Taxes in Puerto Rico

Taxes in Puerto Rico

A Complete Overview

Puerto Rico has a unique tax system that differs from both the U.S. federal tax structure and that of the individual states. Whether you’re a resident, business owner, or someone considering relocating, understanding the island’s tax obligations—including income tax, sales tax, property tax, and municipal taxes—is crucial.

In this article, we will describe Puerto Rico’s outstanding tax incentive program and also give an overview of other taxes that may apply.

1. Act 60 Tax Incentives

One of the biggest draws for individuals and businesses relocating to Puerto Rico is the tax benefits under Act 60. This law consolidates previous tax incentive programs (such as Act 20 and Act 22) and offers significant advantages to qualifying individuals and companies. Therefore, understanding these incentives may be very important for anyone considering a move to the island.

For Individual Investors (Formerly Act 22)

  • 0% (4% for applications submitted after December 31, 2025) tax on capital gains from Puerto Rico-sourced income.
  • 0% (4% for applications submitted after December 31, 2025) tax on dividends and interest income earned from PR.
  • To qualify, individuals must become bona fide residents and spend at least 183 days per year on the island.

(Related: Puerto Rico Residency Rules)

For Businesses (Formerly Act 20 and others)

  • 4% corporate tax rate on eligible business income. (2% for the first five years for small businesses)
  • 100% exemption from PR dividends tax for business owners.
  • 75% – 90% exemption on municipal and property taxes.
  • Eligible industries include IT, consulting, financial services, and more. Thus, businesses operating in these sectors may find Puerto Rico a highly attractive location.

(Related: PR Tax Incentives Program)

2. Income Tax

Unlike the mainland U.S., Puerto Rico has its own income tax system, separate from federal taxation. Residents of Puerto Rico are generally exempt from paying U.S. federal income taxes on income earned in PR. However, they must file and pay taxes to the Puerto Rico Department of Treasury (“Hacienda”). Therefore, it is essential to understand the tax brackets and how they apply to different income levels.

Individual Income Tax Brackets (2024)

Puerto Rico has a progressive tax system with the following brackets:

Taxable Income (USD)Tax Rate
Up to $9,0000%
$9,001 – $25,0007%
$25,001 – $41,50014%
$41,501 – $61,50025%
Over $61,50033%

(Related: Individual Income Tax Brackets)

  • There is also an Alternative Minimum Tax (AMT) that applies to higher earners.
  • Additionally, certain deductions, credits, and exemptions are available for individuals, which can help reduce tax liability. As a result, planning ahead can make a significant difference in overall tax obligations.

Corporate Income Tax

  • The standard corporate tax rate is 18.5%, plus a graduated surtax that ranges from 5% to 19% depending on net income.
Graduated Surtax Net Income
$3,750 plus 5%Up to $75,000
$11,250 plus 15%From $75,001 to 125,000
$11,250 plus 16%From $125,001 to $175,000
$19,250 plus 17%From $175,001 to $225,000
$27,750 plus 18%From $225,001 to $275,000
$36,750 plus 19%Excess of $275,000 for a maximum nominal tax rate of nearly 37.5%
  • Furthermore, some businesses may qualify for tax incentives under Act 60, significantly reducing corporate tax rates. Consequently, companies should evaluate eligibility for these incentives to optimize their tax strategy.

(Related: Department of Treasury – Hacienda/ Puerto Rico‘s Corporate Income Tax)

3. Sales and Use Tax (IVU)

Puerto Rico has a Sales and Use Tax (“IVU – Impuesto sobre Ventas y Uso”) similar to state sales taxes in the mainland U.S. However, there are key differences that businesses and consumers should be aware of.

  • General sales tax rate: 11.5%
    • 10.5% goes to the central government
    • 1% goes to municipalities
  • Reduced Tax Rates:
    • Prepared foods: 7%
    • Prescription medications and certain groceries: 0% (exempt)
    • Business-to-business (B2B) and professional services: 4%

Given these rates, understanding which products and services are taxed is essential for both individuals and businesses. Moreover, careful budgeting can help mitigate the impact of these taxes.

(Related: PR Tax Code – Sales and Use Tax note that this site is in Spanish but your browser should be able to translate it)

4. Property Taxes

Property taxes in Puerto Rico are relatively low compared to many U.S. states. They are assessed and collected by the Municipal Revenue Collection Center (“CRIM – Centro de Recaudación de Ingresos Municipales”). Consequently, property owners must be familiar with the applicable rates and exemptions.

  • Residential Property Tax (Real Property Tax):
    • The tax on real property is directly assessed by CRIM and may be paid in two installments.
    • Tax rates vary between 8.03% and 11.83%, depending on the municipality.
    • The tax is applied to a hypothetical fair market value (FMV) from the year 1957, which typically represents 40% to 50% of the property’s cost.
    • Moreover, homeowners may qualify for homestead exemptions, reducing taxable value. Therefore, applying for exemptions can result in significant savings.
  • Commercial Property Tax:
    • This tax applies to properties used for commercial purposes.
    • The tax rate is assessed similarly to residential properties but may be subject to different exemptions and deductions.
  • Personal Property Tax:
    • Businesses operating in Puerto Rico must pay an annual personal property tax ranging between 5.80% and 9.83%, depending on the municipality.
    • This tax applies to all personal property used in trade or business, including cash, inventory, supplies, and depreciable assets.
    • Businesses must file tax returns electronically via CRIM’s website by May 15 each year.
    • A 5% discount is available if the full personal property tax payment is made by the final installment date.
  • Real Estate Transfer Tax:
    • Puerto Rico does not impose real estate transfer taxes when buying or selling property.

5. Municipal Taxes

In addition to state-level taxes, Puerto Rico’s municipalities impose their own taxes, which vary by location. Municipality taxes in PR are somewhat like a city tax in the mainland.

  • Municipal License Tax:
    • Businesses must pay a municipal gross receipts tax ranging from 0.2% to 0.5%.
  • Municipal Property Tax:
    • The 1% IVU collected goes directly to municipalities.
  • Construction Taxes:
    • Additionally, local municipalities may impose taxes on building permits and property improvements, affecting development costs.

6. Other Taxes

Puerto Rico has several additional taxes that individuals and businesses should be aware of:

  • Motor Vehicle Tax:
    • Import taxes and registration fees apply when purchasing or shipping a car to Puerto Rico. Therefore, it’s important to factor in these costs when budgeting for transportation.
  • Excise Taxes:
    • Levied on imported goods, alcohol, tobacco, and luxury items, making certain purchases more expensive.
  • Estate & Gift Taxes:
    • Puerto Rico imposes estate and gift taxes separate from the U.S. system. Consequently, estate planning is essential for residents and business owners alike.

7. Other Deductions from Your Paycheck

In addition to income taxes, employees in Puerto Rico may see other mandatory deductions from their paychecks. These deductions contribute to public benefit programs and employee protections.

  • Social Security & Medicare (FICA):
    • Employees in Puerto Rico pay the same FICA taxes as mainland U.S. workers: 6.2% for Social Security and 1.45% for Medicare.
  • Temporary Disability Insurance (SINOT):
    • Employees contribute a percentage of their wages to Puerto Rico’s disability benefits program.
  • Workers’ Compensation:
    • Although typically paid by the employer, workers’ compensation coverage is required and may be noted on payroll records.
  • Retirement Contributions (if applicable):
    • Employees enrolled in retirement plans or pension programs may have deductions for contributions to those accounts.

Understanding these deductions is important for accurately budgeting your take-home pay and ensuring compliance with local and federal requirements.

Final Thoughts: Navigating Puerto Rico’s Tax System

Puerto Rico’s tax system is complex but offers both challenges and opportunities for residents and businesses. Understanding income taxes, sales taxes, property taxes, municipal taxes, and special tax incentives is crucial to ensuring compliance and optimizing tax planning.

For those relocating to Puerto Rico, consulting a local tax professional can help navigate the nuances of the tax system and identify potential savings. Moreover, staying informed about tax updates is key to maintaining compliance. Contact Puerto Rico Advantage to schedule a free initial consultation!

Need assistance with tax planning in Puerto Rico? Contact Puerto Rico Advantage for expert guidance on tax laws, compliance, and incentives.

Frequently Asked Questions About Puerto Rico

Frequently Asked Questions About Puerto Rico

Below are some of the most common questions we hear from people considering Puerto Rico as a relocation destination. Contact us for more details, and for a free consultation about your unique situation.

 

Doesn’t Puerto Rico Have a High Crime Rate?

Puerto Rico’s issue has more to do with public relations than actual crime! This image is partly formed by cultural stereotypes and political history.

Like everywhere else, Puerto Rico’s crime rate varies depending upon what area you happen to be in. Its metropolitan areas tend to be higher, especially in less wealthy parts of town. However, it can be argued that the crime in the cities is comparable to US cities. For example, Puerto Rico’s murder rate is half that of Washington DC and Detroit. If Puerto Rico were ranked for safety as if it were a State, it would be 19th in the list.

For those who are relocating and want an extra degree of protection, there are a number of gated community options that are extremely safe.

 

What is the Food Like in Puerto Rico?

The local cuisine is Spanish with Caribbean accents. It is heavy in meat, particularly pork, and moderately spicy, though typically less spicy than what you might find in other parts of Latin America. As in many “island” cuisines, sweet and coconut flavors can be found in many dishes. Plantains are a major staple.

Dining out, we have found that while many fine options exist in Puerto Rico, good restaurants featuring Asian cuisines, in particular, are rare.

Grocery stores are plentiful, and the locally grown food is inexpensive. For organic food, and other items that are not produced on-island, you may have to go to specialty stores, where the prices are higher.

 

Is it Safe to Drink the Water?

The tap water is considered safe to drink in Puerto Rico, as the sanitation standards are the same here as in the States.

 

Is it Necessary to Learn Spanish to Live in Puerto Rico?

The great news is that it is not necessary to learn Spanish to relocate to Puerto Rico!

Both Spanish and English are official languages in Puerto Rico. Most government forms and official sites, as well as most menus and other things you might need to read, are available in English. Also, most service providers and customer service representatives are either fluent in both English and Spanish, or at least know enough English to get by.

However, you will almost definitely encounter some people who speak little to no English. For these encounters, it can be helpful to learn at least a little conversational Spanish, though we have never yet encountered a situation when it was absolutely necessary. Puerto Ricans are generally very friendly and accommodating of a limited Spanish vocabulary; rather than being judgmental or impatient, as some cultures can be in this type of situation, the folks in Puerto Rico usually appear to us to graciously appreciate whatever genuine effort you can make.

 

What is the Cost of Living in Puerto Rico?

The cost of living varies depending upon the area in which you live. Gated communities tend to be more expensive for real estate, and the dining and entertainment in those areas are also pricier. However, people who move to more expensive areas in Puerto Rico may well have lived incomparably expensive areas prior. There are many areas to live which are still desirable and safe, but affordable.

Gas tends to be just slightly more expensive in Puerto Rico than in the States. (Also note that it is sold in liters rather than gallons, which can be confusing at first.) Electricity is currently about twice the price; however, there is never a need to heat your living space here, and while you may choose to run your air conditioner more, fuel efficient inverter air conditioners are common in most modern homes.

Food can be more expensive, particularly if you prefer to buy organic products, as there is currently very little organic farming happening in Puerto Rico. Other items that must be imported may cost more as well.

Here is a cost of living comparison tool which may give you a good idea of what you might expect, based on an average price for living in Puerto Rico, compared to wherever you may be moving from.

 

What would happen if Puerto Rico Became a State?

If Puerto Rico became a US State, its residents would become subject to US federal tax. This almost completely eliminates the benefits of the tax incentive Acts, as the low Puerto Rico tax would then become a state tax, owed in addition to what must be paid to the IRS.

It should be noted, however, that the people of Puerto Rico have declined Statehood, by public referendum, on more than one occasion in the past. Many Puerto Ricans are proud of their independence; Puerto Rico competes as its own country in the Olympic Games. Also, with so many of the population living in poverty, few are eager to accept the additional tax burden for many that would come with Statehood. Finally, it appears to us that many Puerto Ricans are savvy about the prospects for economic recovery, growth, and prosperity made possible by the Commonwealth’s unique legal status. Though Statehood may be inevitable at some point in the farther future, we judge it to be unlikely in the near term.

We Can Help

Our company helps people like you take advantage of Puerto Rico’s excellent tax incentives!  We can help you determine which tax incentives are right for you, help you plan your residency and relocation strategy, and simplify the entire process for you.

Contact us for a free initial consultation.

Get Started

Puerto Rico’s Infrastructure

Puerto Rico’s Infrastructure

Puerto Rico’s Infrastructure

Puerto Rico offers all of the conveniences you are likely used to if visiting or relocating from any developed nation. If you are contemplating a relocation, please contact us if you have questions or would like a free consultation.

 

Roads in Puerto Rico

Major highways and tollways are as excellent as any found in the fifty States. The Puerto Rico highway and local road system is substantial and offers good coverage of all parts of the island. Some roads are not repaired and maintained as frequently as in many parts of the States but are still quite usable.

 

Electricity in Puerto Rico

There is currently only one power company in Puerto Rico – PREPA, the Puerto Rico Electric Power Authority. PREPA is owned by the Puerto Rico government and is the only company authorized by the government to do this type of business. Dealing with PREPA can be a bit of an ordeal at times, and our concierge service can help manage this for you if you require it.

Electricity prices are a bit higher in Puerto Rico, as much as double the prices in the States, though you might find that your usage is different due to no need for artificial heat.

In some parts of Puerto Rico, electric outages occur from time to time. These are generally only for a few minutes to a few hours, but, especially in some urban areas, can be inconvenient. You can easily mitigate this risk by outfitting your home with a backup generator (or securing a residence that already has one, which is not uncommon). Additionally, it is very easy to find small power backups that offer 1-4 hours of energy for a few devices.

 

Water Quality

Tap water is safe to drink in Puerto Rico. As with anywhere else in the States, there are still components that can modify the flavor, and we prefer to have a filter on our tap (as we also did before relocating to Puerto Rico).

In some metropolitan residences, water shortages can occur – this varies a lot depending on the area in which you plan to live. When you are looking for a place to live in Puerto Rico, it is good to ask if the house or building has a water cistern to store a backup water supply to avoid inconvenience during these temporary shortage situations.

 

High-Speed Internet

High-speed internet is available in all metropolitan areas as well as smaller towns. Many find that their internet on the island is faster and more reliable than on the mainland! Prices are comparable to most areas in the States.

 

Cell Phone Coverage

Cell coverage is strong throughout the island. AT&T is by far the largest provider, and signals are strong in most metro areas, ranging to most rural areas as well. Claro is the largest local provider. T-Mobile, Sprint and Verizon users will have coverage although the quality of coverage is not equal.

 

GPS

This, unfortunately, is not always reliable in Puerto Rico. If you are used to navigating by allowing a GPS device or the map application on your cell phone to tell you where you are and reroute you if you turn the wrong direction, you may have to change your habits here. GPS is fine to get overall directions and show the overall map of where you are looking to travel. However, updates are slow, and GPS sometimes gets confused in mid-trip and re-routes the trip inaccurately. It is best to look at the overall map rather than relying on turn-by-turn instructions based on GPS being able to locate your location at any moment.

Addresses are also not always accurately entered in GPS in Puerto Rico. Some GPS applications will be confused by Puerto Rico addresses as they are listed on websites and other listings, and will attempt to be helpful by giving directions to the address that most closely seems to match the one entered. It is important to make sure that the destination your GPS app has found for you is the same one you told it to find!

References

Puerto Rico road system

We Can Help

Our company helps people like you take advantage of Puerto Rico’s excellent tax incentives!  We can help you determine which tax incentives are right for you, help you plan your residency and relocation strategy, and simplify the entire process for you.

Contact us for a free initial consultation.

Get Started

What You Need to Know About Puerto Rico’s Goverment

What You Need to Know About Puerto Rico’s Goverment

PROMESA Board

With the new PROMESA law, changes are in progress. PROMESA gives power for oversight of the Puerto Rico government to a 7-member, bi-partisan board appointed by the United States Congress. This page will be updated as new information is released.

Here is an article with details on the current PROMESA board appointees.

 

Puerto Rico’s Commonwealth Status

As a Commonwealth of the United States, Puerto Rico is part of the US but does not have the same status as a state. Citizens of Puerto Rico are citizens of the US and are entitled to a US passport. Any citizen of a country with travel rights to the US can travel freely to the US.

Puerto Rico is self-governing for internal matters and established its own constitution in 1952. Its chief of state is the President of the United States, and Puerto Rico itself is under the protection of the US military. Puerto Rico elects a Governor as its head of state, governing all internal affairs. US citizens who are residents of Puerto Rico may not vote in US presidential elections, and Puerto Rico does not have elected representation in either house of the US Congress, although a single resident commissioner from Puerto Rico has a voice, but cannot vote.

Puerto Rico corporate entities are considered foreign corporations according to US laws, a distinction that is important when considering your strategy if you are considering relocating. Contact us to discuss more how this may impact you.

Residents of Puerto Rico who earn their income by work done in Puerto Rico (or investments made while formally residing in Puerto Rico) are not subject to tax by the IRS; instead, US citizens in Puerto Rico pay tax to Hacienda, the Puerto Rico internal revenue organization.

 

Puerto Rico’s Legislative and Judicial Systems

With few exceptions, Puerto Rico is subject to all Federal laws and regulations put in place by the US government. Most relevant US agencies have representation within Puerto Rico.

The island is divided into 78 municipalities, each of which is governed by a mayor and municipal assembly. The senior legislative bodies consist of the 27-member Puerto Rico Senate and the 51-member Chamber of Representatives. All of these political positions are put in place by popular election and last for a term of 4 years.

Puerto Rico’s judicial system is directed by its Supreme Court, which consists of 7 judges appointed by the Governor. The system includes a Court of Appeals, a Superior Court, a District Court, and Municipal Court.

 

Puerto Rico’s Government Agencies

Here is a partial list of government agencies and offices you may find to be a helpful reference:

  • AT: Land Administration (Department of Economic Development)
  • DDEC: Department of Economic Development and Commerce
  • DH: Department of Finance
  • DTRH: Department of Labor and Human Resources
  • Hacienda: Treasury Department
  • JR: Review Board and Use Permits
  • La Fortaleza: Governor’s Office
  • PRIDCO: Puerto Rico Industrial Development Company (Department of Economic Development)
  • Promoexport: Trade and Export Company of Puerto Rico (Department of Economic Development)
  • OCIF: Office of the Commissioner of Financial Institutions
  • OGPe: Permit Management Office
  • OIGPe: Office of Inspector General Permit
  • OITE: Office of Industrial Tax Exemption

[Please note that the acronyms commonly used as names of agencies, by both English and Spanish speakers, reflect the original Spanish-language full names of the agencies. The acronyms listed above are what is commonly used by all; the full English-language names listed are the official translations of the full Spanish-language names of the agencies.]

References:
Official directory of government agencies (note that this site is in Spanish – if you are not fluent, the Google translate feature will be your friend here)
Hacienda official site (also in Spanish)

We Can Help

Our company helps people like you take advantage of Puerto Rico’s excellent tax incentives!  We can help you determine which tax incentives are right for you, help you plan your residency and relocation strategy, and simplify the entire process for you.

Contact us for a free initial consultation.

Get Started

What You Should Know About Puerto Rico’s Employment Laws

What You Should Know About Puerto Rico’s Employment Laws

Employee management can be more complex in Puerto Rico

Puerto Rico labor laws can be said to favor the employee. We have also heard from a number of sources that lower wage, non-exempt employees commonly know the employment laws well and hold employers accountable to them. If you will be managing employees of your own, you must become familiar with these laws, especially if you are required to maintain a certain number of employees to remain compliant with a tax exemption grant.

Because management of employees can be complex, our company offers business management services to oversee your human resources needs. We assist our clients in hiring and management of employees, as needed.

Below are some important notes (though this is not intended to be comprehensive).

 

Employment is not “at will:

It can be more difficult to release an employee in Puerto Rico.  If you wish to terminate an employee due to their performance, it must be for just cause, and you must be able to show documentation of disciplinary actions taken over time to remedy the situation.  It is also possible to lay off an employee because their position has truly been eliminated for demonstrable, valid business reasons.

In addition, it is possible for an employee to be hired for only a pre-defined length of time or to have an initial probation period of up to 90 days.  These types of arrangements would need to be explicitly stated in the employment contract and cannot continue indefinitely.

Firing someone without just cause can result in owing severance compensation based on years of service.

 

Paid Time Off

Puerto Rico requires employers to pay for time off in situations not required in the mainland US.

Mandatory paid maternity leave: Employees are entitled by law to 8 weeks paid maternity leave. Paid leave rights also apply to miscarriages, abortions, and adoptions of children 5 years or younger. The Working Mother’s Act also protects employees from pregnancy discrimination.

Vacation leave: All non-exempt employees are entitled to 1.25 days of paid vacation leave for each month in which they work at least 115 hours, though they aren’t entitled to take this leave until it has accrued for an entire year. Employers owe employees payment for vacation time not taken upon termination.

Sick leave: Non-exempt employees are also entitled to accrue one day of sick leave for each month in which they work at least 115 hours.

Paid Christmas Bonuses

Puerto Rico employees are legally entitled to a bonus in December of 6% of the first $10,000 of the employee’s annual wages.

PROMESA Changes

Exempt employees: The July 2016 FLSA rule change that doubled the minimum salary for employees defined as exempt from overtime does not apply in Puerto Rico.  The minimum annual salary for exempt employees in Puerto Rico currently remains at $23,660, but this matter is subject to a review underway by the Comptroller General of the United States.

We Can Help

Our company helps people like you take advantage of Puerto Rico’s excellent tax incentives!  We can help you determine which tax incentives are right for you, help you plan your residency and relocation strategy, and simplify the entire process for you.

Contact us for a free initial consultation.

Get Started

Puerto Rico Tax Changes

Time-Sensitive Tax Reform Updates

 

Puerto Rico is in the process of implementing tax reforms that are likely to impact the Investor program.  If you are considering a move to PR soon, it is beneficial to consider applying for the Investor program before the end of 2025 to lock in the current benefits.

Click here to read a blog post with more details.  Click here to schedule a free consult today.

Or sign up for our mailing list for updates as they become available.

Thank you for signing up!