Location - Puerto Rico is an island located in the Caribbean on latitude 18 and longitude 67, east of the Dominican Republic. It is approximately 1,000 miles (1,600 kilometers) southeast of Miami, Florida and less than 5 hours by plane from Boston, New York, Atlanta, Chicago, Miami, Houston, Dallas and other cities in the southeast of the United States.

Size - Approximately 100 miles long and 35 miles wide.

Population - Close to four million (4,000,000) people, according to the census of 2000.

Climate - The average temperature is between 71° F to 88° F (23° C to 32° C).

Annual average income per capita –Approximately $19,600 for 2007.

Time zone – Atlantic standard time.

Currency – U. S. dollar. Generally major credit cards are accepted.

Languages –Two official languages, Spanish and English, with Spanish being the primary language.

Government – The government is divided in three branches: the executive, the legislative and the judicial branches.

Relationship with the U. S. Federal government – Puerto Rico is an unincorporated U. S. territory. U. S. laws apply except in those cases where the U. S. Congress legislates otherwise.

Financing – Available from various sources including private and government banks for new businesses

Investment opportunities

Puerto Rico offers the benefits and protections of operating within a U. S. jurisdiction with the added benefits of operating as a foreign corporation. Businesses in P.R. benefit from a wealth of facilities, a favorable pro-business environment and a well-educated bilingual workforce. The government offers incentives and favorable tax laws combined with cash grants, tax credits, and venture capital initiatives to certain businesses. Among the different benefits available to these businesses are:

• Maximum 4% corporate tax rate for the exempted period of 15 years.

• 0% tax on certain eligible investment income.

• 100% exemption on dividends.

• 0% tax on liquidations.

• 100% special deduction for expenses incurred in the acquisition or construction of buildings, structures, and machinery and equipment not previously used or depreciated in Puerto Rico.

• Tax Credits

• 60% exemption for municipal licenses and taxes

• 100% exemption on real property during the initial construction or expansion period.

• 100% exemption on construction excise tax for the construction to be used by the exempted business during the period authorized in the grant of tax exemption. 

• 100% exemption on excise and sales and use tax on raw materials (excluding hydraulic cement, crude oil, unfinished or end products derived from oil, and other hydrocarbon mixtures), manufacturing machinery, equipment and vehicles and accessories used in the exempt operations, energy efficiency equipment certified by Energy Affairs Administration, etc.

• The opportunity to conduct operations in a Foreign Trade Zone. Companies obtain significant financial savings since raw material, components, finished goods and packaging may be storage in and transported tax free through these zones.

Financing is available from different government sources depending on the type of industry. The Government Development Bank of Puerto Rico (GDB) makes long-term and large loans to private companies, The Puerto Rico Economic Development Bank loans or guarantees loans up to $1.5 million and also invests in qualified high-risk projects. The Authority of Financing for Industrial, Tourism, Educational, Medical and Environmental Control

Tax System

Forms of business operations – A foreign enterprise may operate in P. R. as a separate corporation, a branch of a separate corporation, a partnership, a special partnership, or as sole proprietorship.

Taxes – The major taxes imposed in Puerto Rico are income taxes, property taxes, municipal license taxes, excise taxes and payroll taxes. Entities doing business in Puerto Rico must comply with the requirements imposed by the different laws such as payments of the tax, withholdings on certain payments and filing different returns and reports with the different government agencies.

Income taxes – for individuals and businesses. The tax rate to an individual depends on whether he is a resident of PR or not. The tax rate applicable during the year 2008 for residents of P. R. during the entire taxable year ranges from 7% to 33% on his taxable income considering his worldwide income. For determining the taxable income, the individual may claim the deductions and exemptions provided in the Puerto Rico Internal Revenue Code of 1994.

Nonresidents are taxed only on their income from sources within P. R. or on income effectively connected with the conduct of a trade or business within Puerto Rico. The tax rate for nonresidents depends on the class of income and on whether or not the individual is engaged in trade or business in Puerto Rico.

The tax rates for corporations and partnerships organized under the laws of Puerto Rico range from 20% to 39% on their taxable income. The taxable income is determined after the allowable deductions and credits. The rates for corporations and partnerships not organized under the laws of PR depend on whether or not the entity is engaged in trade or business in Puerto Rico.

Property taxes – As a general rule, property taxes are imposed on the assessed value of real and personal property. The real property tax is imposed on the value of the property as assessed by the Municipal Revenue Collection Center. The tax is payable semiannually on July 1 and January 1 of each year.

The personal property tax is self-imposed upon the filing of a return by any natural or legal entity engaged in a Puerto Rico trade or business and that on January 1 owns personal property used in the trade or business. The tax rate depends on the place (municipality) in which the property is located. For the taxable year 2007-08 the personal property tax rates range from 5.08% to 8.23%. The real property tax rates are 2% higher.

Municipal license taxes – This tax is similar in nature to the gross receipts. It is imposed on all persons engaged in business based on the volume of business attributable to the corresponding municipality. The tax rate is not the same in every municipality. For determining the applicable rate, businesses are grouped in two categories: financial and non-financial. Financial businesses are subject to a maximum rate of 1.50% of the volume of business. Non-financial businesses are imposed a maximum tax of one half of one percent of the volume of business. The definition of volume of business is different for financial and non-financial businesses.
In order to conduct operations free of this tax for the semester a business commenced operations, every person who commences any industry or business is obliged to notify the Municipal Treasurer within 30 days of commencement of operations.

Sales and use tax – A sales and use tax is imposed on every sale of tangible  personal property or taxable service, admission, use, storage or consumption in Puerto Rico, unless specifically exempted.  The sales and use tax is 7% (6% for the Commonwealth of Puerto Rico and 1% for the municipalities).  Generally retail sales are taxable, but sales for resale and for export are exempt. The sales and use tax will be pay in a monthly basis on or before the 20th of the next month. Also, a sales and use tax return need to be file by that sate, too.

Excise taxes – This tax is imposed only once on articles imported, sold, consumed, used or transferred in Puerto Rico.  This tax is imposed on cement manufactured or introduced into Puerto Rico, sugar, plastic products, cigarettes, fuels, products derived from oil and hydrocarbon mixture and, vehicles and on certain transactions.  The tax rates are different for the different products. 

Some other transactions are also subject to an excise tax.  Included in these transactions are sales of jewelry, occupancy or rooms in hotels, public shows, and horse racing winnings.  The tax rate varies depending on the transaction.

Payroll taxes – A business operating in P. R. must comply with the U. S. Federal Insurances Contribution Act (FICA), the U. S. Federal Unemployment Tax Act (FUTA), the P. R. unemployment and disability taxes provisions, the P. R. chauffeur’s social security, the P. R. workmen’s compensation insurance, and the P. R. Christmas Bonus Act provisions.

Annual report – Every corporation is required to file an annual corporation report with the Puerto Rico Department of State. A $100 annual fee is payable when filing the report. In addition, a corporation organized under the laws of Puerto Rico must file a balance sheet certified by a CPA licensed in Puerto Rico when the volume of business exceeds $1,000,000.

Financial Reporting

Every person whose volume of business exceeds $1,000,000 must file with the income tax return; the property tax return and the volume of business return financial statements certified by a CPA licensed in Puerto Rico. For the taxable year started on or after August 1, 2008, this requirement increase to $3,000,000.

All foreign corporations must file a balance sheet certified by a CPA licensed in Puerto Rico together with the Annual Corporation Report without considering the volume of business.

For more information about doing business in Puerto Rico, please contact us.