By default, Puerto Rican LLCs are taxed as corporations. You must file a Classification Election with the Puerto Rico Department of the Treasury and a Federal Classification Election with the IRS to be taxed as a pass-through entity. Pass-through taxation allows LLC owners to report their LLC earnings on their personal income tax returns, avoiding “double taxation.”
Puerto Rico offers great tax incentives, including a 4% income tax and exemptions from taxes on capital gains, interest, or dividends for individuals and businesses meeting the requirements. Puerto Rico LLCs do not pay federal income tax on Puerto Rico income sources.
Foreigners can own 100% of a LLC in Puerto Rico. Members’ liabilities are limited to their capital investment. The minimum number of members is one to form a LLC.
Under the General Corporations Act of 2009, there are benefits and incentives for using a Puerto Rico corporation for nonresidents. Puerto Rico is 1000 miles Southeast of Florida with a protected US territory status offering corporations special tax deductions and industry protections. Corporations qualifying under Act 20 enjoy 4% corporate taxes, privacy, and security attracting attention from investors over recent years.
Going from 40% tax in the US to 8% in Puerto Rico certainly feels like an improvement. But keep in mind stringent IRS reporting requirements demanding all American citizens’ bank accounts be reported.
To qualify for tax incentives, an individual must not have been a Puerto Rico resident within the last 15 years, become a resident by 2035 residing 183+ days a year, and file paperwork. Once approved, it’s a binding contract with over 12% tax or even 8%.
Puerto Rico LLCs can choose partnership taxation for pass-through benefits. Incentives include 4% income tax rate, 75% property tax reduction, and no tax on interest, gains, or dividends.
The Puerto Rico General Corporations Law and Internal Revenue Code of 2011 regulate corporate matters. Corporations and LLCs are common entities for investors.
Puerto Rico LLCs have strong creditor protection. Creditors can’t foreclose but can place liens and receive distributions. This often leaves creditors with nothing since they can’t order distributions.
To start a business and qualify for tax benefits, you must become a bona fide Puerto Rico resident by satisfying presence, tax home, and closer connection tests. Registrations can be completed online, permits obtained via the Unified System of Internal Revenue.
With favorable incentives, capital access, and resources, Puerto Rico offers advantages for starting businesses. Steps include researching laws, developing a plan, choosing an entity, securing financing, obtaining licenses and permits, and utilizing tax incentives and development programs.