Act 132 - Real Property Market Stimulus Act
On 2 September 2010, Act 132, Real Property Market Stimulus Act, was enacted to create an incentive program to facilitate the purchase of homes and other real property by granting different exemptions from taxation on property tax and income tax. In particular, this act aims to encourage the purchase of newly constructed residential real property suitable for family life that has not been subject to occupation, without limiting its application to property acquired to be the principal residence of the purchaser.
The act provides for 100% exemption from income tax (as well as exemption from the ABT) for a period of up to ten years beginning 1 January 2011 and ending on 21 December 2020 for rental income received on residential property leased. The tax exemption provided will apply to income earned, both with respect to leases that are signed after the enactment of this Act, including those signed after 30 June 2011, as well as contracts that were already signed at the time of approval of this Act. Therefore, rental income subject to this exemption will also be exempt from income tax withholding at source. To be able to benefit from this exemption, the lessor still needs to include in their Puerto Rico income tax return the income earned as well as the location of the property leased and reflect the income as exempt. Otherwise, the net rental income will be subject to tax per the regular provisions established by the Code.
Acts 22 and 138 - The Individual Investors Act
Acts 22 and 138, also known as The Individual Investors Act, were approved by the Legislative Assembly of Puerto Rico during 2012. The purpose of these measures is to provide incentives to individuals who have not been residents of Puerto Rico to become residents. In order to encourage the transfer of such individuals to Puerto Rico, the Acts exempt from Puerto Rico income tax their passive income, which may consists of interest, dividends, and capital gains.
The Acts apply to all individual investors who become 'Puerto Rico Residents' on or before 31 December 2035, provided that such individuals were not residents of Puerto Rico at any time during the six-year period preceding the effective date of the Acts (last date amended: 22 December 2014).
Both US and non-US citizens may qualify under the Acts. Puerto Rico residents who are temporarily outside of Puerto Rico do not qualify as they are still deemed to be Puerto Rico residents.
To qualify for the exemptions granted under the Act, every so-called Resident Individual Investor (i.e. a tax resident qualifying under the Act) must request a tax exemption decree from the Secretary of Economic Development and Commerce (Secretary). The tax exemption decree will provide details of the tax treatment and shall be considered a contract between the Resident Individual Investor and the Puerto Rico government.
The decree may be revoked by the Secretary if any of the following events occur:
- The Resident Individual Investor fails to comply with any of the obligations imposed by the Act or its regulation, or by the terms of the decree.
- The Resident Individual Investor ceases to comply with his or her tax responsibilities under the Puerto Rico Internal Revenue Code (PR Code) and other laws of Puerto Rico.
- The decree was obtained based on false or fraudulent representations of any facts or circumstances, which, in whole or in part, motivated the issuance of the decree.
The income tax exemption will apply only to investment income recognised during the period that starts on the date the individual is domiciled in Puerto Rico and ends on 31 December 2035 (exemption period). After this date, those residents who took advantage of the exemptions granted will be taxed as any other Puerto Rico resident and as stated in the PR Code.
Investment income exempt under the Acts
Interest and dividend income received by Resident Individual Investors during the exemption period will be fully exempt from PR income taxation. The exemption applies to all sources of such income (i.e. Puerto Rico, United States, and foreign).
In the case of capital gains, the Act provides for either a full PR income tax exemption or a reduced tax rate, depending on certain requirements.
Earned Income Credit (EIC)
For taxable years beginning after 31 December 2018, taxpayers who are residents of Puerto Rico during the entire year and between the ages of 27 to 65 years old will be entitled to claim the EIC.
The credit will range from 5% to 12.5% of the gross earned income (subject to limitations) depending on the amount of dependants claimed by the taxpayer.
The credit is not available for married taxpayers filing separate tax returns.