What is an Act 20 Decree?
It is a 20-year tax decree with a 10-year extension created to incentivize the exportation of
services from Puerto Rico.

What are the tax benefits of an Act 20 decree?


4% corporate tax rate on eligible export services income.

60% exemption from municipal taxes (90% if property is in Vieques or Culebra)

A 100% exemption for the first 5 years and 90% exemption thereafter from real
and personal property taxes in the case of Eligible Businesses engaged in
headquarters services, call centers or shared services (accounting, finance, tax,
audit, human resources and marketing, among other services)


Tax-free dividends for shareholders that are Act 22 individuals or PR residents.
U.S. shareholders do not have to pay PR taxes but are subject to US taxes on

What are the requirements?

The entity must be a PR corporation or LLC with a bona fide office in Puerto Rico.

The company must provide “eligible export services” from PR to outside of PR. The type of
acceptable service can be broken down into two prongs: (1) it must be an eligible service and
(2) it must be “for export.”

Accounting books must be kept in Puerto Rico.
What are “eligible services” under Act 20?

Act 20 gives the following examples of eligible services:

1. Research and development;

2. Advertising and public relations;

3. Economic, environmental, technological, scientific, managerial, marketing, human resources,
computer, and auditing consulting services;

4. Advice on issues related to any trade or business;

5. Commercial arts and graphic services;

6. Drafting of construction plans and engineering, architectural, and project management

7. Professional services such as legal, tax, and accounting services;

8. Centralized management services that include, but are not limited to strategic location,
planning, and budgetary services carried out at the headquarters or similar regional offices of an
entity engaged in rendering such services;

9. Electronic data processing centers;
10. Computer program development;

11. Voice and data telecommunications between persons located outside Puerto Rico;
12. Call centers;

13. Shared service centers that include, but are not limited to accounting, finance, tax, auditing,
marketing, engineering, quality control, human resources, communications, electronic data
processing, and other centralized management services;

14. Storage and distribution centers of companies engaged in the business of transportation of
items and products that belong to third parties, known as “hubs”;

15. Educational and training services;

16. Hospital and laboratory services;

17. Investment banking and other financial services, including, but not limited to: (a) asset
management services; (b) alternative investment management; (c) management of activities
related to private capital management; (d) management of hedge funds and high risk funds; (e)
management of pools of capital; (f) management of trusts that serve to turn different types of
assets into stocks; and (g) management services for escrow accounts, insofar as these services
are provided to foreigners.

18. Any other service that the Secretary, with the advice of the Secretary of the Treasury,
determines that must be treated as an eligible service for understanding that it is in the best
interest and for the social and economic wellbeing of Puerto Rico, taking into account the
demand that there may be for such services outside Puerto Rico, the total number of jobs to be
created, its payroll, the investment that the proponent would make in Puerto Rico, or any other
factor that warrants special consideration.

What makes an eligible service “for export”?

An eligible service may be deemed a service for export when such service is rendered
for the benefit of:

1. an individual who is not a resident of Puerto Rico; or

2. a trust whose beneficiaries, trustors, and trustees are not residents in Puerto Rico; or

3. an estate whose testator, heir, legatee, or executor is not, or in the case of the testator, was a
resident of Puerto Rico; or

4. a foreign entity;

NOTE: the service must be rendered from Puerto Rico. The less ambiguity the better.

Can I also provide services that are non-eligible or not for export?

Yes. However, those services will not benefit from the Act 20 decree. Accounting must keep
income sourced from non-eligible and eligible services strictly separate.

Can I deduct operating losses from non-eligible export services sourced income and
apply it to income sourced from Act 20 services?

No. The net operating losses can be deducted depending on their source. NOL’s from Act 20
services can be deducted from future Act 20 services income but not PR sourced income and

Can US shareholders simply park retained earnings in an Act 20 Entity so as to defer
paying taxes on the dividends?

It depends. The answer was previously a simple yes but the 2017 Tax Cuts & Jobs Act changed
the landscape. Pursuant to the 2017 Tax Cuts & Jobs Act, Act 20 companies are treated as
foreign entities. Thus, whether or not deferral is allowed depends on whether the Act 20 entity
is a Controlled Foreign Corporation (“CFC”). If the Act 20 entity is over 50% owned by US
shareholders, then it is deemed a CFC. In that case, any investor who owns over 10% of the Act
20 entity, cannot defer the retained earnings. If the Act 20 entity is over 50% owned by PR
shareholders, then this should not be a problem.

Are there any benefits for US shareholders if they cannot defer the company’s retained

Yes. US Shareholders of over 10% of a CFC are immediately taxed (at a 10.5% rate, increasing
13.1% after 2025) on their proportionate share of the Act 20 entity’s net income even if that
income is not distributed as dividends.

However, the US shareholder is entitled to an 80% credit of the PR taxes that the Act 20 entity
paid. Accordingly, given that Act 20 companies pay a fixed 4% income tax in Puerto Rico, the
U.S. shareholder will be entitled to a 3.2% credit on its taxes. This results in an effective tax rate
of 7.3% until 2025, and 9.9% from 2025 onwards. 1 These are not insignificant savings compared
to U.S. individual and corporate tax rates. Thus, there are still benefits.

1 80% of 4% is 3.2%; 10.5% - 3.2% = 7.3%.
13.1%-10.5% = 2.6% increase beginning in 2025
7.3% +2.6% = 9.9%.