Like any self-governing jurisdiction, Puerto Rico has its own tax laws and generates revenue by taxing residents and spending funds the way the government sees fit. But accounting and taxation in Puerto Rico can be convoluted; businesses and individuals in the U.S. territory must pay U.S. federal income taxes in certain cases. But if they follow the rules and structure their companies correctly, businesspeople and investors can enjoy a vast array of tax breaks.
In 2012, Puerto Rico enacted some tax incentives – commonly referred to Act 20 and Act 22 – in a bit 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.
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How to become a resident to benefit from accounting and taxation in Puerto Rico?
It’s no small feat to become a resident of Puerto Rico. Mostly it’s Americans who move to the island to avoid paying U.S. taxes, but one must meet a number of criteria and pass a number of ‘tests’ to qualify for residency:
- A physical presence on the island – You must be in Puerto Rico at least 183 days a year in order to qualify to become a resident.
- 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 will have to prove to Puerto Rican authorities that you conduct most of your business from the island itself.
- 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 actually reside.
- Not all types of income qualify for tax exemptions – Only Puerto Rican-sourced income is exempt from U.S. taxes. But there are certain types of income that will be tax exempt, while others are subject to Puerto Rican income taxes, which can range 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/or low taxes; the bad being income that is subject to either U.S. or Puerto Rican tax regimes.
For accounting and taxation in Puerto Rico, what is good income and what is bad?
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):
- Salary-based income
- Monthly pension benefits
- Traditional Individual Retirement Accounts (IRAs)
- Social Security benefits
To benefit from the tax incentives the island has to offer 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 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 to deter unscrupulous or opportunistic investors from moving their money in and out of the island’s banks come tax season, or use it as a tax shelter without contributing to the island’s economy.
What types of businesses are enticed by favorable accounting and taxation in Puerto Rico?
Much of the island’s tax incentive legislation is geared toward 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.
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.
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
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.
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.
Puerto Rico typically follows the U.S. Generally Accepted Accounting Principles (GAAP) for financial reporting.
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.
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, with offices in Bogota and Cartagena, as well as over a dozen other major cities in the region. We also have trusted partners in many other markets.
Our unrivalled reach means we are ideally placed to 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 find out more about how we can assist you in finding top talent or otherwise doing business in Latin America and the Caribbean.
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.