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Doing business in Puerto Rico

How quickly can I set up a business?

The Department of State of the Government of Puerto Rico provides online services for corporations, limited liability companies and limited liability partnerships.

What is the minimum investment needed?

No minimum investment required.

How can I raise finance?

Own funds, private banking, capital markets.

What are the legal requirements for setting up my business?

Corporations are classified into domestic or foreign corporations and into for-profit, nonprofit, or public benefit corporations.

• Domestic Corporations – Are those created under the General Corporations Act of Puerto Rico. That is, these are corporations of Puerto Rico.
• Foreign Corporations – Are those created under the laws of other countries and states of the United States. For a foreign corporation to operate and do business in Puerto Rico, it must obtain authorization from the Department of State of the Commonwealth of Puerto Rico.
• For Profit Corporations – Are domestic or foreign corporations where owners derive economic benefit of its operation based on their participation in the business.
• Nonprofit Corporations – Are domestic or foreign corporations in which the proceeds of its operation, if any, are used to promote the purposes of the corporation itself and not to benefit financially the members of that entity through profit distribution.
• Public Benefit Corporation – Are domestic or foreign corporation with a primary public benefit purpose, in other words, their main purpose is not to generate net profits, but if there are, it could be distributed to its owners.

What structure should I consider?

There are advantages and disadvantages of what business entity model should be considered for a business, and there is no one correct answer, it is all dependent on your specific business circumstances and needs. A brief overview of the different business entity models is:

Domestic Corporation:

• Organized under the laws of Puerto Rico.
• Provides limited liability and ring-fencing to Puerto Rico operations
• Gives a perception of a local business, with longevity.
• File a corporation tax return and pay tax on company’s worldwide profits.
• Audited Financial Statements are required to be filed along with the Puerto Rico statutory tax returns when the gross receipts from Puerto Rico operations are or exceeds $3 million on its accounting year. Alternatively, there is an option to complete an Agreed Upon Procedures/Compliance Attestation Report in lieu of the Audited Financial Statements when the gross receipt for the period is above $3 million but less than $10 million. An audit of the financial statements is mandatory when the gross receipts for the year reach or exceeds $10 million.

Foreign Corporation (a branch or subsidiary of the overseas business):

• A foreign corporation may not conduct business in Puerto Rico prior to receiving authorization from the Secretary of State.
• The branch is not a separate legal entity, but an extension of the overseas parent company and the Subsidiary is a separate legal entity.
• Provides limited liability or ring-fencing of the Puerto Rico operations.
• File a corporation tax return and pay tax on company profits from Puerto Rico operations.
• Branch is subject to a deemed distribution 10% branch profit tax on advances to parent company.
• Subsidiary actual repatriation of dividends will be subject to a 10% withholding at source.
• The requirement to audit of the financial statements is applicable to foreign corporation in the same manner as it applies to domestic corporations.

Partnership:

• Partnerships are pass-through entities and profits are allocated to members who then pay Income Tax on these profits personally.
• The requirement to audit of the financial statements is applicable to partnerships in the same manner as it applies to domestic corporations.

Limited Liability Partnership:

• Members (partners) have limited liability.
• Profits are allocated to members who then pay Income Tax on these profits personally.
• The requirement to audit of the financial statements is applicable to limited liability partnership in the same manner as it applies to domestic corporations.

Limited Liability Company:

• Any natural or judicial person may organize a limited liability company in Puerto Rico, and the articles of organization are required to be filed with the Department of State.
• Provides limited liability and ring-fencing to Puerto Rico operations
• For income tax purposes, limited liability companies will be taxed in the same manner as corporations but may elect taxation as a partnership. Any foreign limited liability company authorized to do business in Puerto Rico and filing for income tax purposes as a pass-through entity on its country of origin will be required to file in the same manner for Puerto Rico income tax purposes and will be precluded to elect corporate tax treatment.
• The requirement to audit of the financial statements is applicable to limited liability companies in the same manner as it applies to domestic corporations.

What advice can you give me in regards to payroll and taxation requirements?

Corporate Income Tax:

• Corporate regular income tax is made up of a normal income tax and surtax.
• The normal tax is computed on the net taxable income of the corporation. The normal tax rate is 18.5%.
• The surtax is computed on the surtax net income (net taxable income less the surtax deduction of $25,000). Surtax tax rates range from 5% to 19%.

Individual Income Tax:

• Puerto Rico individual residents are subject to Puerto Rico tax laws.
• If the individual has been present in Puerto Rico for at least 183 days during the year,   then, is presumed to be a resident.
• The individual is subject to Puerto Rico income tax on Puerto Rico source income.
• Individual tax rates range from 7% in excess taxable income over $9,000 to 33%.

Social Security Tax:

• Employers and employees also must pay social security tax in Puerto Rico.
• The provisions of the United States’ Old Age, Survivors and Disability Insurance Act (“OASDI”) and the Hospitalization Insurance Tax (Medicare), commonly known as FICA or social security, are applicable in Puerto Rico.
• The tax rate for Social Security is 6.20% and for Medicare is 1.45%.

Unemployment and Disability Insurance:

Unemployment and disability insurance is managed by the Puerto Rico Human and Labor Resources Department (PRDOL). Businesses must obtain a separate account number specific for the PRDOL filings. Temporary disability insurance may be obtained privately; proof of such insurance must be filed with the PRDOL. The PRDOL also manages the Chauffers’ Insurance for those businesses having employees who drive motor vehicles.

Worker’s Compensation Fund:

Employers are required to obtain a workers’ compensation insurance policy issued by the State Insurance Fund Corporation (Corporación de Fondo del Seguro del Estado (CFSE), by its Spanish acronym). Insurance premiums vary in accordance with the level of risk assigned to the employees.

Sales and Use Tax (SUT):

• The SUT is imposed at a rate of 10.5% at the state level and 1% at the municipality level. The SUT generally applies to all retail sales including mail orders, sale of tangible personal property or services, admissions fees, storage, use or consumption in Puerto Rico.
• A 4% Special SUT Rate is imposed to the Services rendered Business to Business and the Designated Professional Services that are the legal services and the services provided by duly licensed professionals.
• A 4% Special SUT also apply to the services rendered by a non-resident person to a person located in Puerto Rico, regardless of where the service has been rendered, provided such service is directly or indirectly related with the operations in Puerto Rico.

Municipal License Tax:

·      Puerto Rico law allows municipalities to impose and collect municipal license tax based on the volume of business of up to 0.5% of gross receipts.

Real and Personal Property Tax:

·      Puerto Rico law allows the Municipal Revenue Collection Center (CRIM, by its Spanish acronym) to impose and collect real property tax over the appraised value of the business real property. The rate ranges from 8.03% to 12.83% depending on the municipality in which the real property is located.

·      Personal property tax is also imposed and collected over the value of any personal property on hands of a business as of the last day of the calendar year. The rate ranges from 5.80% and 10.33%.

Is there anything else that I should know?

Puerto Rico Incentives Code Act: An economic development tool based on fiscal responsibility, transparency, and ease of doing business.

To promote the necessary conditions to attract investment from industries, support small and medium merchants, face challenges in medical care and education, simplify processes, optimize, and provide greater transparency, Act 60-2019 was signed, which establishes the new Puerto Rico Incentives Code.

Puerto Rico Incentives Code Act: Its main objective is to promote economic development on our island. It provides certainty related to the types of incentives that Puerto Rico offers to attract investment and create jobs on important and traditional sectors such as manufacturing, tourism, and agriculture, as well as aerospace, biosciences, technology, renewable energy, entrepreneurship, and export services. In addition, it defines new incentives to support emerging sectors, such as the creative, eSports and entertainment industries. And it is based on metrics that will measure its effectiveness and the return on investment of all the incentives granted.

• Puerto Rico is an attractive place to set up corporate headquarters if over 90% of the entity’s gross income is derived from exported services and these services are considered strategic services.

• The tax inventive for these businesses is a 4% fixed tax rate on the net export services income, 100% exemption on dividend distributions and 90% exemption on property tax and municipal tax.

• Puerto Rico also offers to eligible businesses highly attractive tax incentive packages that include a fixed corporate income tax rate (4% to 8%) – one of the lowest in comparison with any U.S. jurisdiction – various tax exemptions and special deductions, training expenses reimbursement and special tax treatment for pioneer activities.

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