The Puerto Rico Corporate Tax Rate and Key Incentives

Puerto Rico is a U.S. territory but maintains a distinct tax system, creating a unique fiscal environment for businesses. This autonomy allows the island to offer tax structures attractive to companies, especially those with operations beyond its borders. The island’s ability to set its own tax laws has made it a subject of interest for U.S. businesses evaluating strategic locations.

The Standard Corporate Tax System

For businesses in Puerto Rico without special incentive grants, the corporate income tax is structured in two tiers. The first is a normal tax of 18.5% on a corporation’s net taxable income, which forms the base of the tax liability.

In addition to the normal tax, a graduated surtax is applied. This surtax begins at 5% for “surtax net income” up to $75,000 and increases to 19% for income over $275,000. Surtax net income is the net taxable income minus a $25,000 deduction, resulting in a combined maximum rate approaching 37.5%.

For a corporation with a net taxable income of $300,000, the normal tax is $55,500 (18.5%). For the surtax, the $25,000 deduction leaves a surtax net income of $275,000. The surtax on this amount is $36,750, for a total tax liability of $92,250 before other taxes.

An alternative minimum tax (AMT) also applies, calculated on a company’s tentative minimum tax. The AMT rate is 18.5%, but it increases to 23% for taxpayers with gross proceeds of $10 million or more.

Act 60 Export Services Incentive

The Act 60 Export Services incentive provides a fixed corporate income tax rate of 4% on eligible export service income. This incentive is designed to position the island as an international service hub for businesses providing services from Puerto Rico to clients located outside the territory.

To qualify, a business must perform an eligible service for non-resident individuals or foreign entities with no business nexus to Puerto Rico. Eligible services include:

• Research and development
• Advertising
• Consulting services
• Software development
• Call centers
• Professional services like legal and accounting

For businesses with over $3 million in annual revenue, the employment of at least one full-time, island-resident employee is required.

Business owners seeking to benefit fully from Act 60 must become bona fide residents of Puerto Rico. To meet this standard, an individual must be present on the island for at least 183 days during the tax year, not have a tax home elsewhere, and not have a closer connection to the U.S. or another country. This residency is a factor for receiving benefits like tax-free distributions.

For the 4% rate to apply, the income must be “Puerto Rico source income,” generated from services performed on the island for customers outside of it. Any income from local clients falls under the standard corporate tax system. The incentive is formalized through a tax exemption decree, a contract with the government for an initial 15-year term, with a possible 15-year extension.

Applying for Act 60 Tax Incentives

The process to secure an Act 60 tax incentive begins with an application to the Department of Economic Development and Commerce (DDEC). Submissions are made through the DDEC’s online Incentives Portal and are processed by the Office of Incentives for Businesses in Puerto Rico (OIB), the centralized office handling these requests.

The application package includes financial projections, a business plan, and articles of incorporation. A one-time application filing fee is required. Professional services to prepare and manage an application can range from $2,500 to $4,000.

Once the application is submitted, the OIB conducts a review, which can take several months. During this period, the agency may request additional information or clarification regarding the business’s operations and eligibility. The OIB may engage in a dialogue with the applicant to ensure all requirements are met.

Upon approval, the government issues a tax exemption decree. This document outlines the specific tax benefits granted, the terms of the agreement, and the compliance requirements. Maintaining the decree’s benefits is contingent upon ongoing compliance, which includes filing annual reports with the OIB to demonstrate adherence to the program’s rules.

Other Significant Corporate Taxes in Puerto Rico

Beyond income tax, businesses in Puerto Rico are subject to other taxes. A primary example is the Municipal License Tax, or “Patente Municipal.” This is a gross receipts tax levied by each municipality, with rates varying by location. For most non-financial businesses, the rate ranges from 0.2% to 0.5% of gross receipts, while financial businesses may face a rate up to 1.5%.

Property taxes apply to both real estate and personal property, including business assets like machinery and inventory. Tax rates are set by municipalities and range from 8.03% to 11.83% of the assessed value determined by the Municipal Revenue Collection Center (CRIM). Businesses must self-assess this tax and file an annual return.

The Sales and Use Tax (IVU) rate is 11.5% and applies to the sale of most tangible personal property and certain services. Businesses must register as merchants, collect the IVU from customers, and remit it to the Puerto Rico Treasury Department.

Interaction with U.S. Federal Taxation

U.S. citizens owning a Puerto Rican corporation must navigate both tax systems. Section 933 of the U.S. Internal Revenue Code allows bona fide residents of Puerto Rico to exclude island-sourced income from their U.S. federal income tax. For a U.S. citizen who has relocated to Puerto Rico, income from their local business is not subject to U.S. income tax.

U.S. tax rules can still apply to prevent the indefinite deferral of taxes on foreign income. A Puerto Rican corporation owned by U.S. shareholders can be classified as a Controlled Foreign Corporation (CFC) if over 50% of its stock is owned by U.S. shareholders. A rule under Section 957 of the tax code can prevent this classification for a bona fide resident shareholder if the corporation’s income is primarily from Puerto Rican sources.

If a Puerto Rican entity is a CFC, its U.S. shareholders may be subject to the Global Intangible Low-Taxed Income (GILTI) regime. GILTI targets low-taxed income from CFCs and applies a U.S. tax, which can be as high as 37% for individuals. A U.S. resident who owns a Puerto Rican company but is not a bona fide resident of the island could see their 4% tax rate under Act 60 increased by the GILTI tax, with a combined rate potentially reaching 10.5% or higher.

To mitigate double taxation when U.S. tax applies, the foreign tax credit can be used. This credit allows a U.S. taxpayer to reduce their U.S. income tax liability by the amount of income taxes paid to Puerto Rico. These rules require careful planning for compliance with both tax systems.