Puerto Rico enacted two laws in 2012, generally known as the Export Services Act (“Act 20”) and the Individual Investors Act (“Act 22”). Under Act 20, income from certain eligible services provided by Puerto Rican entities to non-Puerto Rican residents (both individuals and entities) is taxed at a reduced rate of 4 percent. Under Act 22, individuals who are bona fide Puerto Rican residents are entitled to a 100% tax exemption on certain interest, dividends, and capital gains.
In addition, U.S. federal tax laws provide a special tax regime pursuant to which income derived from sources within Puerto Rico, including certain dividends and interests from Puerto Rican corporations and gain from the sale of stock of such corporations, is excluded from a U.S. citizen’s gross income if that individual is a bona fide resident of Puerto Rico for the entire tax year (the “Section 933 Exclusion”). Such income can thus be taxed at an effective rate of 4% (or less) rather than the 39.6% (20% for capital gains) that generally would be imposed on U.S. citizens who are not Puerto Rican residents.