Puerto Rico Tax Treatment

Over the last decade, Puerto Rico has enacted legislation providing a number of tax incentives for financial, insurance and service businesses engaged in certain eligible activities in Puerto Rico. This groundbreaking legislative platform expands Puerto Rico as an international financial center by broadening the tax incentives and economic opportunities for financial entities on the island.

One of the crucial components of such platform is the law that creates an International Insurance Center. Under this law, an insurance structure may qualify for a preferred tax rate of 4% on net income in excess of $1.2 million, secured by a tax decree that acts as a contract between the insurer and the Puerto Rican government. This contract agreement has an effective period of 15 years, with a renewal option for two additional periods. In addition, dividends paid from profits on exported services are 100% tax exempt to individual recipients. Protected cells are allowed, with similar tax treatment for each cell (i.e., the cells pays 4% tax on its own income in excess of $1.2 million; life, disability and health cells are fully tax exempt).

Besides tax incentives created by the Commonwealth, Puerto Rico corporations are treated as foreign corporations under the U.S. Tax Code. Furthermore, for Puerto Rico resident individuals, Section 933 of the U.S. Tax Code exempts Puerto Rico sourced income from federal tax. This combination of factors, creating an autonomous international treatment of income based on the island, encourages the formation of international insurers to write insurance on non-Puerto Rico risks.

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