Act 60: What Is It and What Does It Mean for Puerto Rico Businesses?

The “Puerto Rico Incentives Code” (Act No. 60-2019) is a unique legal framework that consolidates dozens of scattered tax benefits (incentives, subsidies, refunds, and decrees). Its objective is to simplify the process for attracting investors. Act 60 integrated key provisions such as the former Act 20 (export services) and Act 22 (capital gains exemption for new resident investors). Furthermore, it offers tax advantages to multiple sectors: manufacturing, tourism, agriculture, green energy, creative industries (film), infrastructure, and support for local and young entrepreneurs.

Why Does Act 60 Exist?

The creation of this code responds to various needs of the Government of Puerto Rico:

•  Foster economic development: The motivation for this Act is to promote the right environment, opportunities, and tools to drive the island’s sustainable economic development.
• Attract capital and create jobs: Facing an economy that had contracted in 11 of the 12 years prior to its approval, the Act seeks to enhance Puerto Rico’s economic competitiveness globally. It exists to attract foreign direct investment, stimulate local capital, increase exports, and encourage the creation of new jobs, introducing the island to the global competitive environment.
• Bring order and coherence to the tax system: Historically, Puerto Rico used a group of different incentive Acts and programs that did not necessarily have a common thread and were sometimes incompatible. Act 60 exists to centralize these tools, establishing a uniform, agile, and automated process for applying for and evaluating incentives.
• Measure effectiveness (Return on Investment): Unlike past efforts, the Act requires continuous and rigorous measurement of the cost and benefit of each incentive granted through a Return on Investment (ROI) formula. This exists to ensure that invested public funds genuinely generate a positive impact on the treasury and to discard economic activities that prove redundant or result in losses.
• Provide stability and credibility: It seeks to guarantee a transparent and stable relationship between the private sector and the Government, providing certainty to individuals and companies that wish to do business and invest in Puerto Rico.

Do People Who Have These Exemptions Pay Any Taxes in Puerto Rico?

It is a common misconception that these decrees exempt holders from all payments. Under Act 60, tax responsibilities are clearly defined:

Export Services (Former Act 20)

• Income Tax: A fixed rate of 4%.
• Municipal License Tax: A 50% exemption is granted for businesses with a volume of business exceeding $3 million (replacing the old 60% rate from Act 20).
• Property Taxes: Export Services decree holders do pay property taxes; however, they receive a 75% exemption on real and personal property taxes.
• Dividends: 100% exempt for owners and shareholders.

Individual Investors (Former Act 22)

This incentive covers interest, dividends, and capital gains accrued after becoming a resident of Puerto Rico. However, this is not a passive benefit; it carries strict compliance obligations:

• Expiration Date: These incentives (Chapter 2) are set to expire on December 31, 2035.
• Annual Donation: The decree holder must make a mandatory annual charitable donation to certified non-profit entities in Puerto Rico.
• Real Estate Requirement: Holders must purchase real property in Puerto Rico to be used as their primary residence within two years of obtaining the decree.

Act 60 Directly Impacts Mergers and Acquisitions (M&A) and Business Brokerage in Puerto Rico in Two Main Areas

1. Business Purchase and Sale (M&A):

If a company holds a Act 60 decree, its sale or purchase changes:

• Mandatory Approval: Any change of control (transfer of shares/majority interest) voids the exemption without prior approval from the Secretary of the DDEC (Department of Economic Development and Commerce).
• Preferential Rate Upon Sale: The capital gain from selling the business or substantially all of its assets (≥80% of book value) is subject to a fixed preferential rate of 4%, instead of the regular rate. This is highly attractive.
• Successor Businesses: Entities resulting from mergers or consolidations must meet strict conditions (e.g., maintaining average employment) to retain the incentives.
• Exempt Reorganizations: Certain exchanges and credit transfers may not be taxable events if they qualify as exempt reorganizations under the Internal Revenue Code.

2. Incentives for M&A Firms and Brokers:

M&A and brokerage firms can reduce their own taxes by qualifying for the Export of Services (Former Act 20) if they serve clients outside of Puerto Rico.

• Eligible Activities: These include economic, managerial consulting, legal/accounting services, and investment banking/fund management.
• Benefit for the Firm: A fixed corporate rate of only 4% on net export income and a 100% exemption on dividends distributed to owners.

Conclusion

Act 60 is a powerful and transformative tool that seeks to change Puerto Rico’s future. Its goal is clear: attract global investment and drive diverse economic sectors for the island to improve the quality of life and thus prevent further brain drain of local professionals. For a business broker, knowing Act 60 is essential, as it allows them to structure the sale of a local company ensuring that the buyer does not lose the tax benefits (which would destroy the business valuation), but also offers the opportunity to establish their own brokerage firm on the island paying a 4% tax on international transactions.

Let us help you capitalize on the incentives offered by Act 60!