Eligibility, the 4% Tax Rate, and Practical Steps
Act 60 (the Puerto Rico Incentives Code) can deliver a legally defensible 4% tax rate on qualifying export-service income plus broad property/municipal and distribution (dividend) benefits — if you structure correctly, demonstrate economic substance on the island, and pass the ROI/job-impact review required by the DDEC. The process is documentation-heavy and compliance-focused; treat it as a business transformation, not a paperwork exercise.
1) What “export services” under Act 60 really means
Export Services (formerly “Act 20” activity) are services performed by a Puerto Rico–established business for clients outside Puerto Rico. The Incentives Code defines Export Services and ties eligibility to statutory chapters and regulations — the company must be a bona-fide Puerto Rico entity with operations located on the island and must meet the requirements set out in Section 2031.01 (and related sections) of the Incentives Code.
Common service examples used under Act 60 include: software development and SaaS, consulting, digital marketing and creative agencies, financial/asset-management support, specialized engineering, and back-office B2B services — but the Code is rules-based, not industry-list-based; the DDEC evaluates each business on the facts.
Practical note: many advisors and the prior Act-20 practice treat an eligibility threshold of ≈80%+ of gross income from export (non-Puerto Rico) clients as the rule of thumb for an “export services” company — that threshold appears in the statute legacy and in guidance and is commonly used by advisors and reviewers. Build forecasts that clearly segregate Puerto Rico vs. non-Puerto Rico revenue.
2) What the 4% fixed tax regime covers (and what it doesn’t)
If granted a tax exemption decree under the Export Services chapter, eligible net income from export services is subject to a fixed 4% corporate income tax (special regimes for small volumes and other exceptions exist). In addition, distribution of profits derived from the export-service income is often eligible for 100% exemption (i.e., dividends paid from exempted export service income are generally tax-free under the decree rules). The Incentives Code also provides significant property and municipal tax relief during the grant period.
Typical package highlights you’ll see in practice:
- 4% tax on eligible net income (some businesses under certain thresholds or in special locations may get stepped or alternative rates).
- 100% exemption on dividends (as they relate to export-service earnings).
- Property tax (75% typical) and municipal license tax (50% typical) relief for the grant period.
3) What the government evaluates — ROI, jobs, and substance
Act 60 is intentionally results-oriented. The DDEC (Department of Economic Development & Commerce / Incentives Office) applies an ROI methodology: they want to see real island benefits (job creation, payroll, capex, supplier spillovers, skill transfer). Expect to model direct jobs, anticipated annual payroll, capital investment, and economic spillovers — your application must tie tax cost to measurable local returns. The ROI test is standard for granting and measuring incentives.
Checklist of ROI-style items DDEC will weigh:
- Projected full-time Puerto Rico hires and salary levels.
- Local payroll as a percent of total operating cost.
- Capital investment (office, equipment, local vendor spend).
- Evidence that services are sold primarily to non-Puerto Rico clients (revenue mix).
4) Eligibility & “gotchas” — what trips people up
Key eligibility points (practical summary):
- Entity & local establishment: you must have an office or bona-fide establishment in Puerto Rico and be legally formed/registered on the island.
- Revenue sourcing: expect to show most revenue is from clients outside Puerto Rico (practice guidance references an 80% benchmark). Track and document client locations, contracts and invoices.
- Substance: mere mailbox or offshore bookkeeping won’t pass. Office lease, local bank account, payroll, recruiting and management activities in PR are necessary.
- Officer-owner compensation: AD 15-22 and related guidance require reasonable owner compensation when owners work for the exempt company (there are salary imputation rules and ceilings to consider). Expect review of officer pay and time devoted to the business.
- Base-period income rules: if you previously operated in PR before applying, base-period income rules can limit benefits — disclose history fully.
Red flags for audits or denials: fuzzy revenue allocation (no clear “outside PR” evidence), lack of local hiring or payroll, owner working primarily from the U.S., inconsistent intercompany contracts, or failing to follow wage/withholding rules. The IRS and Puerto Rico Treasury pay attention to substance and source rules — plan accordingly.
5) Step-by-step: how to establish a business in PR and apply
This is a practical roadmap you can use to build the DDEC application.
- Pre-work: business case & ROI model
Build a 3–5 year financial model that isolates export revenues, shows gross/net margins, payroll, local spend, and hires. Add a one-page ROI summary linking tax cost to local economic benefit. The DDEC expects measurable impact. - Form the Puerto Rico entity & get local tax IDs
Incorporate or organize (corporation/LLC) in Puerto Rico, obtain employer identification/merchant registrations, and register for Puerto Rico Treasury (Hacienda). - Secure office, banking, and initial hires
Lease a physical office, open a Puerto Rico bank account, and onboard at least the first local employees or contractors you committed to in your ROI model. Substance matters. - Prepare required application documents (examples)
- Business plan and operations narrative (services, clients, delivery model).
- Financial projections and ROI impact sheets.
- Copies of contracts proving non-PR clients.
- Corporate formation documents, PR bank statements, lease, and payroll records.
- Police record/clearances and tax clearances for principals (as required).
- 5. File via the DDEC Incentives Portal — with expert guidance
The application must be submitted through the DDEC Single Business Portal, with fees paid and supporting documents uploaded. While decrees are generally retroactive to the filing date, processing can stretch six to eight months — sometimes longer if information is incomplete.
This is where our team steps in. With offices in both Puerto Rico and the U.S., we manage the entire application process on your behalf, from preparing the financial models DDEC expects to handling all portal submissions, follow-ups, and compliance questions. Our clients avoid the paperwork headaches and instead focus on growing their business while we make sure the application is done right the first time.
- After decree: compliance and reporting
Maintain separate books for decree-covered activities, file annual reports to DDEC and Hacienda, withhold/pay payroll taxes properly, and retain documentation supporting your ROI and export revenue. Expect periodic compliance visits or audits.
6) Compliance essentials (don’t let savings erode)
- Separate accounting: keep clean, auditable ledgers that separate exempt export-service income from other activities.
- Payroll & withholding: timely payroll and social-security withholdings for local hires are required.
- Annual compliance filings & fees: the decree carries annual reporting and fees; missing filings can trigger recapture or penalties.
- Document client sourcing: retain contracts, IP delivery notes, international wire receipts and travel logs — these are central to proving export status in an audit.
7) Practical tax planning considerations (owner & U.S. tax interaction)
If the shareholders or managers are U.S. persons, they must evaluate U.S. federal tax consequences (bona-fide residency tests, source rules for capital gains and wages, and potential IRS scrutiny). Publication 570 is the IRS guide on Puerto Rico residence rules and is required reading for U.S. taxpayers considering relocation or owner residence planning. Coordinate corporate structure planning with individual residency planning to avoid surprises.
8) Common scenarios — quick illustrations
- SaaS agency selling to U.S./EU clients: incorporate in PR, lease remote-friendly office, hire local support and a small engineering team, model >80% export revenue — apply for Export Services decree and propose hires/payroll in ROI.
- Digital marketing shop: show client contracts outside PR, provide proof of service delivery and remote collaboration, demonstrate local admin/substance and payroll to validate decree.
9) Pitfalls that cost time & money
- Treating Act 60 like a tax loophole instead of an economic development program. Lack of substantive island operations or weak ROI documentation is the fastest way to fail an application or invite audits.
- Underpaying or failing to document “reasonable salary” for owner-employees (watch AD 15-22 type rules).
- Weak segregation of PR vs. non-PR revenue and poor contract/evidence trail.
10) Bottom line — who should pursue Act 60 export services?
If you run a service business that legitimately sells primarily to clients outside Puerto Rico, are prepared to build local substance (office, payroll, governance), and can quantify island economic impact (jobs, payroll, capex) — Act 60’s export services regime can transform your effective tax rate and cashflow profile. But the incentive is a business decision requiring operational change, not just a tax filing.
Launching an export services business under Act 60 is one of the most powerful ways to reduce your tax rate while expanding globally — but the path is technical, document-intensive, and requires ongoing compliance. At Delerme CPA, we guide entrepreneurs and service businesses through every step: entity formation, ROI modeling, application filing, payroll setup, and annual compliance. With decades of experience in both U.S. and Puerto Rico tax law, our bilingual team ensures you qualify, stay compliant, and maximize the benefits of the 4% regime. If you’re ready to establish your business under Act 60 and focus on growth while we handle the details, we’re here to make it happen.