{"id":12923,"date":"2017-07-24T15:03:17","date_gmt":"2017-07-24T19:03:17","guid":{"rendered":"http:\/\/www.escapeartist.com\/?p=12923"},"modified":"2020-09-17T08:59:46","modified_gmt":"2020-09-17T13:59:46","slug":"careful-2017-version-puerto-ricos-act-20-tax-holiday","status":"publish","type":"post","link":"https:\/\/staging.escapeartist.com\/blog\/careful-2017-version-puerto-ricos-act-20-tax-holiday\/","title":{"rendered":"Be careful with the 2017 version of Puerto Rico\u2019s Act 20 tax holiday"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">On July 11, 2017, the Governor made some major improvements to Puerto Rico\u2019s Act 20 tax holiday. These revisions made Puerto Rico\u2019s Act 20 \u201cuntouchable.\u201d <\/span><b>No offshore jurisdiction can come close to the tax deal being offered by this US territory. <\/b><\/p>\n<p><span style=\"font-weight: 400;\">Puerto Rico\u2019s Act 20 tax holiday gives your business a 4% tax rate, guaranteed for 20 years. This means you can cut your corporate tax from 35%, plus your state, to 4% by moving your business to Puerto Rico. Dividends paid from a Puerto Rico Act 20 company to a resident of Puerto Rico are tax free. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">And only Puerto Rico can offer this tax deal to US citizens. Here\u2019s why: <\/span><\/p>\n<p><span style=\"font-weight: 400;\">If you move you and your company from California to Panama, you\u2019ll pay Federal income tax on your profits after taking the <\/span><a href=\"http:\/\/premieroffshore.com\/foreign-earned-income-exclusion-for-2017\/\" target=\"_blank\" rel=\"noopener noreferrer\"><span style=\"font-weight: 400;\">Foreign Earned Income Exclusion<\/span><\/a><span style=\"font-weight: 400;\">. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">If you move you and your company from California to Puerto Rico, you\u2019ll pay 4% in corporate tax after your salary. For more, see: <\/span><a title=\"Panama vs. Puerto Rico\" href=\"http:\/\/www.escapeartist.com\/blog\/panama-vs-puerto-rico-right-business\/\" target=\"_blank\" rel=\"noopener noreferrer\"><span style=\"font-weight: 400;\">Panama vs. Puerto Rico<\/span><\/a><span style=\"font-weight: 400;\"> (this article was written before the law changes).<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Unlike income earned in a foreign country, income earned in Puerto Rico is excluded from Federal income tax under <\/span><a href=\"https:\/\/www.law.cornell.edu\/uscode\/text\/26\/933\"><span style=\"font-weight: 400;\">IRC 933<\/span><\/a><span style=\"font-weight: 400;\">. <\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">However, small business owners must be careful with the 2017 version of Puerto Rico\u2019s Act 20 tax holiday. These law changes make it tempting to try and cheat the system. But rest assured, if and when the IRS catches up with you, they\u2019ll be hell to pay.<\/span><\/p>\n\n<p><span style=\"font-weight: 400;\">If you\u2019re going to use Puerto Rico\u2019s Act 20 tax holiday, be ready to defend it from the US IRS. Expect an audits and for Uncle Sam to take a closer look at these amazing tax deals. Hire a professional to plan and document your Act 20 income and get an opinion letter if you will have any US source income \/ transfer pricing issues (if any work to generate the money will be done in the United States, you have US sourcing issues). <\/span><\/p>\n<p><span style=\"font-weight: 400;\">For an article describing the modifications to Puerto Rico\u2019s Act 20 tax holiday, see: <\/span><a href=\"http:\/\/premieroffshore.com\/changes-puerto-ricos-act-20-act-22\/\" target=\"_blank\" rel=\"noopener noreferrer\"><span style=\"font-weight: 400;\">Changes to Puerto Rico\u2019s Act 20 and Act 22<\/span><\/a><span style=\"font-weight: 400;\">.<\/span><\/p>\n<p><b>Here\u2019s why you should \u00a0be careful with the 2017 version of Puerto Rico\u2019s Act 20 tax holiday.<\/b><\/p>\n<p><span style=\"font-weight: 400;\">To explain why these changes create risk for the small business owner, we need to cover a bit of history. Puerto Rico passed Act 20 in 2012 with the requirement that each business employ a minimum of 3 people on the island. In 2015, the minimum number of employees was increased from 3 to 5. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">The purpose of Puerto Rico\u2019s Act 20 is to bring jobs to the island. The territory&#8217;s is bankruptcy and in dire need of outside investment. See: <\/span><a href=\"http:\/\/premieroffshore.com\/benefit-puerto-ricos-bankruptcy\/\" target=\"_blank\" rel=\"noopener noreferrer\"><span style=\"font-weight: 400;\">How to benefit from Puerto Rico\u2019s bankruptcy<\/span><\/a><span style=\"font-weight: 400;\"> (note that this article was published before these changes were announced). <\/span><\/p>\n<p><span style=\"font-weight: 400;\">In July of 2017, the government eliminated the employee requirement for most types of businesses. You can now <\/span><a href=\"http:\/\/premieroffshore.com\/puerto-rico-eliminates-5-employee-requirement\/\" target=\"_blank\" rel=\"noopener noreferrer\"><span style=\"font-weight: 400;\">open a business with one employee and qualify for Act 20<\/span><\/a><span style=\"font-weight: 400;\">. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">I\u2019m a fan of the employee requirement because it protects the business owner from getting into trouble with the IRS. It protects the business owner from her worst enemy\u2026 herself. Here\u2019s why:<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Only <\/span><a href=\"http:\/\/premieroffshore.com\/what-is-puerto-rico-sourced-income-for-an-act-20-business\/\" target=\"_blank\" rel=\"noopener noreferrer\"><span style=\"font-weight: 400;\">Puerto Rico sourced income<\/span><\/a><span style=\"font-weight: 400;\"> is eligible for the Act 20 tax rate of 4%. <\/span><b>Puerto Rico sourced income is business profits earned from work performed in Puerto Rico<\/b><span style=\"font-weight: 400;\">. If some of the work to generate the income is performed in the United States and some in Puerto Rico, you must allocate profits between these two jurisdictions. PR sourced income is taxed at 4% and US sourced income is taxed at 35% plus your state. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">If you shutdown your company in the United States, and move <\/span><i><span style=\"font-weight: 400;\">you and your business<\/span><\/i><span style=\"font-weight: 400;\"> to Puerto Rico, 100% of your future \u00a0profits will be Puerto Rico sourced income. All of the work to earn the money will be done in Puerto Rico, so all income is PR sourced for tax purposes. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">Or you might live in the US and set up an independent division in Puerto Rico&#8230;<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Let\u2019s say you live in the US and set up a division in Puerto Rico. Money you earn from work in the US is US sourced and taxable by the IRS. Likewise, any profits generated by the group in Puerto Rico is Puerto Rico sourced and taxable at 4%. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">You can hold PR sourced income inside your Puerto Rico Act 20 company tax deferred. Setting up a division in Puerto Rico while you (the business owner) remains in the United States, gets you tax deferral at 4%. Moving you and your business to Puerto Rico gets you tax free after paying 4% on your corporate profits. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">That\u2019s easy enough, but some will try to push the envelope\u2026.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">And here\u2019s the risk to small businesses: You\u2019re a one man shop operating from California. You want to live in California and move some of your income to Puerto Rico. You set up an Act 20 company on the island and hire one person. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">This one employee is basically a personal assistant. They pay the bills, do a little accounting, book your travel, etc. They\u2019re not adding significant value to the product or service being sold. The only reason you hired them is so you can run some of your sales through the Puerto Rican company to get the tax deferral. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">Such an employee doesn\u2019t generate any Puerto Rico sourced income. They\u2019re a minor expense for your US business, but won\u2019t help you move a bunch of cash out of the US and into an Act 20 company. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">I know a lot of people will try this! They\u2019ll setup sham companies with one or two low level employees and shift millions of dollars of income out of the US and into Puerto Rico. Eventually the IRS will come in and smash all of these businesses.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">When a Puerto Rico Act 20 company required 5 employees, no one would bother to hire unproductive workers. \u00a0When you needed 5 full time employees, the cost of a fake business was just too high for most players hoping to game the system. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">With 5 full time employees, only companies making money from these workers, and thus generating Puerto Rico sourced income, could afford to set up on the Island. \u00a0With only one employee required, just about anyone can afford to play in the sandbox. <\/span><\/p>\n<p><b>Here\u2019s my take on how to use the 2017 version of Puerto Rico\u2019s Act 20 tax holiday: <\/b><\/p>\n<ol>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">If you move to Puerto Rico, and become a resident by spending at least 183 days a year on the island, you can set up an Act 20 business with only 1 employee (yourself). 100% of the work to generate the business income should be done in Puerto Rico. \u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">If you will remain in the United States, and set up a division for tax deferral, plan on having at least 5 employees. <\/span><\/li>\n<\/ol>\n<p><span style=\"font-weight: 400;\">For those building a division of a US company in Puerto Rico, the benefit of the change in the law is that you can grow at whatever pace you like. You\u2019re no longer required to hire 3 employees and then 2 more in a year. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">But, don\u2019t get it twisted. Only income from work performed in Puerto Rico creates PR sourced income. If 95% of the work to earn that money is done in California, and 5% in Puerto Rico, then you have very little PR sourced income. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">And <\/span><b>this allocation of income is done on a qualitative basis<\/b><span style=\"font-weight: 400;\">, not by hours worked. If you have a team of 50 highly paid programmers in California, and a group of 50 call center workers in Puerto Rico earning minimum wage, the majority of your income is US source.<a href=\"http:\/\/www.escapeartist.com\/consumer-resource-guide\/\"><img loading=\"lazy\" decoding=\"async\" class=\"alignright wp-image-11819\" src=\"http:\/\/www.escapeartist.com\/wp-content\/uploads\/2017\/05\/image-ad.jpeg\" alt=\"Consumer Resource Guide\" width=\"240\" height=\"328\" \/><\/a> <\/span><\/p>\n<p><span style=\"font-weight: 400;\">As I said, setting up a division in Puerto Rico gets you tax deferral. Moving you and your business gets you tax free after the 4% corporate rate. The opportunities available in Puerto Rico for those willing to relocate are incredible and can\u2019t be matched by any foreign country. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">And these benefits don\u2019t stop with Act 20. If you move to the island, buy a home within 2 years, and otherwise qualify under Act 22, you\u2019ll pay zero capital gains tax. Act 22 eliminates capital gains tax on assets acquired after you move to Puerto Rico (does not include real estate in the United States). <\/span><\/p>\n<p><span style=\"font-weight: 400;\">While there are risks of abuse with Puerto Rico\u2019s Act 20, the benefits are significant for those willing to do put in the time and do it right.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">I hope this article on why you should be careful with the 2017 version of Puerto Rico\u2019s Act 20 tax holiday has been helpful. For more information on how to setup your business in Puerto Rico under Act 20, or to negotiate an Act 22 decree, please contact us at <\/span><a href=\"mailto:info@premieroffshore.com\"><span style=\"font-weight: 400;\">info@premieroffshore.com<\/span><\/a><span style=\"font-weight: 400;\"> or call us at (619) 550-2743. All consultations are free and confidential.<\/span><\/p>\n<p>&nbsp;<\/p>\n\n\n\n\n\n\n","protected":false},"excerpt":{"rendered":"<p>On July 11, 2017, the Governor made some major improvements to Puerto Rico\u2019s Act 20 tax holiday. These revisions made Puerto Rico\u2019s Act 20 \u201cuntouchable.\u201d No offshore jurisdiction can come close to the tax deal being offered by this US territory. Puerto Rico\u2019s Act 20 tax holiday gives your business a 4% tax rate, guaranteed [&hellip;]<\/p>\n","protected":false},"author":686,"featured_media":11900,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"content-type":"","om_disable_all_campaigns":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[1401],"tags":[],"yst_prominent_words":[14884,14887,2873,14889,14883,14882,14888,2809,14886,2968,3094,2849,2825,14879,4758,2952,2892,14881,14880,14885],"acf":[],"jetpack_sharing_enabled":true,"jetpack_featured_media_url":"https:\/\/staging.escapeartist.com\/wp-content\/uploads\/2017\/05\/Tax2.jpg","_links":{"self":[{"href":"https:\/\/staging.escapeartist.com\/wp-json\/wp\/v2\/posts\/12923"}],"collection":[{"href":"https:\/\/staging.escapeartist.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/staging.escapeartist.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/staging.escapeartist.com\/wp-json\/wp\/v2\/users\/686"}],"replies":[{"embeddable":true,"href":"https:\/\/staging.escapeartist.com\/wp-json\/wp\/v2\/comments?post=12923"}],"version-history":[{"count":3,"href":"https:\/\/staging.escapeartist.com\/wp-json\/wp\/v2\/posts\/12923\/revisions"}],"predecessor-version":[{"id":41805,"href":"https:\/\/staging.escapeartist.com\/wp-json\/wp\/v2\/posts\/12923\/revisions\/41805"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/staging.escapeartist.com\/wp-json\/wp\/v2\/media\/11900"}],"wp:attachment":[{"href":"https:\/\/staging.escapeartist.com\/wp-json\/wp\/v2\/media?parent=12923"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/staging.escapeartist.com\/wp-json\/wp\/v2\/categories?post=12923"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/staging.escapeartist.com\/wp-json\/wp\/v2\/tags?post=12923"},{"taxonomy":"yst_prominent_words","embeddable":true,"href":"https:\/\/staging.escapeartist.com\/wp-json\/wp\/v2\/yst_prominent_words?post=12923"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}