Puerto Rico Act 20

PUERTO RICO ACT 20

Puerto Rico Act 20 or "Law to Promote the Exportation of Services" was created for the purpose of establishing Puerto Rico as an international service center. The Act is an effort to attract investors to establish qualified businesses in the island by providing attractive tax incentives.

QUALIFIED BUSINESSES

Act 20 applies to any entity with a fixed place of business established in Puerto Rico. The Company must be engaged in a qualified service for export. Qualified services includes: financial services, R & D, advertising and public relations, call centers, centralized management services, various professional services, development of licensable computer software, plus others.

It is very important that although the business is established in Puerto Rico, clients who receive the service must be from outside Puerto Rico. Client who receives the "export service" can not be engaged in trade or business in Puerto Rico.

NEW ELEGIBLE SERVICES APPROVED:

• Distribution and logistics carried out at the headquarters or similar

regional offices of an entity engaged in rendering such services;

• Strategic and organizational planning of processes, distribution and

logistics to persons outside Puerto Rico;

• Commercial and mercantile distribution of products manufactured in

Puerto Rico to other jurisdictions;

• Assembly, bottling and packaging operations of products to be

exported;

• Marketing centers principally dedicated to provide spaces and services

such as: clerical, translation and information processing sources,

communications, marketing, telemarketing and other consulting

services rendered to businesses outside Puerto Rico, including export

and marketing businesses, commercial and aggregate consulates,

governmental agencies responsible for the foreign trade, barter and

exhibition centers for products and services; and

• Trading companies that derive no less than 80% of their gross income

from: (a) the purchase of products manufactured in or outside Puerto

Rico and the resale of such products for use, consumption and

disposition outside Puerto Rico or (b) commissions received from the

sale of products for use, consumption and disposition outside of

Puerto Rico, subject to certain conditions.

When approved, the entity signs a contract (decree) with the Puerto Rico Government. The decree will have a term of 20 years, renewable for 10 additional years, provided certain conditions are satisfied. The decree is not subject to subsequent legislative changes.

TAX INCENTIVES

Eligible activities can benefit from the following incentives on income derived from customers located outside of Puerto Rico in relation to services rendered from Puerto Rico (Extracted from DDEC Communication):

1) 4% fixed income tax rate.

2) 3% fixed income tax rate in the case of services considered strategic.

3) 100% tax exemption on distributions from earnings and profits.

4) 90% tax exemption from personal property taxes for certain types of businesses (100% tax exemption for the first five years of operation). The taxable portion will be subject to the regular tax rate, that currently can be up to 8.83%; therefore, after considering the 90% exemption, the effective tax rate would be up to 0.883%.

5) 90% tax exemption from real property taxes for certain types of businesses (100% tax exemption for the first five years of operation). The taxable portion will be subject to the regular tax rate, that currently can be up to 10.83%; therefore, after considering the 90% exemption, the effective tax rate would be up to 1.083%.

6) 60% tax exemption on municipal taxes (90% tax exemption if business operates in the industrial development zone constituted by the municipalities of Vieques and Culebra). Any taxable portion will be subject to the regular tax rate, that currently can be up to 0.5%; therefore, after considering the 60% exemption, the effective tax rate would be up to 0.02%.