When you make a list of thriving economic hubs and the top places to start a business, Puerto Rico usually isn't mentioned. The country has over $70 billion in debt with no concrete repayment plan in place, imports over 85% of its produce, and Puerto Ricans pay up to three times as much for their energy as the average American. To make matters worse, Puerto Rican nationals are leaving for the continental US at record-breaking rates.
On the surface, it hardly sounds like the ideal place to grow your business, much less move to.
- but you know what they say about judging a book by its cover.
The Puerto Rican government hopes to solve its economic problems by luring entrepreneurs to the country and reinventing it as a knowledge-based economy, like Singapore has done over the past decade. Their offer to entrepreneurs, some of the most friendly tax laws on the planet and a growing market of skilled scientists and engineers.
A personal tax haven
As many of you already know, the United States is one of the few countries on earth that continues to tax its citizens regardless of where they reside. To fully break away from the IRS many entrepreneurs have had to renounce their US citizenship entirely, and forfeit the legal protection that comes with it.
Puerto Rico offers a unique solution to that issue. As a US commonwealth nation, Puerto Rican citizens are exempt from US federal taxes. But, they're allowed to retain their US citizenship and the legal protection it provides. One important note, PR must be your primary place of residence, you must live there for 183 days of the year, to be considered exempt from US federal taxes.
So, just how "friendly" are PR's tax laws?
To start with, PR offers a fixed 4% personal income tax rate. US federal and state taxes can reach up to 50 or 60% of a successful entrepreneur's income in places like California and New York. Income tax aside, Acts 20 and 22, signed in 2012 offer a 90% personal property tax exemption to entrepreneurs in the manufacturing and export services sectors. Additionally, there is no tax on dividend income or capital gains.
4% personal income tax (up to 50-60% in the US)
90% personal property tax exemption for certain industries
0 dividend income and capital gains tax (up to 15-20% in the US)
Some entrepreneurs have described PR's taxes as feeling like little more than a rounding error.
Corporate tax incentives
Businesses in the export services and manufacturing sectors are eligible for a fixed 4% income tax rate. They enjoy a 100% tax exemption on distributions from earnings and profits, and a 90% real property tax exemption in some cases. As an added bonus, some startups will receive a 100% property tax exemption for their first 5 years. Finally, businesses can qualify for a 60-90% municipal tax exemption. The potential savings are simply staggering.
Getting back to the push to make Puerto Rico a knowledge based economy. Companies are offered a 50% tax credit on research and development expenditures. According to the Puerto Rico Science, Technology and Research Trust, 22,000 STEM graduates roll out of Puerto Rican schools every year and 60-70% of them leave the country. PR's government hopes act 73 will help to keep PR's skilled workforce in the country.
4% corporate income tax rate
100% tax exemption on distributions from earnings and profits
90% real property tax exemption for some industries
60-90% municipal tax exemption
PR won't be a perfect fit for every industry, but the potential savings make it well worth considering.
I'm not going to sugarcoat it, Puerto Rico has some tough times ahead. - and while there is the potential for incredible cost savings, building your business in PR won't be any less challenging than doing it in the US, just more cost effective if you do it right.
Regardless of what you do with the information in this article, I hope it gave you some fresh insight into the opportunities that Puerto Rico has to offer.
Got a useful tip I've missed? Have experience with growing a business in Puerto Rico?
Let us know in the comments below. We can't wait to hear from you!