Free Trade Zone
Puerto Rico received approval from the U.S. Commerce Department to convert most of the industrial holdings of the Puerto Rico Industrial Development Company (PRIDCO) into a massive free trade zone (FTZ). The zone encompasses more than 4,500 acres and is the largest non-contiguous free trade zone in the U.S. FTZ status may be granted to individual sites or plants within 60 to 90 days.
Manufacturers operating in the FTZ are exempt from duties on imports of raw materials. Sales taxes are payable only on goods sold within Puerto Rico. Firms that export outside of the U.S. stand to gain the most, because federal taxes are not levied on finished goods.
Puerto Rico’s FTZs also provide savings to manufacturers exporting to the U.S. mainland – the destination of more than 82% of all island exports. Companies can opt to pay duties on either the finish product or on the aggregate value of the raw materials, whichever is less.
Puerto Rico’s FTZ encompasses more than 4,500 acres.
No federal taxes are levied on finished goods exported outside the U.S.
Additional Potent Incentives for Business
Puerto Rico offers a powerful combination of infrastructure, job creation and training incentives to augment its aggressive tax incentives.
Job Creation Incentives
Cash grants are available from the Puerto Rico Industrial Development Company (PRIDCO) in exchange for hiring full-time workers within an 18-month period and retaining that level of employment for at least five years.
PRIDCO’s Infrastructure Incentive Program provides grants to help companies with numerous permanent leasehold improvements, such as installation of:
- Electric lines, electrical substations, back-up generators
- Telephone lines, data and voice networks
- Air conditioning equipment when required for the operation
- Fire sprinkler systems
- Parking facilities
The Puerto Rico Department of Labor and Human Resources will consider reimbursement of up to 50% of the customized training costs and up to 50% of the employee’s salary for on-the-job training upon approval of the company’s training proposal.
Aggressive Tax Incentives for Attracting Business
Puerto Rico offers a highly attractive incentives package that includes a fixed corporate income tax rate – 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.
The recently enacted Act 73 of May 28, 2008, known as “Economic Incentives for the Development of Puerto Rico Act,” makes industry operations in Puerto Rico highly profitable while stimulating additional economic development. Key provisions include:
- 4% or 8% fixed income tax rate
- 2% or 12% withholding tax on royalty payments
- “Pioneer” industries are subject to an income tax rate of 1% or 0% in cases where the intangible property was created or developed in Puerto Rico
- Minimum combined tax rate of 3% if at least 50% of the exempt business shareholders are residents of Puerto Rico
- Minimum combined tax rate of 1% if a small or medium-size business (average gross income of $10 million or less during the previous three years).
The Tax Incentives – Act 73 also allows companies to take a tax credit on their corporate income tax return. Tax credits allow for:
- Job creation tax credit of $1,000, $2,500 or $5,000 depending on the physical location of the business operations
- 50% income tax credit of qualified R&D expenses
- 50% income tax credit for investment in machinery and equipment for the production of energy using renewable resources
- 25% income tax credit for the purchase of locally manufactured products
- Up to 10% credit to reduce the electric energy cost of the industrial exempt business
Municipal and Property Tax Incentives
- 90% exemption from personal and real property taxes
- 60% exemption from municipal license taxes (75% for small and medium-size businesses)
- 100% exemption from state and local sales and use tax on raw material