On January 17, 2012, Puerto Rico enacted Act No. 20 of 2012, also known as the “Export Services Incentives Act” (the “Act”), to offer the necessary elements for the creation of a world-class International Services Center. The Act provides tax exemptions to businesses engaged in eligible activities in Puerto Rico. To avail itself of such benefits, a business needs to become an exempt business by obtaining a tax exemption decree.
Eligibility: The Act provides benefits for services provided from Puerto Rico to outside markets. Eligible activities to receive benefits under the Act are services in the following areas: a) Research and development; b) Advertising and public relations; c) Economic, scientific, environmental, technological, managerial, marketing, human resources, engineering, information systems, auditing and consulting services; d) Consulting services for any trade or business; e) Commercial art and graphic services; f) Production of engineering and architectural plans and designs, and related services; g) Professional services such as legal, tax and accounting services; h) Centralized managerial services, including, but not limited to, strategic direction, planning and budgeting, provided by regional headquarters or a headquarters company engaged in the business of providing such services; i) Services performed by electronic data processing centers; j) Development of licensable computer software; k) Telecommunications voice and data between persons located outside of Puerto Rico; l) Call centers; m) Shared service centers; n) Medical, hospital and laboratory services; o) Investment banking and other financial services, including but not limited to asset management, management of investment alternatives, management of activities related to private capital investment, management of coverage funds or high risk funds, management of pools of capital, trust management that serves to convert different groups of assets into securities, and escrow accounts management services; and p) Any other service designated by the Secretary of Economic Development and Commerce of Puerto Rico (the “Secretary”).
No Nexus with Puerto Rico: In order to qualify as an eligible activity, the service that is provided cannot have a nexus with Puerto Rico. In other words, the service must not be related to the conduct of a trade, business or other activity in Puerto Rico (Promoter Services are excepted from this general rule, as further explained below under Promoter Services). The following services will be considered to have a nexus with Puerto Rico, and thus are not be eligible services: a) Services provided to business or regarding income-producing activities that are or have been performed in Puerto Rico by the applying business; b) Services regarding the sale of any property located in or for use, consumption or disposition in Puerto Rico; c) Counseling on the laws, regulations, administrative procedures and/or determinations of the Government of Puerto Rico and its instrumentalities; d) Lobbying on the laws, regulations, administrative procedures and/or determinations of the Government of Puerto Rico and its instrumentalities; and e) Any other activity designated by the Secretary.
Promoter Services: Some services that are considered non-eligible for having a nexus with Puerto Rico can nevertheless be eligible by way of exception if they are Promoter Services. Promoter Services are services provided to non-resident individuals and/or foreign entities that are related to the establishment of a New Business in Puerto Rico as defined in the Act and its regulations. Only net income derived from Promoter Services provided to a New Business that are performed within the 12-month period ending on the day preceding the earliest of the following actions will be considered exempt service income: a) The New Business executes a contract to acquire or lease facilities in Puerto Rico; b) The New Business begins construction of the facilities to be used in Puerto Rico; or c) The New Business commences operations in Puerto Rico.
Tax Exemption: Eligible activities can benefit from the following benefits on income derived from customers located outside of Puerto Rico in relation to services rendered from Puerto Rico: a) 4% fixed income tax rate; b) 3% fixed income tax rate in the case of services considered strategic that essentially focus on exporting their services; c) 100% tax exemption on distributions from earnings and profits; d) 100% tax exemption for the first five years of operation from personal property taxes for certain types of businesses, and 90% tax exemption thereafter for the term of the tax exemption decree. The taxable portion will be subject to the regular tax rate, that currently can be up to 8.83%, so therefore, after considering the 90% exemption, the effective tax rate would be up to 0.883%; e) 100% tax exemption for the first five years of operation from real property taxes for certain types of businesses, and 90% tax exemption thereafter for the term of the tax exemption decree. The taxable portion will be subject to the regular tax rate, that currently can be up to 10.83%, so therefore, after considering the 90% exemption, the effective tax rate would be up to 1.083%; and f) 60% tax exemption on municipal taxes (90% tax exemption if the business operates in the industrial development zone constituted by the municipalities of Vieques and Culebra). Any taxable portion will be subject to the regular tax rate, that currently can be up to 0.5%, so therefore, after considering the 60% exemption, the effective tax rate would be up to 0.02%.
Tax Exemption Decree: To benefit from the Act, the service provider needs to submit an application with the Office of Industrial Tax Exemption to obtain a tax exemption decree signed by the Secretary, which will provide full detail of tax rates and conditions mandated by the Act and which will be considered a contract between the Government of Puerto Rico and the service provider. Once the service provider obtains the tax exemption decree, the benefits granted will be secured during the term of the tax exemption decree, irrespective of any changes in the applicable Puerto Rico tax laws. The tax exemption decree shall have a term of 20 years, with a possible 10-year extension.
Puerto Rico Income Taxes: An exempt business operating in Puerto Rico under the Act by means of a Puerto Rico entity should not be subject to any taxes (such as a dividend tax, tollgate tax or other similar taxes) on its income from its eligible activities in Puerto Rico, other than the Puerto Rico fixed income tax rate established in the tax exemption decree, regardless of whether said income is distributed or retained by the entity. Upon repatriation, the distributed income would be subject to the tax imposed by the jurisdiction in which the owners of the Puerto Rico entity reside, if any.