A pen rests on a paper filled with numerical data. The words "Biz Latin Hub" and "Accounting and Taxation in Puerto Rico" are prominent in the center, indicating a focus on accounting and tax services in Puerto Rico provided by Biz Latin Hub.

What Do Investors Need to Know About Accounting and Taxation in Puerto Rico?

Puerto Rico’s allure to investors lies in its strategic location, tax incentives, and skilled workforce. The island’s unique blend of business advantages and tropical charm makes it an attractive investment destination.

However, accounting and taxation in Puerto Rico can be complicated; certain businesses and individuals in the U.S. territory must pay U.S. federal income taxes. But if they follow the rules and structure their companies correctly, businesspeople and investors can enjoy a range of tax breaks. 

In 2012, Puerto Rico enacted some tax incentives – commonly referred to as Act 20 and Act 22 – to attract more companies to the island. Companies that sell goods or services overseas and qualify for the Act 20 incentive need only pay a 4-percent flat tax on income generated outside the island. As a personal incentive, investors who are residents of Puerto Rico can earn interest for capital gains and in many (but not all) cases, pay no taxes on that income

Most of the incentives related to accounting and taxation in Puerto Rico require an individual, company, or investor to be a bona-fide resident of the U.S. island territory for at least six months. 

Infographic titled "How to Become a Resident to Benefit from Accounting and Taxation in Puerto Rico?" with a Puerto Rican flag. Includes four steps: stay in Puerto Rico for 183 days a year, pass the 'closer-connection' test, prove no tax home outside, and note tax exemption limits. BizLatin Hub branding and contact information at the bottom.
Some requirements for becoming a resident to benefit from Accounting and Taxation in Puerto Rico

How to become a resident to benefit from accounting and taxation in Puerto Rico?

It’s not easy to become a resident of Puerto Rico. It is usually Americans who move to the island to avoid paying U.S. taxes, but one must meet several criteria and pass numerous ‘tests’ to qualify for residency:

  1. A physical presence on the island – You must be in Puerto Rico at least 183 days a year to qualify to become a resident.
  1. The ‘closer-connection’ test You can’t become a bona-fide resident of Puerto Rico for tax purposes if you have a “closer connection” to the U.S. or another jurisdiction. But in essence, you need to prove to Puerto Rican authorities that you conduct most of your business from the island itself.
  2. The ‘tax home’ test – Another requirement for Puerto Rican residency is that you do not have a tax home outside of Puerto Rico during any part of the tax year. With accounting and taxation in Puerto Rico, your tax home is where you live and conduct business regularly, regardless of where you reside.
  3. Not all types of income qualify for tax exemptions – Only Puerto Rican-sourced income is exempt from U.S. taxes. But certain types of income will be tax exempt, while others are subject to Puerto Rican income taxes, ranging from anywhere between 13 and 33 percent

SEE ALSO: Company Formation in Puerto Rico

Many analysts talk about “good” and “bad” types of income, the good being income that enjoys tax exemptions and low taxes. The bad income is subject to either U.S. or Puerto Rican tax regimes.

Accounting and taxation in Puerto Rico: What is good income?

Good income (i.e., income that can be tax-exempt):

  • Contract or service-related income generated on the island
  • Capital gains income
  • Investment advisory services
  • Dividend payments from Puerto Rico-based companies
  • Asset management services
  • Affiliate marketing activity
  • Income generated by an online business
  • People who own large quantities of cryptocurrency such as Bitcoin

Bad income (i.e., income that is subject to U.S. or Puerto Rican tax regimes):

biz latin hub infographic on how to benefit from accounting and taxation in puerto rico
Becoming a resident can help you benefit from Accounting and Taxation in Puerto Rico
  • Salary-based income
  • Monthly pension benefits 
  • Traditional Individual Retirement Accounts (IRAs)
  • Social Security benefits

To benefit from the tax incentives the island offers requires a lifestyle change, as you will have to live in Puerto Rico for the medium- or long-term to qualify for residency. It takes at least six months of living on the island to become a “bona-fide” resident of Puerto Rico. The Puerto Rican accounting and taxation system is designed in such a way as to deter unscrupulous or opportunistic investors from moving their money in and out of the island’s banks come tax season or using it as a tax shelter without contributing to the island’s economy. 

SEE ALSO: 5-step guide to starting a business in Puerto Rico

What types of businesses are attracted by favorable accounting and taxation in Puerto Rico?

Much of the island’s tax incentive legislation is aimed at attracting certain kinds of businesses to the territory – namely export services, commerce, and the tech sector. With favorable accounting and taxation in Puerto Rico, authorities hope to turn the island into an international export service and commerce hub.

Businesses and industries that Puerto Rico wants to see more of include:

  • Advertising and public relations
  • Digital/online marketing 
  • Corporate Headquarters
  • Call Centers
  • Financial services
  • The creative sector (design, art, music, publications, app development, etc.)
  • Software developers
  • Education technology companies
  • R&D businesses
  • Professional services (legal, tax, and accounting services) 

A U.S. citizen who becomes a bona fide Puerto Rico resident and moves their business to the island (thus turning its revenues into Puerto Rico-sourced income) may benefit from paying a 4-percent fixed corporate tax rate. In addition, they will be 100 percent exempt from paying property taxes as well as exempt from taxes on dividends.

Image displaying a table from Biz Latin Hub detailing Accounting and Taxation in Puerto Rico. Taxable income up to $75,000 is taxed at 5%, $75,001-$125,000 at 15%, $125,001-$175,000 at 16%, $175,001-$225,000 at 17%, $225,001-$275,000 at 18%,
What is the corporate tax rate in Puerto Rico. Accounting and Taxation in Puerto Rico

Common Questions when understanding accounting and taxation in Puerto Rico

Based on our extensive experience these are the common questions and doubts from our clients when looking to understand accounting and taxation in Puerto Rico.

1. What is the corporate tax rate in Puerto Rico?

The corporate tax rate in Puerto Rico is based on a normal tax and surtax structure, whereby a taxpayer who is not a member of a controlled group, taxable income will be subject to a normal tax of 18.5% and the balance in excess of the $25,000 surtax exemption will be subject to the following surtax:

– $0-$75,000                            5%
– $75,001 – $125,000               $3,750 plus 15% of excess over $75,000
– $125,001 – $175,000             $11,250 plus 16% of excess over $125,000
– $175,001 – $225,000             $19,250 plus 17% of excess over $175,000
– $225,001 – $275,000             $27,750 plus 18% of excess over $225,000
– $275,001 – Over                    $36,750 plus 19% of excess over $275,000

2. How are businesses taxed in Puerto Rico?

Businesses in Puerto Rico are subject to various taxes, including corporate income tax, sales and use tax (known as IVU), property tax, and other local taxes. The specific tax liabilities of a business can vary based on factors such as its industry, location, and eligibility for tax incentives under Puerto Rico’s tax code. Income taxes are calculated on the difference between revenue minus deductible expenses.

3. What is the IRS called in  Puerto Rico? 

In Puerto Rico, the equivalent of the Internal Revenue Service (IRS) in the United States is known as the “Departamento de Hacienda” or the Puerto Rico Department of Treasury. It is responsible for administering tax laws and collecting taxes on the island.

4. What is the accounting standard in Puerto Rico?

Puerto Rico typically follows the U.S. Generally Accepted Accounting Principles (GAAP) for financial reporting.

5. What is the CPA equivalent in Puerto Rico?

In Puerto Rico, the equivalent of a Certified Public Accountant (CPA) is known as a “Contador Público Autorizado” (CPA). A Contador Público Autorizado is a certified professional accountant who is licensed to practice accounting, audit, and taxation services in Puerto Rico.

6. Does Puerto Rico report in IFRS?

Puerto Rico primarily follows U.S. GAAP for financial reporting. However, some entities in Puerto Rico, especially those under the jurisdiction of the Puerto Rico Financial Oversight and Management Board, may use International Financial Reporting Standards (IFRS).

Biz Latin Hub can help you with accounting and taxation in Puerto Rico

At Biz Latin Hub, we provide integrated market entry and back-office services throughout Latin America and the Caribbean. Our unrivaled reach means we can support multi-jurisdiction market entries and cross-border operations.

As well as knowledge about accounting and taxation in Puerto Rico, our portfolio of services includes hiring & PEO accounting & taxation, company formation, bank account opening, and corporate legal services.

Contact us today to learn more about how we can assist you in finding top talent or otherwise doing business in Latin America and the Caribbean.If this article on accounting and taxation in Puerto Rico was of interest to you, check out the rest of our coverage of the region. Or read about our team and expert authors.

Infographic titled "How Can Our Accounting & Taxation Services Help Your Business?" surrounding the BizLatin Hub logo. It lists services: Bookkeeping, Payroll Processing, Financial Reporting, Invoice Management, Audit & Tax Filing, and Treasury Services. Meeting accounting requirements in Bolivia? Contact us!
Biz Latin Hub services: Accounting and Taxation in Puerto Rico

The information provided here within should not be construed as formal guidance or advice. Please consult a professional for your specific situation. Information provided is for informative purposes only and may not capture all pertinent laws, standards, and best practices. The regulatory landscape is continually evolving; information mentioned may be outdated and/or could undergo changes. The interpretations presented are not official. Some sections are based on the interpretations or views of relevant authorities, but we cannot ensure that these perspectives will be supported in all professional settings.
Craig Dempsey
Craig Dempsey

Craig is a seasoned business professional in Latin America. He is the Managing Director and Co-Founder of the Biz Latin Hub Group that specializes in the provision market entry and back office services. Craig holds a degree in Mechanical Engineering, with honors and a Master's Degree in Project Management from the University of New South Wales. Craig is also an active board member on the Australian Colombian Business Council, and likewise also active with the Australian Latin American Business Council.

Craig is also a military veteran, having served in the Australian military on numerous overseas missions and also a former mining executive with experience in various overseas jurisdictions, including, Canada, Australia, Peru and Colombia.

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