Puerto Rico is considered the high-income economy in the Caribbean and the most competitive economy in Latin America. Puerto Rico has a highly educated and skilled workforce and is considered a US customs territory which allows US companies to establish themselves in Puerto Rico. The economy is considered highly vulnerable to changes in world economies due to reliance on imported goods such as food materials and industrial raw materials. The economy has transitioned from a predominantly agricultural economy to an industrial economy and is gradually moving through the information age.
The financial year begins on July 1st and ends on May 31st. Puerto Rico has a GDP of $101.5 billion and ranks 60th by nominal GDP. The GDP growth rate was -0.6 as of 2013. The GDP per capita by purchasing power parity (PPP) is 34,938. The manufacturing sector contributes 46.4% to GDP per capita followed by finance, insurance and real estate at 19.6%, services at 12.5%, government sector at 8.6%, then trade 8%, transport and other public utilities 2.9%, construction 1.7% and agriculture contributes 0.6%.
The country has an inflation rate of 2.47% and an unemployment rate of 13.7%. About 45% of the population lives below the poverty line, making Puerto Rico one of the poorest countries in the Americas. The service industry, government, and commerce are the country’s largest employers. An estimated 1.286 million people are part of the workforce. The public debt is $67.7 billion which is 66% of the GDP. The country earns revenues of $31.3 billion against expenditures of $29.1 billion.
Main sectors of industry
Agriculture continues to be an activity of primary importance for the production of sugar, alcohol, rum, coffee, tobacco and citrus fruits. Tourism is strongly developing because the island constitutes a “free zone” for North American tourists: reasons of attraction are also the climate and the variety of nature which sees alternating sandy beaches and mountainous areas from which rivers full of water arise. One problem of the island is growing urbanization, a phenomenon that is spreading more and more.
The most important city is San Juan which has about 900,000 inhabitants. It is an important industrial center (industrial and manufacturing) and the largest commercial port on the island. Of interest are the numerous civil and religious buildings as well as the fortifications that date back to the era of Spanish domination.
Taxation for businesses in Puerto Rico
Corporate income tax:
• The ordinary corporate income tax is composed of a normal income tax and a surcharge.
• The normal tax is calculated on the company’s net taxable income. The standard rate is 18.5%.
• The surcharge is calculated on net surcharge income (net taxable income less the deduction of the $25,000 surcharge). The rates of the surtax range from 5% to 19%.
Tax on personal income:
• Puerto Rico resident individuals are subject to the tax laws of Puerto Rico.
• If the individual was present in Puerto Rico for at least 183 days during the year, he is assumed to be a resident.
• The individual is subject to Puerto Rican income tax on Puerto Rican source income.
• Individual tax rates range from 7% on taxable income in excess of $9,000 to 33%.
Social Security Tax:
• Employers and employees are also required to pay Social Security tax in Puerto Rico.
• Puerto Rico is subject to 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.
• The tax rate for Social Security is 6.20% and for Medicare it is 1.45%.
Investing in Puerto Rico
Puerto Rico has exploited its independence over the years to attract new investments, offering significant tax incentives for some categories of foreign investors. Before 2020, there were two laws that particularly favored two different categories of foreign investors: Law no. 20 which had as recipients those who exported international services; and the law n. 22 which concerned wealthy individuals who wished to become “bona fide” residents of the island.
From 1 January 2020, the law n. 69 which brought all the incentives for investors into a single framework – the law is known as the Incentives Code, and makes Puerto Rico a privileged place in particular for three categories of investors:
- International service exporters;
- Producers of innovative goods; And
- Individuals with high net worth.
In order to benefit from the tax advantages provided for by the new law, companies and individuals who are interested in them must request a “tax exemption decree” from the Department for Economic Development and Commerce. If the applicant meets the requirements established by law, he will be able to benefit from:
- a flat 4% income tax rate;
- profits and distributed dividends 100% exempt from income tax;
- 75% property tax exemption;
- 50% exemption from municipal taxes;
- tax credits on research and development expenses up to 50%;
- standard duration of the decree of 15 years, extendable for another 15.