Puerto Rico’s Latest Guidance: An Important Update for Individual Investors with a Tax Exemption

Puerto Rico provides generous tax exemption decrees for individuals and service businesses located on the island under Act 60 and while these tax exemptions for individual investors have existed in the Puerto Rico tax incentive landscape for just over a decade, the benefit has become more popular in recent years.

In fact, the Puerto Rico secretary of the Department of Economic Development and Commerce (DEDC) announced that the department received a record number of applications during 2021 for tax exemption decrees for individual investors, which has led to heightened scrutiny.

Notably, the Puerto Rican Department of Treasury (PRTD) has issued new guidance for individual investors who have a tax exemption decree and receive an order of revocation from the DEDC. This guidance advises that individuals who receive an order of revocation should:

1. Amend their income tax returns for the tax years for which the revocation is effective;
2. Calculate their tax liability without the exemption; and
3. Pay any tax due.

Individuals who do not amend their income tax returns will receive a “Mathematical Error Notification” with the tax due. Beneficiaries of this tax incentive should be familiar with all the terms and conditions of their tax exemption decree and be in good standing.

This would have a drastic effect on their effective tax rate as Puerto Rico’s income tax rates are similar to those of the mainland U.S.

Individuals with questions about their compliance would be well served to seek resolution to prevent delays or scrutiny.

Additionally, there is more scrutiny from the IRS in this area, so a beneficiary of the consent decree must also be aware of the U.S. Federal rules to make sure they maintain Bona Fide residency in Puerto Rico.

For more information about Puerto Rico’s tax exemptions and how to make sure you’re in compliance locally and from a U.S. perspective, please reach out to Gwayne Lai, Director of Anchin’s International Tax Group, Alan Goldenberg, Principal and Leader of Anchin’s State and Local Tax and Tax Controversy Groups, or your Anchin Relationship Partner.