All about taxes for expats in Puerto Rico

I think there is a lot of misunderstandings especially about Act 20/22/60. As with most trades in PR, I contacted about a dozen CPA firms from May through last week but, only 3 set up a introductory call.

I have an LLC with less than $3m in revenue. Act 60 states this is a Small and Medium Enterprise (SME). It is a consulting business so I qualify under export services. This was the old Act 22, now chapter 3 in Act 60.

I have read the Act and it offers two two incentives for SME's not available to larger entities. 1) a tax rate of 2% for the first 5 years, then 4% for the next 10 and it clearly states the company is required to employee 1 Puerto Rican citizen “within 18 months” of hitting $3mm in revenue.

I had previously been told my tax rate was 4% and I had to employ 1 person regardless of revenue, that person could be me.

I asked these CPA's 2 basic questions. 1) what is my tax rate under chapter 3; 2% or 4%, and did I have to have 1 employee?

There are only 4 combinations to these questions. I got three different answers. I then asked two lawyers and got a 4th answer and a second for one scenario. When I pressed them as to why, most told me to go elsewhere and none would give me an opinion in writing, though I offered to pay.

What this shows is all these people who tell you they know… May not.

I finally spoke to someone I believe to be a true expert. He said my tax rate was exactly as it states in chapter 3, SME, 2% for 5 years. He then said Act 60 clearly states that I do NOT need an employee but, and it is a big but.

The US Treasury and IRS, who are the entities that authorized the LLC and gave the EIN would consider zero employees simply as a tool to avoid taxes like FICA, FUNTA… And they would come after me, not the hacienda. The fines were 100% of tax, plus tax and interest. He suggested googling “IRS reasonable salary.” I did. I now pay myself. So to those looking at Act 60 make sure you have a competent advisory firm, do your research and ask questions.