Act 20 – Partnerships

Sharing Operational Costs and Tax Exemption Benefits Among Synergistic Businesses and Individual Practitioners

Act 20 Partnerships for Small Businesses or Individual Practitioners. For some time, in order to qualify for the tax benefits for service export in Puerto Rico, the government imposed a minimum employment requirement of 5 employees– the goal of the tax benefits, after all, are to create jobs and boost the island’s economy — and other compliance requirements like detailed auditing and reporting.  For larger businesses, complying with all the employment and program requirements is easily justified by the overall tax savings, and is simply a “cost of doing business”.

While currently there is not a minimum employee requirement to obtain an Act 20 decree, the compliance overhead remains. For smaller enterprises such as start-up businesses, sole proprietors such as specialized business consultants, and other businesses with less than around $200-300 thousand in annual net profits, the cost of obtaining and maintaining an Act 20 decree can easily eat up a good portion of the financial benefits. In addition, the income sourcing requirements for those that choose to spend a significant amount of time stateside or abroad may reduce the amount of income that is eligible under Act 20.

This has led many small businesses to band together into larger Act 20 Partnerships, often using Series LLC structures, in synergistic industries.  Groups of consultants serving similar industries share best practices and processes, back-office staffing and ​employee overhead, for example.  Such partnerships can be created with a group of businesses or individuals seeking to relocate together, or businesses and individuals can be matched with each other for such purposes.

Properly structured, these synergistic partnerships effectively combine the business expertise of professionals from various businesses as partners and pass through the operational savings and Act 20 tax benefits fully to each partner.

Key Act 20 Partnership Benefits

  • Experience – Long track record of successfully managing and operating an Act 20 Partnership is a cornerstone for attracting prospective partners.
  • Control – Provide each partner(s) with complete control of their partnership entity (typically a Series of a Series LLC).
  • Innovation – Clearly developed methods, structure, and service that marks them as a leader in best practices.
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    Safety – Experienced implementation of processes and procedures that assure they, and you, remain in compliance with the Act 20 program requirements.
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    Reliability – A proven structure and approach that has allowed their partners to meet with approval from both Puerto Rico and the IRS and continuously benefit from the Act 20 program.
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    Cost-Effectiveness – Provides its partners with very quick and affordable access to the Act 20 income tax benefits.
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    Easy Exit Strategy – Require no ongoing obligations or commitments from its partners.
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    Synergies – Seasoned experience and resources that provide real value to all partners and their mainland and international clients and companies.

There are, however, a number of important considerations that must be weighed before entering into a partnership agreement, including but not limited to economic substance, liability isolation among partners, and proper compliance with local ordinances governing such structures beyond just tax decree eligibility.  

At Act 20/22 Solutions, we’ve been closely involved in the creation of most of the successful partnerships under these programs, and can guide you toward an existing partnership that may be a fit for your business, help you locate other companies to establish a new partnership, or help organize your existing group into a properly structured Act 20 partnership business.

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