and it depends on the geographical location of the company and the quantity of persons that will be employed.

Job Retention Incentives

In some instances, PRIDCO provides economic assistance to businesses for the retention of their employees.  Examples of some of the instances in which these incentives can be extended, include:
• established companies (in Puerto Rico)  that have never received any incentives from PRIDCO and in need of financial assistance to support expansion projects;
• established companies that have received incentives from PRIDCO, that have met their commitments for prior incentives and that need financial assistance to support business expansions or retraining of its personnel;
• and  for companies that need financial assistance to support a turnaround plan. The amount provided is determined after reviewing the company’s business plan (turnaround plan for those companies in distress) and its financial condition.

Additionally, PRIDCO will require a commitment to retain the employment positions for which an incentive was extended, for a period not less than 3 years.

Incentives for Machinery and Equipment

To support start-up or expansion projects, or to assist companies achieve operational improvements through new technology, PRIDCO offers incentives to contribute a portion of the investment. Incentives will be given to eligible businesses that have the interest to develop new projects requiring the purchase and installation of machinery and equipment.  The company will reimburse 50% of the cost of machinery and equipment, up to a maximum of $50,000.00.  The eligible company’s commitment will be to keep operating for a minimum of three (3) consecutive years as well as comply with all the requirements of the incentives contract.

Quality Control and Certification Incentives

PRIDCO will reimburse 50% of the total investment up to a maximum of $20,000.00. The incentive to be granted to the eligible company (through reimbursement) will be divided into two phases: (1) 50% to a maximum of $20,000.00 for the stages of evaluation, training and improvements to the processes of the operation, (2) 50% of the cost up to a maximum of $15,000.00 for the registration process.

For the first phase, the eligible company will use the given incentive to cover direct costs associated with the system or operational process (i.e. quality control) such as purchase of equipment and machinery, recruitment of personnel for the design of manuals, standards and specifications, recruitment of qualified personnel to provide advice and training, recruitment of technical personnel, recruitment of private or governmental laboratories, acquisition of materials, seminars, and workshops.

For the second phase, the eligible company will use the awarded incentive to cover expenses related to the process of obtaining certification such as training and workshops for training, purchase of materials and equipment related to process improvements required, payment of expenses to consultants and/or temporary assistance, payment of payroll to the staff assigned to the project, and payments associated with the registration and audit company.

The eligible company’s commitment is to maintain an operation for a minimum of three (3) years as well as complying with all the requirements of the incentives contract. The eligible company may apply for this incentive only once within a period of 24 months.

Incentives for Projects of Strategic Importance

In some occasions, PRIDCO may provide additional incentives for businesses that are of strategic importance to the Island’s economy.  These incentives may be tailored to a company’s specific needs and will require a commitment to maintain operations for a specific time or retain a certain number of employees, among other.
Companies that are promoted by PRIDCO that execute projects that have extraordinary importance for the economy of Puerto Rico—i.e., because they create and maintain a large number or high quality jobs, promote new technology, transfer technology business knowledge, or are otherwise considered highly meritorious by the Executive Director and the Board of Directors of PRIDCO—may be eligible for these incentives. The company will receive an orientation from PRIDCO and must submit certain information for evaluation by PRIDCO and approval by PRIDCO’s Board of Directors.

Incentive for Industries located in Vieques and Culebra

To support the creation and retention of jobs in the island municipalities of Vieques and Culebra, PRIDCO offers additional economic assistance to promote companies to establish operations in these Islands.

Companies that are promoted by PRIDCO may be eligible for a cash incentive of up to $100,000 for establishing and operating a business in Vieques or Culebra. The incentive can be used for maritime, land, and aerial transportation of raw materials and finished products, including labor costs, tolls, and other expenses related to transportation, based on an evaluation by PRIDCO. The eligible company may request the incentive at the end of each trimester, after the commencement of operations has been certified, or at the end of the fiscal year, whichever is more convenient. The application must include detailed costs. The commitments will be formalized through a contract.

Special Aid for the Rescue of a Project

When a PRIDCO-promoted business intends to cease operations or reduce its workforce by 50% or more, a new owner committed to keeping at least 25% of the employees who are working at the moment of the rescue may be entitled to assistance. The new owner will receive an orientation from PRIDCO and must submit, within six months from the promotion date, certain information for evaluation.

Rent Incentives

Eligible businesses for this incentive are those that have an interest in leasing a PRDICO building for at least five (5) years or those who rented PRDICO buildings that have no debt or are under a payment plan and are in compliance with and still have at least (5) years in the lease or are to renew their contract for at least five (5) years. The evaluation and approval of this incentive will take into consideration the particular circumstances of the eligible company, demand for the property in the market, including payment history, financial situation, among others.

The incentive to be granted will never be greater than 50% of the rent established for the area where the property is located. The incentive should be gradually reduced so that at least on day one (1) of the first month of the sixth (6) year of the lease, the lessee pays 100% of the rent established for the industrial zone. The percentage of rent that is not covered by the incentive will be paid in full by the eligible company, as provided in the lease agreement.

The eligible company’s commitment is to comply with the terms and conditions of the lease agreement as well as comply with all the requirements of the incentives contract.

Incentive for the Puerto Rican Industry Manufacturing of Furniture and Related Products, and the Apparel Industry and Similar Products

This incentive is available for Puerto Rican businesses that have been operating for at least one year in the manufacture of furniture or related products or in the manufacture of apparel or similar products that qualify for the economic incentives provided by the Act No. 8 of 1986.

Moreover, this incentive can be granted in addition to other special incentives. Businesses that qualify for the incentive will receive a cash incentive of 3% of eligible sales, up to a maximum amount of $150,000 per business per year. The incentive can be used to acquire raw materials, machinery or equipment; acquire and/or improve the company’s manufacturing facilities; pay production payroll (where the company is not already participating in another reimbursement program); subsidize the lease of buildings housing the manufacturing process; acquire technical assistance, training in new production techniques, administration, promotion, and/or marketing; improve services through computerized equipment; promote the business’s services and/or products outside Puerto Rico; make interest payments on loans related to operations; and other purposes established under Act No. 8 of 1986.

Incentive for Assisted Projects

Established companies that are not promoted by PRIDCO, including both local and non-local businesses, may be eligible to receive special aid for creating jobs that are “additional to” the base employment level established by PRIDCO for this company. The company will receive an orientation from PRIDCO and must submit, within a year from the promotion date, certain information for evaluation.

Training Incentives

Recognizing the importance of having a well trained work force, PRIDCO offers a variety of incentives and service programs to assist companies in funding training initiatives.

All eligible companies that have an interest to cover development and training of their employees will be eligible for this incentive. PRIDCO will refund to a maximum of $6,000.00 per training or workshop. The commitment of the eligible company will be to remain in operation for a minimum of three (3) years as well as comply with all the requirements of the incentives contract.

A Massive Free Trade Zone

Puerto Rico received approval from the U.S. Commerce Department to convert most of the industrial holdings of the Puerto Rico Industrial Development Company (PRIDCO) into a massive free trade zone (FTZ).  The zone encompasses more than 4,500 acres and is the largest non-contiguous free trade zone in the U.S.  FTZ status may be granted to individual sites or plants within 60 to 90 days.

Manufacturers operating in the FTZ are exempt from duties on imports of raw materials.  Sales taxes are payable only on goods sold within Puerto Rico.  Firms that export outside of the U.S. stand to gain the most, because federal taxes are not levied on finished goods.

Puerto Rico’s FTZs also provide savings to manufacturers exporting to the U.S. mainland – the destination of more than 82% of all island exports.  Companies can opt to pay duties on either the finish product or on the aggregate value of the raw materials, whichever is less.

Pull Quotes

Puerto Rico’s FTZ encompasses more than 4,500 acres.

No federal taxes are levied on finished goods exported outside the U.S.

More information on the following links:  http://businessinpuertorico.com/en/profit/incentives-overview and http://pridco.pr.gov