If you’re anything like me, you’ve been pay at a tax rate in the 20 or 30% range for years, maybe decades. Please, don’t get me wrong, I am not one of the “tax dodgers” that think the constitution protects from paying any taxes, no, there are way too many people in federal prison that tried that argument.
So, when I found out that there is a US territory that has a tax program that would drop my business tax rate to just 4%, well, I had to sit up and listen, as should you. It’s Act 20 Puerto Rico, and its an amazing program.
I mean, let’s get real, right? Who really wants to pay more taxes than they are legally obligated to pay?
If the United States was better at managing their money, and able to properly execute on public assistance programs and the like without wasting tax dollars, then I think more folks wouldn’t care so much about how many tax dollars they contribute each year.
Unfortunately, that’s not the case, and many people are fed up with throwing tax dollars into what they perceive to be as nothing but a corrupt, wasteful, political machine that has no clue about how to balance its own budget or get out of debt.
This is why when opportunities present themselves to legally pay less in federal taxes, people get excited and hope that what they are hearing is true and legal. In this case, both are true.
It’s the Commonwealth of Puerto Rico, which just happens to be a US territory, and the tax program is called Act 20. The official name of the program is the Export Services Act.
San Juan Skyline
The Export Services Act is one of the more interesting pieces of tax legislation in the history of taxes, because it didn’t address just a small, single issue, it basically opened a huge door to try and change the entire Commonwealth’s economy. Let’s dive into what this is all about.
First you need to establish/create a Puerto Rican corporation. That company will be engaged in what is predominately a business whose customers are outside of Puerto Rico, but would benefit from a service from Puerto Rico.
Your service might be management consulting, accounting, legal services, information technology services, make for a perfect Act 20 Puerto Rico company.
Puerto Rico does not want the people you service to actually be here on the island, hence the word “export”, so as long as you make your money OUTSIDE of the Commonwealth, then this amazing tax program could save you a lot of money.
Now, when one of my friends, who is in this program, was telling me about it for the first time, I was thinking the entire time, “Why wouldn’t I do this?”. I mean, it just sounds too good to be true. Here’s the bottom line, and then we’ll go into more details:
1. You must live in Puerto Rico, i.e. become a bona fide citizen. Is that a big deal? We will be discussing the pros and cons of that in another article.
2. You must obviously move your business to Puerto Rico. Now, if you’re a digital nomad like myself, meaning you can perform your work anywhere, then Act 20 is perfect for you.
3. You must have a Puerto Rican corporation. This is quite easy to accomplish and we will discuss the exact way I did this in another article.
4. You must apply and be accepted. Now, this one had me really concerned, because in order for me to be considered a bona fide resident of Puerto Rico, my first main point, I needed to be living in Puerto Rico for at least 183 days in the calendar year of 2019 to get the tax benefits for that year. Which meant I pretty much had to move to Puerto Rico literally weeks after finding out the program was a good fit for me. This meant I would have to move and THEN apply for the program and wait four months or so to see if I was accepted.
5. You will need a Puerto Rico business bank account, and most likely setup with a local payroll system to pay yourself. The system, reporting and everything is just so much different in Puerto Rico than it is in the mainland that it’s just smarter to pay a service for this vital function of your business.
6. Some people say that you are slightly at higher chance for a tax audit because you’ve moved from a high tax location to a low tax location. Let me just tell you right now that I’ve seen no evidence of that whatsoever.
Act 20 Puerto Rico
The biggest issue any business would have qualifying for this program is if they didn’t have a service that could be “exported” from Puerto Rico. One perfect example is the business that is an FBA seller on Amazon.
You’re not providing a service, you’re selling physical products. So, is there a way to still be able to take tax advantages of Act 20 if you’re an Amazon seller? Yes, there most certainly is, and it will in the form of providing consulting services to your business, or even setting up a product export business.
A product export business simply means that your vendors now bill your Puerto Rico company for the products you purchase, and your Puerto Rico company then marks up the costs and “resells” the inventory to your FBA Business.
You can also provide consulting services to your FBA business and charge for that. Understand I am not a CPA or an Attorney, nor do I play one on TV, so make sure you get proper legal/accounting advice prior to doing anything for Act 20 Puerto Rico.
When you apply for the Act 20 program, you are telling the government exactly what your services are, and those are the services they expect you will be providing under the protection of the tax grant they will offer you.
Remember, Puerto Rico has its own tax system. If you move yourself, and a business there, and all of your income comes from that business, you technically would never have to file another US income tax return ever again.
Now, most people still take the time to file a zero income return, because by doing so you take away the ability of the IRS to come back and audit returns older than four years. If you don’t file returns every year, then those last three or four returns subject to audit are always the ones you reported income on, even if they were ten years ago.
Now, here’s the interesting part. Puerto Rico is nothing like the slums of a run down metropolitan area needing some revitalization so the government offers some tax benefits to get a large business to get in there and bring the area back to life.
Puerto rico is an island in the Caribbean, in other words, a tropical paradise that hundreds of thousands of people pay huge amounts of money to visit every year because it truly is the Enchanted Isle.
You may even have it on your list to visit because of everything you’ve heard about its beaches, luxury living and water sports.
It’s much like taking a trip from state to state. Let’s say you get on a plane in Miami and fly to Puerto Rico’s capital of San Juan.
Arriving in Puerto Rico couldn’t be any easier. You get on the plane in the United States, you land in San Juan, you get off the plane, grab your bags, grab your transportation and boom, that’s it. It’s an island in the Atlantic, but remember, it’s a US Territory. If you have a valid drivers license, yuou can get on a plane, fly here, get off and walk out the door without talking to anyone.
Here’s the concept behind it …
Again, the secret to getting this 4% business tax rate is that you’re offering a service or services exported outside of Puerto Rico.
An Act 20 Puerto Rico business is only limited by your imagination. I’ve seen entrepreneurs move to the island just to start up a new business for the sole purpose of taking advantage of the tax programs here.
Plus, this is not the worst place to live, lol. I’ll probably do a separate article just on the weather, but in a nutshell its pretty much sunny and 85 degrees every day of the year.
People flock here in the winter to escape the cold of the north. The fact that it is a very large island also helps with the feeling that your “stuck on an island”.
We have been living here six full months as of this writing and have yet to do the kind of exploring I’d like to do. We’ve just been enjoying our new home on the beach in Palmas Del Mar.
I am going to have to do a series of articles on Palmas Del Mar also. It’s one of the more interesting places to live that I’ve seen in a long time.
We will be continuing with the series of Act 20 Puerto Rico articles to provide instructions on exactly how to apply and what it’s like living on an island in the Caribbean.
It is our hope that when you relocate to Puerto Rico, this site, with all its information, will have been a huge benefit to you.