Small and medium-sized businesses, or PyMEs (from the Spanish abbreviation), are a vital component of Puerto Rico’s economy, significantly contributing to employment and economic growth. According to the Department of Economic Development and Commerce’s (DEDC) PyMEs Annual Report, in 2019, PyMEs made up 91.4% of all businesses in Puerto Rico, accounted for 44.8% of private-sector jobs, and represented 39.2% of total payroll in the private sector.
Beyond their economic impact, these businesses foster social connections within their communities. Recognizing their importance, the Puerto Rican government has introduced incentives aimed at supporting and promoting local businesses. This article delves into the incentives available to PyMEs, eligibility requirements, and related tax benefits.
In acknowledgment of the critical role PyMEs play, the DEDC has introduced initiatives to assist these businesses in accessing capital, purchasing machinery and equipment, and maintaining cash flow. Access to capital is often a significant hurdle for PyMEs, hindering growth and long-term stability. Through these initiatives, the government provides economic incentives to both newly established and existing PyMEs.
Under Act 60-2019, the Incentives Code, PyMEs are classified as either PyMEs or New PyMEs. A PyME is an exempt business with an average annual revenue of $3 million or less over the three tax years preceding the current one and employing up to 500 people. For the Incentives Code, PyMEs exclude Resident Individual Investors, Hard-to-Recruit Professionals, as well as Eligible Professional Medical Services and Scientific Research.
Additionally, Act 52-2023 introduced a new classification, “microenterprise,” referring to PyMEs with an annual gross income below $500,000 and up to seven employees. A New PyME is a PyME that had not commenced operations as of July 1, 2019, the effective date of Act 60-2019, and meets other criteria set by the Secretary of the DDEC.
As PyMEs play a key role in Puerto Rico’s economy, it’s essential to consider the most attractive incentives the government offers to support this sector.
Incentives Under Act 60:
Incentives Requested with Tax Grant
This incentive is available for New PyMEs. As outlined, a New PyME is a business that had not started operations as of July 1, 2019, has no economic activity or business volume, and is newly established. To qualify as a PyME under Act 60, a business must formally apply for this classification when requesting its incentive decree.
Benefits:
- Income tax is 2% in first 5 years, 4% remaining period of the tax grant
- Real and personal property tax is 100% in first 5 years, 75% remaining period of the tax grant
- Municipal taxes are 100% in first 5 years, 50% remaining period of the tax grant
Young Entrepreneurs
This incentive targets young Puerto Rican residents (as defined by the DEDC) who are dedicated to establishing and managing a business in Puerto Rico. To qualify for tax exemptions, the Young Entrepreneur must enter into a Special Agreement with the Secretary of the DEDC.
Requirements:
- Be a bona fide resident of Puerto Rico
- Age 16-35 years old
- Interested in creating and operating a business in Puerto Rico for an indefinite amount of time
- Must have a high school diploma (PR Education Department)
- Benefits are limited to one new business per young entrepreneur
- The business must not have operated previously through affiliates or reorganization à operations must have commenced after submissions of application
- The business must be operated exclusively by young entrepreneurs
Benefits:
- Income tax – 100% exemption on the first $500k of net income subject to tax. Net income in excess of $500k is subject to taxation at regular rates (per Puerto Rico IRC)
- Real and personal property – 100% exemption during the 3 year period starting from the commencement of business operations
- Municipal taxes – 100% exemption during the 3 year period starting from the commencement of business operations
Innovative PyMEs
This incentive program provides certain PyMEs focused on innovation through research and development with access to capital for starting or sustaining operations. The following is an overview of eligibility and available benefits.
Who can apply?
- Businesses involved in advanced manufacturing, aerospace, bioeconomy (including pharmaceuticals, biotechnology, and medical devices), environmental sciences, energy, or technology that operate as critical suppliers, substitute imports, or export goods or services.
- The business must demonstrate expenses related to research and development that enhance products, services, or processes to improve performance and add value.
- Only applicable to businesses established and operating in Puerto Rico.
- Gross sales must be under $3 million, with investments in new technology or scientific advancements as part of the business model.
- Applicants with less than three years in operation must either have prior business experience or complete specific training courses.
Benefits:
- Up to $200k will be disbursed according to the needs of the business
- This incentive can be used for:
- Various business expenses, including payroll, office rent, marketing, utilities, contracting professional services, and purchasing machinery and equipment. It also includes costs for research and experimentation aimed at developing new products or enhancing existing ones, as well as expenses for patent applications related to new inventions.
- This incentive can be used for:
There are a variety of other incentives for small business growth including but not limited to: the Machinery and Equipment Procurement Program, Cash Grants, Preferential Rent Program, and Seed Capital Pareo Program.
Our firm understands the vital role PyMEs play in Puerto Rico’s economy, and we are dedicated to keeping you updated on the latest available benefits. We can guide you through the process to access incentives and ensure you’re making the most of the tax advantages. Reach out to us today to discover how we can support you in maximizing your business growth.