The economy of Puerto Rico continues to contract. This fact has motivated some business owners to move their businesses off the island with the goal of conquering new markets.
Many business owners, however, are not aware that under Act 20, there are also benefits for local businesses, specifically to promote the export of services, and that they would pay a tax rate of 4%, applicable to income from export of products and services. If they do not take advantage of this enactment, the maximum rate for a regular corporation is 39%.
“The fact is that Act 20 will help many people who think: ‘Well, I’m going to leave Puerto Rico.’ Instead, they can stay and run their businesses from here. The tax savings will help them begin to export their goods and services,” said Edgar Ríos Méndez, a partner in the firm Pietrantoni, Méndez & Álvarez.
He also explained that those who establish their businesses in the United States have to pay a maximum federal individual income tax rate of 39.6%. That is why Act 20, with such a low tax rate, is a favorable alternative for owners of local and foreign businesses based on the Island.
Additionally, those who take advantage of the law may have a 90% tax exemption on real estate and property and a 60% exemption on municipal taxes.
A law with “locals” in mind
Ríos Méndez admitted that few local businesses have requested to be covered under Act 20. He explained that many business owners believe that the law was developed only to reduce the tax rate for foreign companies that relocate their operations to Puerto Rico. In fact, he has handful of local clients who benefit from the law versus a hundred international clients. Among the former, he noted the success of a Puerto Rican business owner who has provided human resources consulting services to customers in Latin America from her base on the Island.
Services eligible for export
“Any business has the potential to develop a service in Puerto Rico for a market outside the Island. Additionally, companies that already have clients abroad can request the benefits of Act 20,” said Ríos Méndez. If the company is dedicated both to exporting and to activities covered by Act 20, it has to keep two sets of books: one for sales and services for export and another for business done only for clients on the Island.
Among the eligible activities for export are:
- Consulting of any kind; for example human resources, public relations, and marketing
- Shared services centers
- Management centers
- Call centers
- International trading companies established on the Island that buy and sell products for consumption outside of Puerto Rico
- Internet sales of products for use off the Island
Terms of the law
The Act is in effect until December 31, 2020. Once the exemption is granted, the business owner will enjoy the benefits for 20 years. In other words, if you receive approval on December 31, 2016, you have until 2036 to enjoy the benefits, even if changes are made later in the tax laws. Additionally, you have five years to activate it, or in other words, to put your export business into operation.
The request for an exemption under Act 20 involves an investment of approximately $800 in fees paid to the government. Once approved, the business owner signs a contract with the Puerto Rico Government. For more information, visit the Department of Economic Development and Commerce (Hyperlink: http://ddec.pr.gov/es/).
Minimum number of employees
Businesses that take advantage of the exemption have a maximum of six months to hire three employees and up to 18 months to add two more people to their team, for a total of five in a period of two years.
Your niche, from here to the world
Act 20 could give you a boost in exporting your products and services to neighboring countries such as the Virgin Islands, Cuba, the Dominican Republic and the United States, or to destinations as distant as Spain. There are no limitations on the countries, and using the internet, you can do many kinds of business.
At the same time, the migration of Puerto Ricans to the United States could be an area of opportunity for you. “Look for those products that Puerto Ricans are accustomed to consuming. They will want to get them,” Ríos Méndez recommended.
Let’s go! Think about the tax savings versus the investment you would make to export. Remember to consult your financial and legal advisors before making any business decision.
Banco Popular de Puerto Rico, its subsidiaries, and/or affiliates do not engage in the offering of tax, legal or accounting advice. If legal, tax, or accounting assistance is required, the services of a competent professional should be sought.