How tax planning can help your startup grow

Taxes.

Yes, we also heard the theme to Psycho playing in your head. No one is ever happy to pay taxes, or even talk about it. But as the saying goes nothing is certain but death and taxes. What many don’t realize is that there are laws in place to reduce the burden of taxes and maintain a higher percentage of earnings in your company.

Puerto Rico is taking advantage of the startup market by providing a number of tax credits, incentives and exemptions to a vast array of companies that set up shop on the island. Sure, you’d need to comply with certain requirements, but in return your company would receive low tax rate, tax-exempt dividends, tax credits among other benefits.

Not all the enacted Acts are created equal. Here’s a breakdown on those that could benefit your company.

Act 20

Established in 2012, the Act 20 provides both tax credits and tax exemptions to a pretty wide array of business that establish their services on the Island to service other countries. Act 20 applies to companies, service centers, investment companies and health services (medical, laboratories, etc).

To ensure a benefit for the Island, the government requires the hiring of 5 employees in a period of two years

Once the tax decree is obtained, the good stuff starts: only a four percent corporate tax rate. Yep. 4% percent on the income generated on the island. 100% tax- exempt dividends, 60% exemption on municipal taxes and NO federal taxes on source income The decree guarantees these numbers for a whooping 20 years with the possibility of a decade extension.

Act 22

The Act 22 is known as the Individual Investors Act because, yep you guessed it, it’s tailored to promote investments on the island.

The good: NO taxes on capital gains, dividends interest AND. NONE. NADA. ZILCH. The catch? You have to become a resident of the Island, which means that you have to live in Puerto Rico for at least 183 days of the year. Not a bad deal considering the tropical weather and access to the same amenities as the States.

Act 22 has been the most publicized outside of the island and there’s a growing community of investors, mostly from the U.S. taking residence in the Island. It will be valid until December 31, 2035.

Act 73

Established in 2008 and, currently, the most comprehensive tax incentive law, the Act 73 provides the same benefits as Act 20 and then some. According to Puerto Rico Industrial Development Company (PRIDCO), it “also allows companies to take a tax credit on their corporate income tax return.”

Among the industries that benefit from Act 73 are software on a commercial scale, medical research, commercial manufacture, recyclable materials industries, hydroponics, among many others.

If your industry provides what the Department of Economic Development and Commerce refers to as “pioneer activities or operations”, your company would receive a 1% fixed income tax rate; a 90% tax exemption on: personal property taxes, real property taxes, 100% tax exemption on municipal license taxes for three semesters which will then go down to 60% exemption, 100% exemption on municipal construction taxes. These are only a few of the incentives provided by Act 73.

Act 120

If so far everything sounds great but you still to hire people to actually produce some income and enjoy the benefits, fret not.

You have the idea but no manpower behind it. What’s an entrepreneur to do? Well, apply for the Act 120. With it, you’d receive 50% of your money back for your payroll of up to 15 employees. And the professional pool in Puerto Rico is ready to take on your business. Talented and bilingual, their hiring would benefit both your company and the island.

Act 135

The youngest of the Acts is directed to the youngest of entrepreneurs. Act 135 was established in 2014 to provide financial mentorship and tax incentives to those between ages 16 to 35 in an effort to generate self-employment among young people. The main requirement is to have a completely new company, nothing reorganized or reestablished; no state or municipal tax debt

If after all these options, your entrepreneur self is still questioning why Puerto Rico, here a few more reasons: Puerto Rico is rapidly growing as a startup hub. The island’s proximity to both South America and the U.S. make the island a central location from which you can run your business at a global scale. Despite being an island, Puerto Rico is still a more affordable option than larger hub cities, such as San Francisco and New York while providing a unique market. The Island sociopolitical status and ties to the U.S. have created a market that is both American and Latino with a thriving international community.

All the money saved from the exemptions and credits that are applicable to your company is money that can be invested right back to it. Also, by having a Puerto Rican set up, your company would have access to a talented pool of bilingual professionals eager to become a part of the startup movement.

*Updates to the acts and applications can be found at the Department of Economic Development and Commerce’s Office of Industrial Tax Exemption website