ACT 60 - Export Services (ACT20)

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Act 60 of 2019, known as the Puerto Rico Incentives Code, was enacted to consolidate into one single act, and simplify, all incentives available for individuals and businesses in Puerto Rico under the previous incentives laws. “Individual Investor” incentive , previously covered under “Act 22 of 2012”, known as the Act to Promote the Relocation of Individual Investors to Puerto Rico, was enacted to stimulate Puerto Rico’s economic development by providing tax incentives on interests, dividends and capital gains realized or accrued after the Individual Investor becomes a bona fide resident of PR. Act 60, very similar to Act 20, provides this magnificent tax exemption to Individual Investors, as defined under Act 60, who become Puerto Rico residents. In order to avail from such benefits, the Individual Investor shall apply for and obtain a Tax Exemption Decree.

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Eligibility Requirements

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Individual Investor must not have been a resident of Puerto Rico during any of the 10 years prior to the effective date of Act 60 (July 1st, 2019). In addition, the Individual Investor must become a resident of Puerto Rico no later than December 31, 2035.

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Pursuant to the Section 933 of the U.S. Internal Revenue Code (“US-IRC”), a bona-fide resident of Puerto Rico is a person who meets the following tests:

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• Presence Test – The individual must meet any of the following: (1) be present in Puerto Rico for at least 183 days during the calendar year; (2) be present in the United States for no more than 90 days during the calendar year; (3) have no “earned income”, as defined under the regulations, from sources within the United States (that is, compensation for labor or personal services rendered by the manager in the United States exceeding $3,000) and be present in Puerto Rico for more days than in the United States; (4) be present in Puerto Rico for a minimum of 549 days during the three-year period that includes the current tax year and the two preceding calendar years, as long as he is also present in Puerto Rico for a minimum of 60 days during each of those three years; or (5) have no “significant connection” to the United States, as defined under the regulations, which would include having a permanent home in the US or a current registration to vote in a political subdivision.

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• Tax Home Test – The individual’s regular (or principal, if more than one) place of business that he claims for purposes of determining income tax deductions for traveling expenses while away from home in the pursuit of a trade or business must be in Puerto Rico. Thus, to meet the tax home test, the individual must spend substantially more time working from his office in Puerto Rico than from an office in the United States or a foreign country. If the Individual does not have a regular or principal place of business or is not engaged in carrying any trade or business within the meaning of the IRC, his or her tax home is his/her regular place abode in a real and substantial sense.

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• Closer Connection Test – The individual must have a “closer connection” to Puerto Rico than the U.S. or any other foreign country. The closer connection is determined by a variety of factors including but not limited to the following: (1) the location of the individual’​ permanent home; (2) the location of the individual’s family; (3) the location of the individual’s personal belongings, such as automobiles, furniture, clothing, and jewelry; (4) the location of social, political, cultural, or religious organizations with which the individual has relationships; (5) the location where the individual conducts routine personal banking activities; (6) the location where the individual conducts business activities (other than those that constitute the individual’s tax home); (7) the location where the individual holds a driver’s license; (8) the location where the individual votes; and (9) the country of residence designated by the individual on all official government forms, documents, and tax returns. The significant connections analysis can also take into account similar factors that attempt to show that the individual is no longer living in the United States.

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There are certain exceptions applicable to the tax home and closer connection tests applicable during the year of move to PR as explained below.

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The “Eligible Individual” must be certain to qualify as bona-fide resident of Puerto Rico, as defined in US-IRC §937. Otherwise, the individual’s income would still be subject to federal income taxes. Bona fide residency in Puerto Rico must be analyzed with respect to the entire calendar year. Accordingly, the individual must meet the tax home and closer connection tests on or before December 31 of the year preceding the calendar year for which the individual intends to qualify as a bona fide resident of PR and must meet the presence test during the calendar year for which he/she wishes to qualify as a bona fide resident.

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If the individual is not a bona fide resident of PR during the entire calendar year, the individual may nonetheless qualify as a bona fide resident of PR if he/she: (1) was not a bona fide resident of PR for any of the three calendar years immediately preceding the year of the move to Puerto Rico; (2) meets the presence test for the calendar year; and (3) complies with the tax home and the closer connection tests for at least each of the last 183 days of the calendar year in which he/she moved to Puerto Rico. However, under this alternative, the individual must continue qualifying as a bona fide resident of PR for each of the three calendar years immediately following the calendar year of the move to Puerto Rico. If the individual fails to qualify as a bona fide resident of PR in the following three calendar years, the individual will not qualify as a bona fide resident of PR for the year of the move to Puerto Rico and will be subject to U.S. federal income tax for that year.

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Conditions of the Grant

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Beginning on the second year after being awarded the Grant, the Individual must comply with an annual contribution of at least $10,000 to a non-for-profit entity operating in PR and certified as such by the PR Treasury Department.

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The Individual shall evidence the acquisition of residential real property by purchase as a sole owner or with spouse, from an unrelated person, within 2 years after effectiveness of the Grant.

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Grantee shall demonstrate in the annual report, the exclusive and complete control of a real property for residential use throughout the term of the Grant.

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During the term of the Grant, the Grantee must file an annual report to inform its compliance with the terms and conditions of the Decree during the corresponding year. The annual report shall be filed no less than 30 days after filing of the PR income tax return, including any extensions.

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Tax Incentives and Benefits

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Generally, Act 60 provides the following income tax benefits to the new Puerto Rico bona-fide residents on qualified investments:

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• Interests & Dividends: 100% tax exemption from Puerto Rico income taxes on interests and dividends from all sources received or earned after becoming a PR resident. The US-IRC generally provides US income tax exemption on Puerto Rico source dividends and interest earned by a “bona-fide Puerto Rico resident”. However, dividend and interest income from non-Puerto Rico sources (i.e., US or foreign sources) will be subject to US income taxation.

• Capital Gains: Exemption is applicable to securities and other assets which are defined terms under the Act.

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• Appreciation of securities before the individual becomes resident of PuertoRico: As per the US Internal Revenue Code, the gains will be considered Puerto Rico source income when sold after 10 years of Puerto Rico residency. As such, if the capital gains are realized after 10 years, the US tax rate is 0%.

                Capital gains will be taxed at a:

• 10% if such gain is recognized within 10 years of Puerto Rico residency. They will be considered a US source income and will be subject to federal income tax. Such taxes paid may be used as a credit in another jurisdiction that taxes such gains.

• reduced rate of 5% in PR if recognized after 10 years of becoming a resident but on or before December 31, 2035.

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• Appreciation of securities after the individual becomes resident of Puerto Rico: These gains will be considered Puerto Rico source income and will enjoy a 100% tax exemption from Puerto Rico income tax and will not be subject to US income tax. However, these gains must be recognized on or before December 31, 2035 to enjoy 100% tax exemption from PR income tax.

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“Securities” means any note, bond, promissory note, debt evidence, options, future contracts, forward contracts, stock, and any other similar instrument or with similar characteristics, including derivative instruments adopted by circular letter, administrative determination, regulation or any other pronouncement made.

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“Other assets” means commodities, coins and digital assets based on blockchain technology.

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Tax Exemption Decree

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To benefit from the Act, the Individual Investor needs to submit an application with the Department of Economic Development and Commerce of Puerto Rico to obtain a Tax Exemption Decree, which becomes a binding agreement between the Government of Puerto Rico and the Grantee once issued and accepted. The Decree will set forth in full detail all of the terms and conditions mandated by the Act. Once the Individual Investor obtains the Tax Exemption Decree, the benefits granted will be secured during the term of the Decree, irrespective of any changes in the applicable Puerto Rico tax laws. The Grant shall have a term of 15 years, with a 15-year extension that may be granted if it is timely requested and Grantee is in compliance with the Decree.