Doing Business in Puerto Rico

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Puerto Rico, a Caribbean island, is one of the world’s most vibrant destinations to establish, relocate and expand a business. Puerto Rico offers the security and stability of operating in a U.S. jurisdiction with an array of special tax incentives for foreign direct investment that can be found nowhere else in the world. Our skilled and highly educated workforce, our world-class infrastructure, innovation centers and low cost of doing business, attracts diverse kinds of industries to invest in the island.

However, there are a number of issues which you must consider when you are looking to set up your business in Puerto Rico. This document takes you through some of the common questions we come across and gives you practical information about the issues you need to consider.

What type of Business Structure should we use?

There are advantages and disadvantages to all of them, and there is no one correct answer, it’s all dependent on your specific business circumstances and needs. A brief overview of the main structures is below:

Foreign Corporation (a branch or subsidiary of the overseas business)

  • A foreign corporation may not conduct business in Puerto Rico prior to receiving authorization from the Secretary of State.
  • The branch is not a separate legal entity but an extension of the overseas parent company and the Subsidiary is a separate legal entity
  • Provides limited liability or ring-fencing of the Puerto Rico operations
  • File a Corporation tax return and pay tax on company profits from Puerto Rico operations
  • Branch is subject to a deemed distribution 10% branch profit tax on advances to parent company
  • Subsidiary actual repatriation of dividends will be subject to a 10% withholding at source
  • Accounts require auditing if Annual Revenues from Puerto Rico operations are over $ 3 million.

Domestic Corporation:

  • Organized under the laws of Puerto Rico
  • Provides limited liability and ring-fencing to Puerto Rico operations
  • Gives a perception of a local business, with longevity
  • File a Corporation tax return and pay tax on company’s worldwide profits
  • Accounts require auditing if Annual Revenues are over $ 3 million.

Partnership:

  • Partnerships are flow-through entities and profits are allocated to members who then pay Income Tax on these profits personally.
  • Accounts require auditing if Annual Revenues are over $ 3 million

Limited Liability Partnership:

  • Members (partners) have limited liability
  • Profits are allocated to members who then pay Income Tax on these profits personally
  • Accounts require auditing if Annual Revenues are over $ 3 million

Limited Liability Company

  • Any natural or judicial person may organize a limited liability company in Puerto Rico, and the articles of organization are required to be filed with the Puerto Rico Department of State
  • Provides limited liability and ring-fencing to Puerto Rico operations
  • For income tax purposes, limited liability companies will be taxed in the same manner as corporations, but may elect taxation as a partnership
  • Accounts require auditing if Annual Revenues are over $ 3 million

How much Corporation Tax will the business pay?

Corporate regular income tax is made up of a normal income tax and surtax. The normal tax is computed on the net taxable income of the corporation. The normal tax rate is 20%. The surtax is computed on the surtax net income (net taxable income less the surtax deduction of $25,000). Surtax tax rates range from 5% to 19%.

Income subject to Surtax The Surtax will be
Not over $75,000 5%
$75,001 - $125,000 $3,750 + 15% of the excess over $75,000
$125,001 - $175,000 $11,250 + 16% of the excess over $125,000
$175,001 - $225,000 $19,250 + 17% of the excess over $175,000
$225,001 - $275,000 $27,750 + 18% of the excess over $225,000
Over $275,001 $36,750 + 19% of the excess over $275,000

 

Puerto Rico also offers to eligible businesses highly attractive tax incentive packages that includes a fixed corporate income tax rate (4% to 8%) – one of the lowest in comparison with any U.S. jurisdiction – various tax exemptions and special deductions, training expenses reimbursement and special tax treatment for pioneer activities.

What if we use Puerto Rico to set up our holding company?

Puerto Rico is a very attractive place to set up corporate headquarters if over 90% of the entity’s gross income is derived from services for export and these services are considered strategic services.

The tax inventive for these businesses is a 4% fixed tax rate on the net export services income, 100% exemption on dividend distributions and 90% exemption on property tax and municipal tax.

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