Income protection is at the core of Act 20/22. Taxes erode earnings and make it difficult to build wealth, especially for middle-market business owners. They either find themselves at the mercy of the economy or the IRS. Puerto Rico devised Act 20/22 to cater to entrepreneurs and self-starters who seek to reap the rewards of their hard work and make an impact through their contributions to the local economy.

Act 20 businesses are subject to a 4% flat corporate tax compared to 21% in the US. Furthermore, if the business owner is a Puerto Rican resident, company distributions are completely tax-exempt. Both acts are powerful in their own right, but using them in tandem provides the ultimate benefit.

Act 20 outlines 20+ industries that may qualify for preferential tax treatment. Puerto Rico’s Department of Economic Development and Commerce remains highly motivated to accommodate industries that were not included at the inception of the law, and retains the authority to designate new services based on various economic factors. If a service does not appear on the list, CASPR will work to identify creative methods to adapt the business structure to fit within the framework.

For example, a non-listed US business may move back-office functions such as IT, Human Resources and Payroll to Puerto Rico. The entity based in Puerto Rico will bill the US company for these services, thereby reducing the overall effective tax rate.

Unlike other tax havens, work and income have to be actively constructed in Puerto Rico. Establishing a new entity will likely require local Puerto Rican employees for a variety of functions. Although Act 20 was recently amended, eliminating the five employee requirement, having top talent is important for a successful operation and for compliance with IRS sourcing guidelines.