In the search to reduce my tax burden I ran across Puerto Rico. Puerto Rico has deliberately set itself up as a popular destination for digital business owners and other entrepreneurs by implementing a series of tax benefits. In this article, I’ll examine those benefits, how they work for digital business owners, and give some of own thoughts on why I didn’t ultimately move down there.
Qualified businesses can benefit from a 4% tax rate, compared to the U.S. rate of up to 37%. Along with that stock, bond, and even crypto investors can enjoy 0% tax on gains and distributions. This and other benefits, while subject to certain conditions, provide an opportunity for digital business owners to greatly enhance profitability while enjoying Puerto Rico’s beauty and culture.
The best part is you DO NOT have to renounce your US citizenship!
Digital business owners who are prepared to move their operations to Puerto Rico and become bona fide residents of this American territory can take advantage of the many tax benefits and exemptions which have been designed to attract entrepreneurs and investors to the local economy. I’ll detail in this article exactly how to achieve that.
The Tax Benefits For Digital Business Owners in Puerto Rico
Act 20: Export Services Act and Act 22: Individual Investors Act were incorporated as Chapter 3 and Chapter 2, respectively, into a new piece of legislation, Act 60, also known as the "Puerto Rico Incentives Code," in 2019. This legislation offers substantial tax benefits to encourage entrepreneurs and investors, particularly in the digital sector.
Tax Benefits For Digital (And Other) Businesses
Previously included in Act 20, now Chapter 3 of Act 60, benefits for eligible businesses include:
- 4% corporate tax rate
- 0% tax rate for distributions from earnings and profits, i.e., dividends, interest, and capital gains
- 50% tax exemption on municipal taxes (tax rate ranging from 0.2% to 0.5% of gross revenue) paid with annual Volume of Business declaration form
- 75% tax exemption on municipal and state property taxes, increased to 100% for the first five years for small businesses.
- if your business exports services from Puerto Rico (most digital businesses), like you run a podcast or run an affiliate blog, you pay 4% tax.
- if you have gains or distributions from stocks or bonds, those are taxed at 0%.
Note: service export and investors decree are separate, so you essentially have two different decrees and double the fee cost.
This favorable tax treatment is attracting talented digital professionals and entrepreneurs to the island, fostering the development of a vibrant tech ecosystem. The act covers a wide range of services, including digital marketing, software development, graphic design, e-commerce, consulting, and more.
Eligibility and Requirements For Puerto Rico Tax Benefits
How do the owners of digital businesses qualify for the tax incentives? As a starting point, Act 60, known as The Tax Incentive Code, provides these tax exemptions to investors and businesses that are set up or that relocate to Puerto Rico.
It’s important to understand what is needed, not only to qualify for the exemptions but also to not be liable for tax in the U.S. – these are the requirements:
To no longer be subject to U.S. tax and enjoy Puerto Rico tax incentives, you must be a "bona fide resident," which means passing three tests:
1. The Substantial Presence Test
There are several ways to pass the Presence Test:
- You must be physically present in Puerto Rico for at least 183 days or satisfy one of the other presence tests during the taxable year.
- You can also satisfy this test if you are present in Puerto Rico for at least 549 days in the current tax year and the two previous tax years and for at least 60 days in each tax year during that period.
- You were in the U.S. for less than 90 days during the tax year.
- You did not earn more than $3,000 in the U.S. during the tax year and were present in Puerto Rico for more days than in the U.S.
2. The Tax Home Test
You must not have a tax home outside of Puerto Rico during any part of the taxable year. A tax home is where your primary place of employment is, regardless of where you live. If you do not have a regular place of employment, then your tax home is your primary residence. There is an exception for the year of your move only.
3. The Closer Connection Test
This is quite a demanding test and requires that Puerto Rico becomes the location of:
- Your permanent home and where you store your belongings.
- Your immediate family
- Your current social, political, cultural, professional, or religious organizations
- Your business and banking activities
- Where you hold a driver's license
- Your voting activity
- Your residential address on forms and documents
As you can see, to pass the closer connection test (which is essential), you need to relocate your entire life to Puerto Rico. On the positive side, moving to Puerto Rico allows you to retain your U.S. citizenship even though you no longer reside on the mainland.
Do Puerto Rico Tax Benefits Come At A Cost?
The tax benefits Puerto Rico offers to digital business owners and other entrepreneurs whose businesses qualify are very attractive and appealing to those with a heavy Federal tax burden. However, everything comes at a price, and there are certain costs involved:
- There is a $750 fee due with your application for tax exemption. Once approved, you must pay a one-time $5,000 acceptance fee.
- You are required to make a $10,000 annual contribution to a non-for-profit entity authorized by the Puerto Rico Department of Treasury;
- It is obligatory to acquire by purchase from an unrelated person residential property within 2 years after the exemption is granted.
- Every tax year, you must file an annual compliance report with a filing fee of $300.
- Don’t forget about accounting and legal fees for your taxes each year. CPA’s and lawyers know that you’re not broke, and they charge accordingly. This could add 10s of thousands of dollars.
Some Points To Consider Before Moving Your Digital Business
I would strongly recommend speaking to a qualified tax practitioner before committing yourself and your family to relocate permanently to Puerto Rico.
- Apart from the abovementioned costs, there is the expense of selling your home, transporting your household and possessions, and setting up in Puerto Rico.
- Although the Puerto Rico government will give you a commitment to maintain the tax exemptions, the economy is not in good shape, and things may change without warning – unlikely but possible.
- Not all digital businesses qualify for Act 60 exemptions, and you must be very clear about your operation and its eligibility. Don’t take the word of anyone but a professional tax consultant, as there are many “advisors” and promoters just out to make a quick buck.
- The Gringo Tax. First of all, everything on the Island is high priced than you’d expect on the mainland United state. Groceries are more and cars are more. In addition to that, everyone you do business with will know that you’re not exactly broke and you’ll pay higher prices than locals for everything from remodeling, to doctors visits.
I went To Puerto Rico, I didn’t stay.
A few years back, after discovering the tax advantages and calculating the amount of tax savings I’d have, I booked a one way flight down with my mountain bike and the plan to stay for about a month to feel it out. I quickly decided it wasn’t for me.
First, it is truly ‘island life’. Things don’t happen the way they do on the main land, and their is a noticeable distaste for the tax dodging gringos. There are even road blocks set up in protest of the Acts that substantially reduce taxes. And then there is the gringo tax. You feel it when doing business any where other than a retail store. Add in your tax prep fees each year which are no longer just a couple thousand dollars and you’ll realize you’re paying a good bit in ‘taxes’.
And then, I just didn’t really like the place. To really make it work you have to like Puerto Rico and enjoy it there.
Act 60 has positioned Puerto Rico as an attractive destination for digital business owners, offering significant tax incentives, a supportive business environment, access to a skilled workforce, and an appealing quality of life. These benefits have fostered the growth of digital enterprises, stimulating economic development on the island. By taking advantage of Act 60, digital business owners can establish and expand their ventures in Puerto Rico, enjoying substantial tax savings and opportunities for long-term success.