Summary of Act 20 and Act 22 Puerto Rico Tax Incentive Laws

December 5, 2015

At the beginning of 2012, the Legislative Assembly of Puerto Rico approved several Puerto Rico tax incentive laws with the hopes of improving the economic development of the territory. The two acts that are receiving the most attention are known as the Export Services Act (Act 20) and the Individual Investors Act (Act 22), and they both offer extremely generous tax incentives in an effort to encourage the growth of businesses, the job market, the real estate market, and the banking industry in Puerto Rico.

Act 20: The Export Services Act

This Puerto Rico tax incentive law is all about inspiring companies to both establish and expand their export services by offering them low tax rates on the income they receive from the services they provide to customers outside of Puerto Rico. This includes both the manufacturing of exported goods as well as the warehousing and distribution of imported products that will continue on to be exported.

In order to benefit from this Puerto Rico tax incentive, the business must obtain the necessary documentation to prove their eligibility. Once the contract with the Puerto Rico government is signed, the company will receive:

  • A flat-rate tax of four percent on income from exported goods/services
  • A 100% tax exemption on profit distributions or dividends from said services
  • A 100% tax exemption on property taxes during the first five years and 90% thereafter (eligibility requirements apply)

Act 22: The Individual Investors Act

In an effort to attract wealthy investors, the Act 22 Puerto Rico tax incentive law was created. It allows new bona fide residents of Puerto Rico to receive substantial tax exemptions on their dividends, interest, and capital gains. In order to be eligible for these exemptions, the investor must be able to prove that they live in Puerto Rico for at least half of the year (with their family, if applicable) and they have no ties left behind in the U.S. They must bank with Puerto Rico banks, have their children attend Puerto Rico schools, and obtain licenses issued by Puerto Rico. Once this is done, individual investors will receive:

  • A 100% Puerto Rico income tax exemption on all income earned from dividends or interest
  • A 100% Puerto Rico income tax exemption on capital gains accrued after the investor became a Puerto Rico resident.

With these Puerto Rico tax incentive laws in place, the hope is that Puerto Rico’s economy will flourish. They will bring new businesses and residents to the territory, which, in turn, will lead to real estate investments, the consumption of goods sold in Puerto Rico, and an increase in the cash flow of the Puerto Rico banking sector.