E2 with Puerto Rico Act 60 Tax Incentives
Puerto Rico Act 60 Tax Incentives
Setting Up Your E2 Business in Puerto Rico with Tax Benefits
The Commonwealth of Puerto Rico has its own taxing authority separate and apart from the US Treasury Department’s Internal Revenue Service (IRS). US citizens are taxed on their worldwide income, except that a bona fide Puerto Rican resident can shield Puerto Rican sourced income from US taxes. In 2012, Puerto Rico established an incentive program (then known as Act 20-22, now known as Act 60 where Act 20-22 was consolidated in 2019). An E2 investor who sets up US business operation in Puerto Rico and agrees to become a Puerto Rican bona fide resident (and otherwise qualifies) would avail himself of the same tax benefits. In the case of a restructured business (relocating an overseas business to Puerto Rico) could reduce or eliminate foreign taxation of that business (example follow below).
Act 20 provides tax incentives for companies that establish and expand their export services businesses in Puerto Rico. Under Act 20, income from certain services (outlined below) rendered for the benefit of non-Puerto Rican resident individuals or non-Puerto Rican foreign entities is taxed at a tax rate of 4%. Moreover, dividends are 100% exempt from Puerto Rico taxation.
Eligible Act 20 services include:
- Research and development
- Advertising and public relations
- Data processing centers
- Call centers
- Scientific, management, information technology and marketing consulting services
- Professional services
- Development of computer programs
- Shared management services
- Educational and training services
- Hospital and laboratory services
- Investment banking and other financial services
EB-5 Immigrant Investor Program
USCIS administers the EB-5 Program. Under this program, entrepreneurs (and their spouses and unmarried children under 21) are eligible to apply for a Green Card (permanent residence) if they:
- Make the necessary investment in a commercial enterprise in the United States; and
- Plan to create or preserve 10 permanent full-time jobs for qualified U.S. workers.
This program is known as EB-5 for the name of the employment-based fifth preference visa that participants receive. Congress created the EB-5 Program in 1990 to stimulate the U.S. economy through job creation and capital investment by foreign investors. In 1992, Congress created the Immigrant Investor Program, also known as the Regional Center Program. This sets aside EB-5 visas for participants who invest in commercial enterprises associated with regional centers approved by USCIS based on proposals for promoting economic growth.
- An E2 investor seeks to open a business that conducts research and development of software for several clients located outside of Puerto Rico. The E2 investor is from a country that does not tax its citizens who relocate abroad. Upon issuance of the E2 visa the investor relocates to San Juan Puerto Rico and opens the office, hires 2 employees and starts his business. After the first year of operations the business has generated $600,000 in gross revenue and after all business expenses are accounted for it shows net review of $350,000. As the beneficiary of the Act 20 Decree, the company pays 4% tax of the net review and the E2 investor pays 0 on the profit that he received as a dividend. The same E2 business in the US would most likely result in a dividend tax obligation of 30% of the net profit (or $105,000).
- Same facts as above, except that the E2 investor has an existing business for the past 5 years in his country of origin, with annual revenue of $1 million and $350,000 net revenue. He wants to maintain that operation but decides to open an affiliate in Puerto Rico and relocate with his family to live in San Juan. He opens the new office in San Juan and after the first year of operations he files tax returns in his country of origin and in the Puerto Rico/US as follows: country of origin gross and net revenue is $500,000 and $100,000. In Puerto Rico the gross and net is $1,250,000 and $750,000. His personal tax in the country of origin is 45% of net or $45,000, and the tax due on the net dividend paid in Puerto Rico ($750,000) is 0.
In all cases each interested applicant should consult with his own tax advisor in both jurisdictions prior to proceeding with the E2/Puerto Rico Act 20 application.