Home / All / The Truth About Puerto Rico Taxes
Puerto Rico taxes

The Truth About Puerto Rico Taxes


Have you heard these statements about Puerto Rico taxes and benefits?

  • You don’t have to pay federal taxes when living in Puerto Rico.
  • Act 20/22 gives businesses excellent tax breaks if moving to (or starting in) Puerto Rico.
  • Puerto Rico is the next tax haven for Americans.

So, have we! In fact, we’d been naïve enough to believe them without doing thorough research. Before we moved here, we talked to our accountant and she honestly told us that she didn’t know anything about taxes in Puerto Rico. So, we went on blind faith, hoping that we’d learn more about the Puerto Rico taxes once we got here. And learn we did.

This year, was the first time we considered moving our business here, so we embarked on a closer look at the amazing tax benefits we heard Puerto Rico offers.

We already knew that sales taxes here were ridiculously high – they went up from 7.5% to 11.5% since we’ve been here. And the talks of taxes going up to 16% (which was once approved), will probably resume now that elections are over. So, we were hoping that these other promised benefits would offset the high sales taxes.

Boy, were we ever in for a shock of our lives!

But, let me start from the beginning…

We own an online business and this year we thought it would be a good idea to move it to Puerto Rico (you know, since we want to be residents here long term). So, we hired a local accountant to learn about the following regarding Puerto Rico taxes:

  • Federal tax breaks
  • Local income taxes
  • Incentives for new business (or moving existing business) – Act 20
  • Ease of running a business in Puerto Rico

First, in summary, here is what we learned. [Note that this is our own experience, and if you’re in the process of contemplating the same, please seek the advice of your own accountant.]

Are Puerto Rico taxes high

Summary Of Puerto Rico Taxes Findings

  1. You do have to pay federal taxes. You may not have to pay federal income tax (this is not true of everyone, depending on your employer). But you DO HAVE TO pay Federal Social Security and Medicare taxes, which if you are self-employed = 15.5%. This is the same as running a business in the mainland States.
  2. Local income taxes are ridiculously high!!!! Higher than any in the States. Anyone making over $9,000/year has to pay between 7%-33%. I will explain the formula down below, so bear with me.
  3. Incentives under Act 20 are mostly for big business and only for certain types of business. They promise 4% corporate taxes for 20 years. We do not qualify, as this is clearly structured for the very rich. And even if we did, the tax break only gives you what most of the States already do and these breaks only apply to corporate taxes; so, you still must pay the Puerto Rico income taxes from point #2.
  4. The number of permits and fees that come with running a business is mind-boggling!!!!! Everyone wants their cut! Some businesses have to obtain as many as 20+ permits!!!!!
  5. Import taxes on any items coming into the island (whether sold here or not) are 11.5% + whatever the federal import tax is (this depends on what you’re importing).
  6. The tax rules keep changing, as do the permit requirements. And, of course, they are never in your favor. So, it is very difficult to stay in compliance. And if you don’t, penalties are very harsh; in some cases, they include shutting your business down and confiscating the inventory – WHAT?!
  7. We’ve not found anyone here that understands internet business, not even the accountant we hired. Consequently, they seem to want to tax EVERYTHING. As if it were a brick and mortar shop.
  8. It is far more expensive for us to try to run our LLC from here than it would be from anywhere else in the States. I am not exaggerating. We have decided that it is not worth it and will be incorporating in the mainland instead. I just don’t know how small businesses make money here. It seems impossible.

what? living abroad

OK, that’s the gist, now let me fill in the details. I will show you how things are calculated and I will compare it to the mainland States. At the end, you will see why we decided not to run our business from Puerto Rico.

OK, let’s get started…

Federal Income Tax Exemption

It is true that if you are an official resident here, you may not be required to pay federal income taxes. This may sound like a huge savings, but is it really? As I mentioned already, if you make money, you are still required pay Medicare and Social Security federal taxes. Also, the federal income taxes, allow you personal exemptions and a bunch of other deductions, that local taxes here don’t. So, you may actually be taxed on a smaller percentage on the federal income taxes, than on the Puerto Rico taxes.

And, if you spend more than 6 months on the island, you will need to file a PR tax return anyway. In addition, just because you are retired in Puerto Rico and collecting a pension and/or Social Security, does not mean that you are exempt from federal taxes either. My understanding is, that you get some sort of a tax credit on your federal taxes, but this didn’t apply to us, so I didn’t look into it that much. Also, some, like military or federal retirees, must pay federal taxes anyway. So, if in doubt, best thing to do is to consult an accountant.

Puerto Rico taxes

Here are the facts about Puerto Rico Income taxes. They are usually NOT lower than the federal income taxes. And, there are no personal exemptions on island’s taxes. The average taxes on a $100K income (I picked it to easily show the numbers) are much higher than ANY USA STATE!

Puerto Rico Tax Rates:

Income Puerto Rico Taxes
$0 – $9,000 0%
$9,000 – $25,000 7% above $9K
$25,000 – $41,500 14% above $25K
$41,500 – $61,500 25% above $41.5K
$61,500 – up 33% above $61.5K

Source: Hacienda PR


The Puerto Rico tax is cumulative, so below is an example how an income of $100,000 is taxed.

Taxes On $100K Income

Income Tax Amount Actual Tax Rate (top range)
$0 – $9,000 $0 0%
$9,000 – $25,000 $1,120 4.48%
$25,000 – $41,500 $2,310 8.27%
$41,500 – $61,500 $5,000 13.7%
$61,500 – $100,000 $12,705 21.14%

You add all the taxes together to get the total tax paid for $100,000 to be $21,135, which is an actual tax rate of 21.14%. In the table above, you can see the income tax for each tier of income. If you make somewhere in the middle, your tax will be somewhere between the tiers.

To add to all this is the fact that as of 2016, Puerto Rico requires that if you live on the island for 6 months or more (or claim residency), you will be required to file a Puerto Rico Tax return. It does not matter if your income was solely earned in the States and not on the island. Puerto Rico taxes world income, i.e. all income.

So, for us, we estimated that we would pay an additional $9,000 in taxes, if we filed in Puerto Rico, and that’s with not paying federal income taxes. Simply put Puerto Rico taxes are more expensive for us than paying federal income and state income taxes elsewhere. WOW!

Now check out the income taxes for your state below:

Source: Tax Foundation

Import Taxes

As I said in the summary. We were told that we would be required to pay an “additional” 11.5% import tax on the value of items we import to the island. I say “additional” because the feds want their cut too. For our products, it would be 3.5-4% federal import and 11.5% Puerto Rico’s import tax. Total up to 15.5%!

In addition, we could not get a clear answer on whether the “value” of the goods was the actual price we pay or some arbitrary “value” assigned by the government (as was the case with the import of our car).

Sales Tax

We were also told that we would be required to pay a sales tax on the island for all items brought in here, another 11.5%, and this would be the case, even though, we sell the items online. WOW! Oh, and don’t forget that sales tax may go up to 16% next year.

As a comparison, the highest sales tax in the states is currently in Tennessee at 9.45%.

Check it all out below and see how it compares to other State’s sales taxes. And, by the way, don’t forget that many of the States with high sales tax, like Texas, have a small or no state income tax.

Source: Tax Foundation

Act 20 Tax Breaks

Here is what it’s good for:

“The Act provides benefits for services provided from Puerto Rico to outside markets. Eligible activities to receive
benefits under the Act are services in the following areas:

  • Research and development;
  •  Advertising and public relations;
  • Economic, scientific, environmental, technological, managerial, marketing, human resources, engineering,
    information systems, auditing and consulting services;
  • Consulting services for any trade or business;
  • Commercial art and graphic services;
  • Production of engineering and architectural plans and designs, and related services;
  • Professional services such as legal, tax and accounting services;
  • Centralized managerial services, including, but not limited to, strategic direction, planning and budgeting,
    provided by regional headquarters or a headquarters company engaged in the business of providing such services;
  • Services performed by electronic data processing centers;
  • Development of licensee computer software;
  • Telecommunications voice and data between persons located outside of Puerto Rico;
  • Call centers;
  • Shared service centers;
  • Medical, hospital and laboratories services;
  • Investment banking and other financial services, including but not limited to asset management, management
    of investment alternatives, management of activities related to private capital investment, management of
    coverage funds or high risk funds, management of pools of capital, trust management that serves to convert
    different groups of assets into securities, and escrow accounts management services; and…
  • Any other service designated by the Secretary of the Department of Economic Development and Commerce
    of Puerto Rico.”

And, our Business?

Simply put, we do not qualify under that list. If approved, it presumably reduces your corporate income taxes to 4% for a period of 20 years. Normally the corporate taxes in Puerto Rico range from 5% – 19%, depending on the income of your business.

However, compare the corporate taxes to the States below. As you can see, many of the states are already in the 4-6% range, so even if we qualified for the Act 20 incentive, the savings aren’t huge and they are time limited. Perhaps if you’re a big business, incorporating in PR and avoiding federal income taxes, then Puerto Rico’s deal sounds good…

Source: Tax Foundation

Ease Of Running A Business In Puerto Rico

From our research, it seems impossibly difficult. The biggest concern to us is the constant changes that occur in this area and the penalties, if you’re unaware. But, of course, the number and cost of all the permits is also very worrisome.

Furthermore, the increasing cost of utilities and services is also a bit scary, as is the lack of understanding of online business. After sharing these findings with some of our friends, we learned that this is the reason for the huge underground economy on the island. Residents don’t feel that the government is here to help them, so they find ways to cheat, but for us, this is not an option.

So, we gave up and we’ve decided not to go down this road.

We’ve already begun the process of moving our LLC to another State, instead of to PR. I think you can probably see why. For our type of business, it is simply cost prohibitive and energy/effort prohibitive to incorporate here. Don’t get me wrong, I’m a firm believer that you need to worry about making money first and then deal with the taxes, but in this case, when profits would literally be pennies on a dollar?.. What would be the point?

It’s really too bad but, I guess, we live and we learn.

Cheers!

Joanna-

About Joanna

is a Polish American living in Arizona with her husband Tim. She is a founding partner of JTR Tech and she is proud to be a professional geek. She had dreamt of living abroad for many years. So, she and Tim created AbroadDreams.com to document the process of making their dream of moving abroad come true. They spent 2 years in Puerto Rico and several months in Spain and Poland. Now they are exploring the American Southwest.

Check Also

Why Puerto Rico Won't become a State (for a long time)

Why Puerto Rico Won’t become a State (for a long time, if ever…)

In case you haven’t heard, there was a recent referendum in Puerto Rico where voters …

21 comments

  1. Oh, wow, this is a really thorough and thought provoking post, Joanna. Thank you, for providing all of this breakdown. From my understanding, if we retire with our pension to PR, we will pay Federal taxes only and not PR. So do we file a PR tax return but show no income from PR so have zero taxes to pay?

    • Hi Barbara,
      If you live on the island for 6 months or more, you are required to file PR taxes. I am confused as to why you’d pay federal but not PR taxes? If residing here in PR, pensioners receive a large PR tax exemption but the pension company has to be registered and recognized in PR. We have been told by American retirees here, that there are many pension companies that are simply not registered in PR. Also, unless you were a federal employee, you should not have to pay federal taxes. The income is taxed if you are resident, regardless of where the income comes from (even if it is USA income) because PR taxes world income. Someone recently tried to argue with us about this but I saw the forms and talked to an accountant, so I don’t know what they are talking about. In general, there are LOTS of new tax rules in 2015 and 2016, so I think everyone is completely confused.
      And I am not a tax accountant, so it would be best to consult one before you move down here.
      Joanna-

      • Thank you, Joanna, for replying and clearing up some of my questions. We don’t receive a pension from the gov’t but from my husband’s construction union. I guess we’ve been told that PR only taxes income from PR. We currently do not get taxed on it in our home state of Illinois but just pay Federal taxes.

        All the best to you both!

  2. AS I MENTIONED PREVIOUSLY, WE MOVED HERE ABOUT SIX MONTHS AGO.
    1. WE SHIPPED FIVE(5) 40′ CONTAINERS OF HOUSEHOLD GOODS. WE PAID -$0- IN TAXES ON ALL THESE PERSONAL ITEMS. WE DID USE A CONSIERGE COMPANY TO ASSIST US IN RECEIVING THE CONTAINERS AT A COST OF ABOUT $900
    2. WE ARE SETTING UP AN ACT 20 COMPANY, WHICH MEANS WE PAY 4% CORPORATE INCOME TAX. ALL DIVIDENDS (INCOME) PAID TO US PERSONALLY BY OUR COMPANY (WE ARE NOW PUERTO RICAN RESIDENTS) ARE TAX FREE.
    3. YOU GET FREE SHIPPING ON MOST ITEMS VIA AMAZON PRIME; ALSO NO SALES TAX IS COLLECTED BY AMAZON.
    4. IT IS A MAZE OF REGULATIONS AND THERE DEFINITELY ARE ADDED COSTS (WE HAVE TO EMPLOY FIVE PR RESIDENTS, ALTHOUGH WE ARE TWO OF THE FIVE) AND THIS DOES BRING WITH IT CERTAIN COSTS FOR PAYROLL ETC
    5. THERE ARE MANY OTHER COSTS AND OBLIGATIONS THAT GO WITH THE WHOLE “TAX FREE” DEAL IN PR, (AND IT REALLY ISN’T TAX FREE), BUT IT CAN BE A LARGE REDUCTION IN TAXES IF YOU ARE WILLING TO NAVIGATE THE MAZE. SO, IF IT ISN’T TAX FREE, IT MIGHT STILL BE 80% LESS…. AND THAT IS A LOT OF EXTRA DOLLARS TO LIVE ON OR SAVE FOR RETIREMENT OR INVEST IN YOUR BUSINESS. PLUS YOU GET THE ISLAND LIFESTYLE THROWN IN FOR FREE TOO!
    6. AND YOU ONLY HAVE TO BE HERE 183 TOTAL DAYS TO QUALITY FOR RESIDENCY..
    7. LOTS OF PLUSES; SOME MINUSES. YOU NEED GOOD INFO THOUGH AND THAT MEANS A LOT OF TALKING AND RESEARCH TO FAIRY EVALUATE YOUR OWN SITUATION. THE ACT 20/21 CLUB IS A GOOD SOURCE( I DID NOT SAY THE ACT 20/22 SOCIETY)
    ALSO JEFFERSON KIM OPERATES A FACEBOOK PAGE PACKED WITH HELP AND INFO AT “ACT 20/ 22 PUERTO RICO TAX INCENTIVE FORUM” YOU HAVE TO ASK TO BE A MEMBER(NO COST) WHILE WE PAID AN ATTORNEY/ACCTG FIRM FOR HELP, MR KIM NAVIGATED THE WHOLE ACT 20/22 ON HIS OWN WITH MINIMAL COSTS AND HE OUTLINES THE PROCESS IN HIS POSTS.
    8. SO FAR, SO GOOD……
    GREG

    • Hi Greg,
      Thanks for posting. It looks like you accidentally left the Caps Lock on. LOL. It seems that you are making it work for you. That’s great. Can you expound on the 80% savings? I’d like to know more about that because it is inconsistent with my own research. Also, many companies on Amazon do not ship to PR, or if they ship, they charge for shipping, and that’s with Amazon Prime (we have it) but on Amazon, taxes are free, as long as the business you are buying from isn’t based out of PR. Please stay in touch because I would also love to hear back from you after you’ve gone through the taxation&setup process to see how your investment $$ vs. tax savings worked out. Good luck to you.
      P.S. More business rules were changed as of this week. Everyone is now required to provide Business IDs for every supplier they buy from, including places like Walmart, Walgreens, etc. Pretty much any place you would ever buy anything from.
      Joanna

      • I DIDN’T ACCIDENTLY LEAVE THE CAPS ON. AT MY AGE I READ EVERYTHING ON THE COMPUTER BETTER IN CAPS, PLUS I HAVE A PERSONAL BIAS ABOUT THE “SHOUTING” THING BEING A BIT “PRETENTIOUS/SNOBBISH”

        THIS WHOLE TAX THING REMINDS ME A BIT OF THE OLD SOVIET UNION JOKE ABOUT HOW THEY PRETEND TO PAY US AND WE PRETEND TO WORK…. ITS ALL A GAME AND THE WINNERS ARE THOSE WHO KEEP THEIR SENSE OF HUMOR WHILE BEING ONE STEP AHEAD OF THE GOV’T.

        I DO THINK THE ACT 20/22 IS MOST USEFULL FOR THOSE WHO MEET A MINIMUM THRESHHOLD OF INCOME AND THAT PROBABLY GIVES RISE TO THE THOUGHT THAT SAVING 80% IS BETTER THAN NOTHING- BUT THE BIG KEY IS MEETING A CERTAIN “BREAK EVEN ” LEVEL OF INCOME BECAUSE THERE ARE COSTS ASSOCIATED WITH UTILIZING THE PROGRAMS. IT’S ALL JUST NUMBERS.

  3. WOW….this was such an eye opening post. 20+ percent tax,not counting the elevated sales tax!!!! Not a long term preposition right now…..looks like plan B is to have this be a great 3 month winter destination. Yikes.

  4. Greatest post on PR taxes I have seen anywhere – the other info out there is mostly bad even from tax attorneys. The one way I could see to legally get around all the physical product taxes would be to have a call center company in PR that receives a 1099 from the company operating with physical product in the states. The physical product company could then pay out to the call center/advertising/non physical product company, creating a loss in the states and the gain in PR. However the whole thing does look like a headache and no one else writing about this mentioned the PR local tax return, which may just make it all not worthwhile anyway.

    • Hi Brian,
      Thanks for commenting. I have heard of people doing the call center scheme but I agree with you, it’s too much of a headache and the PR income taxes still apply. And I don’t think it could easily be done without having a presence in both USA and PR, especially with import products.
      Joanna-

  5. You are spot on. I hope most people who read this don’t think that this doesn’t apply to them because they are not starting a business. It probably does affect you if you move to PR.

    JUST LOOK AT THAT TAX RATE 33% for house hold income above $61.5K. Ok you may think $61K is a lot of money and your right it is and 33% may be fair, I agree but lets look at that number. If you and your spouse make an adjusted gross income of $31,000 a year each you will be paying 33% on some of your money.

    No where in the States do you even come close to paying 33% on an AGI of $31,000.

    Another thing, if you ever do a “401K” or IRA in PR be prepared to lose 20% on all of it if you move back to the states. I know several Honeywell employees who moved to the States and lost the 20% (some lost more but that was their own fault)

    I am trying not to loose the 20% but have spent 10 hours on the phone now and I am no closer to a correct answer than when I started.

  6. Joanna,

    Were you taxed on “household items” when you moved to PR? I certainly understand the vehicle situation with the excise tax. But I have have found no clear information that spells out other items we want to ship. Items such as kitchen goods, artwork, tools, computer, stereo, CDs/DVDs, books, etc. The shipping companies say to list every item and place a value on it. So do you seriously have to list: spatula $1.00 or grilling tool set $15.00 and so on. How does the government determine how much you will have to pay in taxes to receive items in your container or pallet in PR?

    Thank you in advance for any help you can provide in this area.

    Laura

  7. Hi, Joanna — Very informative. Just as a small aside, I believe you mean “Medicare and Social Security” not Medicaid. That’s the taxes that are, of course, shared with your “employer” when you are employed by someone else and paid, as you note, completely by *you* when it’s your own business, i.e. you’re self-employed.

    Sure looks like it doesn’t make much sense to try to do business there!! Hope some other options begin to shape up for you.

  8. Thank you for the article. I was considering moving and starting a software development or consulting business. I was counting on Act 20 to make it all work. I’m still considering moving to PR to retire. Or maybe semi-retire and spend some time there and keep my residency here in the states. Anyway, your articles are always informative and enjoyable to read.