By now, many savvy business owners recognize the unparalleled tax benefits Puerto Rico’s Act 60 offers—a 4% corporate tax rate and a 0% capital gains tax. But these advantages come with strings attached. Compliance isn’t optional; it’s the linchpin that ensures you can maintain and maximize these benefits.
Falling out of compliance can mean penalties or, worse, losing your decree altogether. Here’s what you need to know to stay on the right track.
1. Establishing a Bona Fide Business Presence in Puerto Rico
One of the foundational elements of Act 60 compliance is proving your business’s genuine presence in Puerto Rico. This is more than just setting up a P.O. box or a shell office—it’s about building a legitimate operational base. Your business must meet the following criteria:
- Physical Office Space: You need a physical location where your business operations are conducted.
- Employing Local Staff: For businesses generating over $3 million annually, hiring at least one full-time Puerto Rican resident is mandatory. This employee must be actively involved in core business operations. Depending on your business size, more staff may be required.
- Primary Operations on the Island: Your day-to-day operations should occur in Puerto Rico. This isn’t just a paper requirement; authorities will check to ensure that your core business functions are genuinely conducted from the island.
2. Registering with Municipal and Government Agencies
Compliance requires interfacing with multiple government entities to secure proper registrations and permits. This helps demonstrate that your business is active and legitimate. Here’s what you need to complete:
- Municipal Registration: Register with the municipality where your business is located to acquire business permits and comply with local tax obligations. Neglecting this step can result in penalties that could disrupt operations.
- CRIM Office Registration: Your business must register with the Municipal Revenue Collection Center (CRIM). This registration ensures that your business pays the appropriate property taxes on real and personal property.
- Other Governmental Compliance: Act 60 compliance may involve other regulatory bodies, such as Hacienda (Puerto Rico’s Treasury Department) and the Department of State, for various tax and operational filings.
3. Annual Reporting Requirements
Annual reporting is non-negotiable for maintaining your Act 60 benefits. This includes:
- Act 60 Annual Filing with OITE: Every year, businesses must submit an annual report to the Office of Industrial Tax Exemption (OITE) to confirm their adherence to Act 60 requirements. This report needs to demonstrate that at least 80% of your gross income is derived from services provided to clients outside of Puerto Rico.
- Operational Benchmarks: Your report should indicate that your business meets any job creation or local investment requirements outlined in your decree. Falling short can lead to fines or, in some cases, forfeiture of your tax benefits.
- Property Tax Returns (CRIM): File an annual property tax return with CRIM to report the value of any real or personal property owned by your business. This filing is crucial for demonstrating that your business’s property taxes are up to date.
4. Payroll and Employment Compliance
Ensuring payroll compliance is essential not only for Act 60 but for maintaining good standing with Puerto Rican labor laws:
- Owners’ and Shareholders’ Salaries: Any business owner or shareholder actively involved in the business must be on the payroll and receive a reasonable salary. This shows that you’re not just skirting labor laws but are invested in contributing to the local economy.
- Payroll Reporting: File appropriate payroll documents to ensure taxes and employee benefits are correctly handled and reported. This is vital for demonstrating that you are fulfilling local employment regulations.
5. Corporate and Municipality Filings
Maintaining corporate good standing requires annual renewals and tax filings:
- Annual Corporate Renewal Filings: Submit these with the Puerto Rico Department of State to keep your business legally recognized and compliant. Failure to do so could result in penalties or suspension of your corporate status.
- Municipality Tax Filings: Submit an annual tax return to the municipality where your business is registered. This return should detail your gross income and pay the corresponding municipal taxes.
6. U.S. Federal Tax Filings (If Applicable)
For businesses with U.S. operations or obligations, compliance doesn’t stop at Puerto Rico’s borders:
- Federal Tax Returns: Ensure that you file necessary federal corporate income tax returns and any other applicable filings. Dual compliance is key to avoiding tax complications that could undermine your business’s credibility.
7. Key Compliance Challenges to Anticipate
Act 60 compliance can be complex, especially when dealing with multiple regulatory bodies and evolving requirements. Here’s what business owners should anticipate:
- Navigating Multiple Agencies: Staying compliant means coordinating with various offices, including Hacienda, CRIM, OITE, and your local municipality. Missing a step with any of these organizations could impact your tax incentives.
- Documented Proof of Operations: Authorities may request documented evidence of your business operations in Puerto Rico, such as lease agreements, payroll records, or client contracts. Be prepared to provide this documentation promptly.
- Keeping Up with Changes: Regulations and requirements can evolve, so staying informed through official channels or working with a trusted CPA familiar with Puerto Rican tax law is crucial.
Ensuring compliance under Act 60 is a continual effort that demands attention to detail and a proactive approach. The stakes are high—getting it right means maintaining access to game-changing tax benefits, while non-compliance could mean severe financial and operational repercussions.
Don’t navigate these waters alone, an experienced CPA can be an invaluable ally in maintaining your business’s good standing and protecting your tax incentives. Click here for a free Act 60 consultation.
