“In America, there are two tax systems; one for the informed and one for the uninformed. Both systems are legal…” Judge Learned Hand
From my clients, I constantly hear reasons not to fully realize the benefits available in the Internal Revenue Code. “It’s too good to be true!” “If this was real, everyone would know about it!” However, my years of experience in accounting has made me realize that no one knows everything.
This article will walk you through the basics of Act 60 and how you can retain your US citizenship and save millions of dollars in taxes each year.
On July 1, 2019, the Governor of Puerto Rico signed House Bill 1635 into law as Act 60-2019, known as the Incentives Code of Puerto Rico (the “Act”). This Act consolidates incentives that have been granted over decades to promote economic growth more effectively. It establishes a legal and administrative framework for the Government of Puerto Rico to manage the application, assessment, and approval or denial of these incentives. While some incentives remain the same, others have been revised or removed to improve the public investment’s returns. The Act is organized into six subtitles, with tax incentives outlined in various chapters under Subtitle B.
Standard Incentives and Terms
- Term: Tax exemption grants are standardized to a 15-year term, extendable for an additional 15 years, totaling 30 years.
- Employment: Eligible businesses with an annual or projected business volume exceeding $3 million must employ at least one person for export services grantees (formerly under Act 20-2012) and three employees for industrial incentives grantees (formerly under Act 73-2008). Businesses with grants under Acts 20-2012 and 73-2008 may request amendments to meet the new employment criteria in the Act, which the Secretary of the Department of Economic Development and Commerce (DEDC) has the authority to approve. Other eligible businesses are exempt from employment commitments.
- Income Tax: A flat 4% income tax rate applies to exempt income generated by eligible businesses. This revises some exemptions, such as tourism, which previously had a different income tax exemption under Act 74.
- Property and Municipal Taxes: A 75% exemption applies to property tax, reducing the previous 90%-100% exemptions. Eligible businesses also receive a 50% exemption on municipal taxes, including municipal license and construction excise taxes.
- Exempt business with 2% tax rate: Exempt businesses in Culebra and Vieques, as well as new small and medium-sized businesses, qualify for enhanced tax incentives (see details below). According to Section 1020.01(a)(61) of the Code, a small or medium-sized business is defined as an Exempt Business with an average business volume of $3,000,000 or less over the three taxable years preceding the current year. To qualify for these additional incentives, the business must meet the following criteria as of July 1, 2019:
- Has not yet commenced operations
- Lacks economic activity
- Has no business volume
- Is a newly established entity
- Complies with any additional requirements set by the Secretary of the DDEC
Eligible businesses receive a reduced income tax rate of 2% for the first five years of the Grant, increasing to 4% for the remainder of the Grant period. Additionally, they enjoy a 100% exemption from real and personal property taxes and municipal taxes during the initial five years. For the remainder of the exemption period, they benefit from a 75% reduction in real and personal property taxes and a 50% reduction in municipal taxes. Note that this treatment is not automatic and must be requested when applicable.
- Tax Credits: The Secretary of the DEDC issues tax credits to eligible businesses through incentive agreements. Criteria for tax credit allocation, aimed at maximizing economic impact, may include application order, fund availability, project permit status, tax credit level relative to investment, and ROI.
Grandfathering and Effectiveness of Incentives
The Act became effective on July 1, 2019. Changes incorporated by the Act did not affect grantee holders under previous laws.
Procedures for Processing Incentives
Applications for tax incentives are managed by the Office of Incentives (OI), formerly the Office of Industrial Tax Exemption. The OI Director has five days for preliminary application assessment to decide on ordinary or extraordinary processing. If additional information is needed, the applicant is notified within 10 days and given 10 days to submit it.
- Ordinary Process: This process is for applications without external endorsement requirements. The OI has 30 days to review the application and provide a recommendation to the DEDC Secretary, who then seeks comments from the Treasury Secretary within five days. The Treasury Secretary has 20 business days to respond, after which the OI has 10 days to finalize its recommendation.
- Extraordinary Process: This applies to cases needing customized terms, requiring consultations with relevant agencies and municipalities to assess legal and economic viability.
- Expedited Process: This new option allows applicants eligible for ordinary processing to submit a pre-eligibility report from a certified professional. In these cases, a grant decision is made within 30 days of application. Certified professionals, such as attorneys or CPAs licensed in Puerto Rico, must be registered with the DEDC.