The purpose of the Act 20 - Export Services Act is to promote the development of new businesses in Puerto Rico
Act 20 is an economic development program. As with virtually all economic development programs, various tax incentives are used to attract, retain and expand businesses, create jobs, and induce investment into the community the economic development program serves. In this case, the community is the entire Commonwealth of Puerto Rico, a U.S. Territory. These Puerto Rico tax incentives have stimulated the inbound transfer of foreign businesses and investment to Puerto Rico. Many of these businesses are from the U.S. Since 2012, the incoming Act 20 participants have helped to establish Puerto Rico as an international Export Services hub. Act 20 also seeks to encourage existing local businesses to expand their services to persons and businesses outside of Puerto Rico, including to the United States.
Below is the description of the Act 20 program as provided by the Puerto Rico Department of Economic Development and Commerce (DDEC).
Act 20 - Export Services Act Overview
- TAX INCENTIVES
The Export Services Act applies with respect to any entity with a bona fide office or establishment located in Puerto Rico that is or may be engaged in an eligible service (the “Eligible Business”).
The term eligible service includes:
(i) research and development;
(ii) advertising and public relations;
(iii) economic, environmental, technological, scientific, management, marketing, human resources, information and audit consulting;
(iv) advisory services on matters relating to any trade or business;
(v) commercial arts and graphic services;
(vi) production of construction drawings, architectural and engineering services and project management;
(vii) professional services such as legal, tax and accounting;
(viii) corporate headquarters;
(ix) electronic data processing centers;
(x) development of computer programs;
(xi) voice and data telecommunications between persons located outside of Puerto Rico;
(xii) call centers;
(xiii) shared services centers ("shared services") including but not limited to, accounting, finance, taxes, auditing, marketing, engineering, quality control, human resources, communications, electronic data processing and other centralized management services;
(xiv) storage and distributions centers (“hubs”);
(xv) educational and training services;
(xvi) hospital and laboratory services;
(xvii) investment banking and other financial services; and
(xviii) any other service that the Government of Puerto Rico later determines that must be treated as an eligible service (collectively, the “Eligible Service”).
The original Export Services Act of 2012 has been amended to include the following additional services as eligible activities:
- Distribution and logistics carried out at the headquarters or similar regional offices of an entity engaged in rendering such services;
- Strategic and organizational planning of processes, distribution and logistics to persons outside Puerto Rico;
- Commercial and mercantile distribution of products manufactured in Puerto Rico to other jurisdictions;
- Assembly, bottling and packaging operations of products to be exported;
- Marketing centers principally dedicated to provide spaces and services such as: clerical, translation and information processing services, communications, marketing, telemarketing and other consulting services rendered to businesses outside Puerto Rico, including export and marketing businesses, commercial and aggregate consulates, governmental agencies responsible for the foreign trade, barter and exhibition centers for products and services;
- Medical tourism;
- Telemedicine facilities, where at least 30% of the doctors in a telemedicine facility must be residents of Puerto Rico, unless the facility can show that there are not sufficient qualified doctors in Puerto Rico
- Trading Companies dedicated to international trading - will mean any entity that produces no less than 80% of gross income from the following:
- Sales to any persons or entities that are outside of Puerto Rico, for use, consumption or disposition outside of Puerto Rico, of products which have been manufactured inside or outside of Puerto Rico and have been bought by the eligible business for resale;
- From commissions derived from sales of goods for consumption and use outside of Puerto Rico will be considered industrial development income. The property used for this income is not used for other activities not authorized under tax decree; and
- Other eligible exportation services as described under this law.
Service for Exportation
An Eligible Service must also qualify as a service for exportation.
- Services for exportation are services performed for non-resident individuals and/or foreign entities that have no nexus with Puerto Rico (that is the Eligible Service is not, and will not be, related to the conduct of a trade, business or other activity in Puerto Rico).
Tax Exemption Decree
To enjoy the benefits granted under the Export Services Act the services provider must request and obtain a tax exemption decree under said act (the “Tax Exemption Decree”). Such decree will have a term of 20 years, renewable for 10 additional years, provided certain conditions are satisfied.
The Tax Exemption Decree will constitute a contract with the Puerto Rico Government not subject to subsequent legislative changes.
Service providers operating under a Tax Exemption Decree will enjoy the following tax incentives during the term of such decree:
- 4% flat income tax rate on Export Services Income (as defined under Income). This rate may be reduced to 3% when more than 90% of the Eligible Business’s gross income is derived from export services and such services are considered strategic services, according to the criteria established in the Export Services Act.
- 100% tax-exempt distributions from earnings and profits (dividends) derived from the Export Services Income.
- 90% exemption from property taxes. (100% exemption from property taxes during the first five years of operations in the case of eligible services described as Corporate Headquarters, Call Centers, and Shared Service Centers. After said 5-year period, a 90% exemption will apply during the term remaining under the Tax Exemption Decree.)
Export Services Income
The term Export Services Income means net income derived by an Eligible Business subject to the following:
- In the case of new Puerto Rico businesses, all net income derived from an Eligible Service.
- In the case of existing Puerto Rico businesses, only that portion of net income derived from an Eligible Service that exceeds the average net income generated by such business during the three taxable years preceding the date a request for a Tax Exemption Decree is filed by such business.
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