Puerto Rico is an unincorporated territory of the United States. And has a territorial tax system that allows for tax exemptions on income, profits. And gains from sources within Puerto Rico. This makes it easier to start a business in Puerto Rico than if you were outside of the US. The federal taxes are only applied when there is a distribution of earnings or dividends from any source outside of Puerto Rico.
There are a few other benefits to doing business in it as well. The first is that there is no capital gains tax on the sale of property, stocks, or businesses in Puerto Rico. There is also no estate or inheritance tax, so your assets can be passed down to your heirs without any additional taxes. Additionally, Puerto Rico has a very low corporate income tax rate of just four percent. And there are no withholding taxes on dividends or interest payments paid to non-residents. It also allows for 100% expensing, which means that you can write off all expenses incurred in order to start your business.
What is the Puerto Rico Tax System?
- The Puerto Rico tax system is based on the U.S. federal income tax system, but there are a few key differences. The most significant difference is that Puerto Rican residents are subject to taxes on worldwide income. While U.S. citizens and residents are only taxed on income earned within the United States.
- Puerto Rico also has its own corporate income tax. Which applies to both domestic and foreign companies operating in Puerto Rico. The corporate tax rate is currently 20%, although it will be reduced to 17% in 2019.
- There are several other special rules that apply to businesses operating in Puerto Rico. Including a 100% exemption from withholding taxes on dividends paid to non-resident shareholders. And a 90% exemption from excise taxes on certain goods and services.
Puerto Rico has its own estate tax:
- Puerto Rico also has its own estate tax, which only affects the wealthy residents of Puerto Rico. (and U.S. citizens with a significant connection to Puerto Rico). The first $11,180 of an individual’s taxable estate is exempt from taxes. Anything above that amount will be taxed at 16%. Married couples can double this exemption level ($22,360) for their combined estates. In addition, property held in trusts or foundations may qualify for additional exemptions under special rules designed to encourage charitable giving in Puerto Rico. However, assets placed into such entities must remain within those structures indefinitely. If they are ever withdrawn from the trust or foundation by either the grantor or beneficiary. Any tax exemptions for that trust or foundation will be revoked.
- The rules governing Puerto Rican credits are also different than in the United States. Although there is one important similarity: both jurisdictions allow non-residents to claim a credit against their taxes for foreign income taxes paid on Puerto Rico source income. This can help individuals avoid double taxation problems. When they live in one country but earn all of their money from another country (as many expatriates do). For example, an individual who lives and works full time in San Juan could pay 20% tax under Puerto Rico law. While still qualifying for a $20,000 U.S. Foreign Earned Income Exclusion each year because he has already paid his share of federal taxes on the same earnings back in the United States.
The Puerto Rico tax system is complex, and there are many other nuances that we haven’t covered here. However, these are some of the key benefits that make it attractive to businesses and individuals looking for a new place to call home.