Tax Incentives for Investors, Businesses, Private Equity Funds

ACT 20 | Act to promote Export Services

Entity with a bona fide office within Puerto Rico that export eligible services
The Act provides a very broad definition of eligible services

Corporate Income Tax- 4% fixed rate (may be reduced to 3% in certain circumstances)
E&P Distributions- No tax on distributions derived from the export services income
Municipal License Tax- 60% tax exemption
Property Tax- 100% tax exemption for the first 5 years of operations. After said 5-year period, a 90% exemption will apply during the term remaining under the Tax Exemption Decree.

Apply for a Tax Exemption Decree
Employ at least three (3) direct jobs within six months and five (5) direct jobs in the first 2 years. However, HR Bill 878- approved b the House on May 19, 2017- eliminates such requirement. The Bill is pending on Senate approval.

The Tax Exemption Decree shall have a term of 20 years, with a possible 10-year extension.
The Decree will constitute a contract between the Eligible entity and the Government of Puerto Rico. As such, the benefits granted will be constitutionally secured during the term of the decree, irrespective of any changes in the applicable Puerto Rico tax laws.

Bona-fide residents of Puerto Rico that were not residents of Puerto Rico for the 6-year period preceding the enactment of the Act on January 12, 2012

100% tax exemption from Puerto Rico income taxes on all dividends;
100% tax exemption from Puerto Rico income taxes on all interest;
100% tax exemption from Puerto Rico income taxes on all short-term and long-term capital gains accrued after the individual becomes a bona-fide resident of Puerto Rico
Bona-fide residents of Puerto Rico are not subject to U.S. federal income taxes on income derived from sources within Puerto Rico.
U.S. citizens that are bona-fide residents of Puerto Rico benefiting from the Act will only be subject to federal income taxation on income derived from sources outside of Puerto Rico.

Obtain a Tax Exemption Decree
Generally, a bona-fide resident of Puerto Rico is a person who:
is present for at least 183 days during the taxable year in Puerto Rico;
does not have a tax home outside of P.R. during the taxable year; and
does not have a closer connection to the United States or a foreign country than to Puerto Rico.

The term of the decree will be until December 31, 2035.
The benefits granted will be sconstitutionallly secured during the term of the decree, irrespective of any changes in the applicable Puerto Rico tax laws.

Companies engaged in the business of investing in securities that are non-publicly traded securities at the time of investment
Have accredited investors
Have an advisory board consisting of at least 1 of its investors or limited partners.
Use a registered investment adviser that is ETB-PR with a business office in Puerto Rico.
Minimum capital of $10 million within 24 months of issuance, and thereafter.
At least 80% invested in Private Securities and up to 20% in allowable short-term investments.

The Fund will not be subject to any income tax on its interest and dividend income or capital gains.
Income derived by investors from interest and dividends will be subject to an income tax of 10%.
Fund exemption from municipal license tax
Fund exemption from personal and real property taxes
Fund exemption from the provisions of the Investment Company Act of Puerto Rico (Act 6-1954) and the Puerto Rico Investment Companies Act of 2013 (Act 93-2013).
The Act does not affect any tax treatment that may be obtained by Fund participants under the provisions of any current or future incentives’ law, including, without limitation, Act 20 and Act 22

Election for treatment as a Fund under the Act must be notified to the PR Treasury no later than the last day of 3rd month after the Fund inception date.
Within 4 years from inception and thereafter, restrict investment in any one business and affiliates to 20% of Fund’s capital.
For Foreign-PEFs: at all times derive at least 80% of gross income from Puerto Rico sources or income effectively connected or treated as such under the Code (the “80% PR Gross Income Rule”).
For Foreign-PEFs: within 4 years from inception and subsequently, maintain at least 15% of Fund’s capital invested in Private Securities that comply with the 80% PR Gross Income Rule during the prior 3 years period.
For PR-PEFs: within 4 years from inception and thereafter, maintain at least 60% of Fund’s capital invested in either (i) Private Securities that comply with the 80% PR Gross Income Rule during the prior 3 years period, or (ii) exempt investment trusts under Section 1112.01 of the Code.