23 May Puerto Rico: Offering Unique Incentives and Benefits to EB-5 Investors and Business Owners

As a Commonwealth of the United States, Puerto Rico uses the U.S. Dollar as its currency, is defended by the U.S. armed forces, and is subject to the American Federal Court System and Laws. However, one little-known fact that is highly useful to prospective EB-5 business owners and investors is that the island also enjoys some degree of autonomy from U.S. fiscal policy, particularly with respect to taxation. As a result, Puerto Rico is able to offer a highly attractive “incentives package” to new businesses that is not available in the continental United States. Below, we review some of the many benefits and incentives of doing business and residing in Puerto Rico.

An Attractive Tax System

Puerto Rico corporations are treated for federal tax purposes as foreign corporations and are not generally subject to U.S. corporate taxes. Consequently, the island jurisdiction offers a fixed corporate income tax rate – one of the lowest in comparison with any U.S. jurisdiction. In addition, U.S. federal taxes do not apply generally to income generated within the Commonwealth. Other benefits include various tax exemptions and special deductions, training expenses reimbursement, and special tax treatment for pioneer activities.[1]

Special Tax Benefits for New Puerto Rico Residents

In 2012, Puerto Rico’s legislature signed into law Acts 20 and 22, providing new and aggressive incentives to urge investors to move to the Island to do business. The legislature’s intention was to make the island a center for the export of international services throughout the world. Qualifying business owners and investors can take advantage of these many lucrative incentives, which can be of great benefit to EB-5 stakeholders.[2]

Act 20, “The Export Services Act,” which aims to transform Puerto Rico into an international service export center, offers the following specific incentives and benefits to business ventures, particularly those involved in the export of goods and services from the island:

• 4% corporate tax rate for businesses providing services for exportation;
• 100% tax-exempt dividends from earnings and profits derived from the export services income of eligible businesses;
• 60% exemption on municipal taxes;
• 90% exemption on property taxes; and
• 20-year decree guaranteeing these rates.

Act 22, “The Individuals Investors Tax Act,” promotes the relocation of individual investors to Puerto Rico by attracting new residents to the Island. The Act provides a total exemption from Puerto Rico’s income taxes on all passive income realized or accrued after such individuals become bona fide residents of Puerto Rico.  The specific benefits of Act 22 include:

• 0% tax on dividend and interest income for new Puerto Rico residents;
• 0% tax on short-and-long term capital gains for new Puerto Rico residents; and
• 0% federal taxes on Puerto Rico source income.

Note: To become a new bona fide resident of Puerto Rico, an individual must have physical presence in the Island for at least 183 days of the year and must not have been a resident in Puerto Rico for the 15 years prior to the Act’s effective date.

A complementary piece of legislation passed the same year (2012), is Act 273, The International Financial Center Regulatory Act. Act 273 offers a 4% income tax rate for new banking and financial businesses established in Puerto Rico under qualifying circumstances.[3]

In addition to the many tax incentives and benefits listed above, another potential benefit of becoming a U.S. citizen upon naturalization in Puerto Rico is that an immigrant investor would be considered a nonresident alien for U.S. estate and gift tax purposes, which, with the appropriate estate planning, could limit their exposure to such taxes. Therefore, such investors can enjoy the Puerto Rico income tax exemptions granted under Act 22 on their passive investment income or capital gains while potentially limiting the impact of any U.S. estate or gift taxes.[4]

Large Free Trade Zone

Puerto Rico received approval from the U.S. Department of Commerce to convert most of the industrial holdings of the Puerto Rico Industrial Development Company (PRIDCO)—a government-owned corporation dedicated to promoting Puerto Rico as an investment destination for companies and industries worldwide—into a massive free trade zone.  The zone encompasses more than 4,500 acres and is the largest non-contiguous free trade zone in the U.S.  Free Trade Zone status may be granted to individual sites or plants within 60 to 90 days. The benefits of this status include:

• Manufacturers operating in the FTZ are exempt from duties on imports of raw materials.
• Sales taxes are payable only on goods sold within Puerto Rico.  Firms that export outside of the U.S. stand to gain the most, because federal taxes are not levied on finished goods.[5]

Puerto Rico as an Attractive Business Destination

With all of these advantages, it is no wonder that some of the world’s leading companies have recognized the attractiveness of Puerto Rico as a business destination. The island has a bilingual, generally hard-working and educated workforce of 1.3 million individuals and is home to the highly regarded engineering program at the University of Puerto Rico Mayaguez, which is a feeder for various biotech and industrial companies operating on the island.[6] Additionally, the island features a well-developed infrastructure and is a transportation hub in the Caribbean and between the U.S. and Europe, offering 9 modern maritime ports, 11 airports, and more than 24,000 miles of highway.[7]

According to financial and consulting firm BDO Puerto Rico, 13 of the top 20 medical device companies operate in Puerto Rico, 12 of the top 20 pharmaceutical and biotechnology companies have manufacturing operations on the Island, and 7 of the top-selling medications in the world are produced in Puerto Rico.[8]

EB-5 investors and business owners interested in the many unique benefits of residing and doing business in Puerto Rico can start the process by contacting our skilled EB-5 experts at info@ecouncilinc.com. e-Council Inc. is an experienced, concierge company with a long track record of successfully guiding its clients through the complex EB-5 process. We provide turnkey, customized EB-5 services, including best-in-class Matter of Ho-compliant business plans, due diligence project assessments, and a wide range of ancillary services. e-Council Inc. can help interested investors to pursue the “American dream” in Puerto Rico.

e-Council Inc.’s website, newsletter and other forms of communication contain general information about legal matters. The information is not legal advice and should not be treated as such. You must not rely on the information on this website as an alternative to legal advice from an attorney or other professional legal services provider. For specific questions about any legal matter please consult with an attorney or other professional services provider.

[1]EB-5 Regional Center, Iconic Caribbean, http://iconic-caribbean.com/?page_id=4735; http://bdopr.com/prkeyessentials/doing_business.html; http://bdopr.com/prkeyessentials/doing_business.html

[2] Since there are special rules provided for the year of the move from the United States to Puerto Rico, investors are encouraged to follow them closely in order to take full advantage of the new laws and its benefits.

[3] http://bdopr.com/prkeyessentials/doing_business.html

[4] http://www.gaclaw.com/News-Publications/Puerto-Rico-Tax-Advantages-Offer-Additional-Incentives-for-EB5-Foreign-Investors.pdf

[5] http://www.pridco.com/why-puerto-rico/incentives/Pages/Free-Trade-Zone.aspx

[6] http://www.hispanicengineer.com/Editorial/top%20schools.shtml; ttp://iconic-caribbean.com

[7] http://www.pridco.com/why-puerto-rico/Pages/Infrastructure.aspx

[8] http://bdopr.com/prkeyessentials/doing_business.html