Act 20 Export Services

The Act to Foster the Exportation of Services

ACT 20 Of 2012

Unlike other tax incentives laws directed at the manufacturing industry, Act No. 20 of January 17, 2012, as amended, known as the “Act to Foster the Exportation of Services” (“Act No. 20”), focuses on service businesses that operate within Puerto Rico. Companies offering certain “eligible services” to markets outside of Puerto Rico may benefit from reduced tax rates and other benefits under Act No. 20.

I. Eligible Businesses

Act No. 20 applies to businesses that provide the following services from within Puerto Rico:

  • Advertising and public relations
  • Architectural, engineering and project management
  • Call centers
  • Centralized management services
  • Commercial and graphic art
  • Computer program development
  • Consulting
  • Counseling on matters related to any industry or business
  • Educational and training
  • Electronic data processing centers
  • Hospital and laboratory
  • Hubs
  • Investment banking and other financial services
  • Professional services such as legal, tax and accounting (excluding those based on Puerto Rico law)
  • Research and development
  • Shared service centers
  • Voice and data telecommunications between persons located outside of Puerto Rico

To be eligible, the company must export its service from Puerto Rico, meaning that the service is provided for the benefit of:

  • an individual who is not a Puerto Rico resident
  • a trust whose beneficiary, settlor and trustee are not Puerto Rico residents
  • an estate whose deceased, heir, legatee or executor are not Puerto Rico residents
  • a foreign entity

II. Incentives

A) Income Tax

Pursuant to Act No. 20, a 4% fixed income tax rate is applicable to eligible businesses during the decree’s effectiveness period. The Secretary of the PR Treasury Department may reduce said fixed rate by 1% for a taxable year in which 90% of the entity’s gross income is derived from the exportation of services and these are considered to be strategic, given their nature, importance, investment, among other factors.

B) Property Tax

A 90% exemption is granted for state and municipal taxes on real and personal property used in business activities covered by the decree. In case of businesses whose services consist of investment banking and financial services, call centers and shared service centers, the property tax exemption is total during the first 5 years of operations.

C) Municipal License Tax

Act No. 20 provides a 60% exemption (90% exemption for businesses operating in a special industrial development zone in Vieques or Culebra) on municipal license tax and other municipal taxes. Said exemption applies for the semester of the Government’s fiscal year in which the business commences operations and subsequent semesters, until the expiration of the decree’s term. For businesses that have been operating before submitting the tax decree application under Act No. 20, the date of commencement of operations for municipal license tax purposes is the first day of the semester following the application’s filing date.

D) Distributions and Operating Loss Deductions

Shareholders, partners and members of eligible businesses do not have to pay income taxes on distributions made from income derived from the exportation of services. In addition, Act No. 20 allows using the net loss incurred as part of the operations covered by the decree to reduce the income from the eligible activities. Losses not used, may be carried forward to subsequent taxable years. In case the decree expires for income tax purposes, the cumulative operating net loss may be deducted from any Puerto Rico taxable income, subject to the provisions of the Code.

E) Tax Decree under Act No. 20, 2012

The incentives provided by Act No. 20 are limited to the decree’s effectiveness period, which is 20 years. However, the Secretary may grant 10 additional years if the business met the requirements and conditions imposed by the decree. During this extension, the business’ income will continue to be taxed at the 4% fixed rate, but the exemption on property taxes will be reduced to 50%.

F) Expiration and Effective Date for Incentives

Act No. 20 has been effective since its approval on January 17, 2012, and applications for new decrees will be accepted until December 31, 2020.

 


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