In the final installment of our series on the tax benefits available under Puerto Rico Act 60, this article examines the Export Services regime in Chapter Three of Act 60-2019.
The regime allows businesses that provide qualifying services from Puerto Rico to customers outside the island to substantially reduce Puerto Rico taxation. The benefits are elective. They are delivered through a tax grant (decree) issued by the Puerto Rico Department of Economic Development and Commerce (DDEC) after an application and approval process.
To qualify, the business must maintain an office or bona fide establishment in Puerto Rico and provide an eligible export service. Qualifying activities include research and development, advertising, consulting, legal, tax, and accounting services, centralized management, electronic data processing, software development, blockchain-related services, call centers, shared-services centers, educational services, investment banking, and other services approved by DDEC.
The service must benefit a non-Puerto Rico resident individual, a qualifying nonresident trust or estate, a foreign or domestic entity not engaged in a trade or business in Puerto Rico, or a person engaged in Puerto Rico business that ultimately provides services to a foreign client. The activity must not have a Puerto Rico nexus. A nexus may arise when the services relate to a Puerto Rico business or income-producing activity, Puerto Rican laws or regulations, or the sale of property for use or consumption in Puerto Rico. Income connected with those activities does not qualify as export services income.
The tax benefits a decree holder may receive include:
- A 4% fixed Puerto Rico income tax rate on export services income for the 15-year grant term, with a renewal option [confirm mechanics];
- A 100% Puerto Rico income tax exemption on distributions from earnings and profits derived from that income;
- Carryforward of net operating losses incurred under the grant; and
- Partial exemptions from municipal license tax and property tax on the exempt activity.
The 4% rate applies only to export services income. Income outside the decree is taxed at regular Puerto Rico rates, so businesses with mixed revenue streams must track and allocate income carefully.
These benefits do not reduce US federal tax. A Puerto Rico corporation is a foreign corporation for US purposes, so US owners may face controlled foreign corporation, Subpart F, and GILTI (now NCTI) exposure. The Code §933 exclusion applies only to Puerto Rico-source income of bona fide Puerto Rico residents. The entity, compensation, and federal reporting must be structured together.
To maintain compliance, decree holders should retain records showing the customers served, services performed, the location of operations, and the absence of Puerto Rico nexus. They must also meet annual DDEC compliance reporting requirements and Puerto Rico filing obligations. Resident companies generally must file an income tax return regardless of net income. The ordinary deadline is the 15th day of the fourth month after year-end, and a six-month extension is available if requested timely.
In conclusion, the Export Services regime can substantially reduce Puerto Rico taxation on qualifying income from customers outside Puerto Rico, but it does not reduce US federal tax for US-owned entities and their owners. The benefits depend on a DDEC decree, a documented absence of Puerto Rico nexus, and timely filings. Structure the entity, compensation, and federal reporting together before applying. To discuss whether this strategy fits your business, contact Strategic Tax Planning at (202) 455-6010 or schedule a confidential consultation.
