This is why your startup should learn about taxes in Puerto Rico

sebastian vidal
6 min readNov 28, 2016


No matter how cool, sophisticated or venture-backed you and your startup are, there´s one thing that NO company can avoid. And that is paying taxes. As the saying goes: “In this world nothing can be said to be certain, except death and taxes.”

Then, why so many companies have trouble understanding and, sometimes, paying their taxes? Simple, taxes are far from being sexy. Normally you don’t care about them because you don´t understand them, and usually the topic is taken care of by experts (which is pretty wise.) But as a founder you should at least understand, from a strategic standpoint, some basic tax breaks that are out there and can make your company bootstrap longer or simply be more efficient.

I want to make a disclaimer before we start. I’m far from being an expert in the field but, for the last year, I have been experiencing life in Puerto Rico — amazing place BTW — as the CEO of Parallel18. The Caribbean island is a country mostly known for its beautiful beaches, pop icon Ricky Martin, the Zika virus, and the economic situation they’re facing.

But wait, in addition to these topics, there´s something that’s not getting the highlight it deserves and that is its AMAZING TAX BREAKS. Believe me, at the very beginning I was kind of skeptic. Why startups should care about this? But now I just think that you’re crazy if you don’t. To that purpose, I’ll give them to you straight so you don’t get bored:

In the path to become profitable, learn about Act 20

With PR Act 20 you only pay 4% taxes over profit for all services sold from Puerto Rico to the world. Let’s say you’re making USD $100K in profits*. In an average US state you would pay around USD $30K in taxes, meanwhile in the sunny enchanted island, you will only pay

USD $4K. Yes you read right, A 26 THOUSAND DOLLARS DIFFERENCE! And the best thing, this benefit lasts 20 years!

Do you need to relocate the whole company? The answer is a big fat NO, you can set up operations in Puerto Rico by creating a subsidiary from the parent company, in Delaware for instance.

One of the good things about this incentive is that once you submit the documentation**, it does not matter how long it takes you to get the final permit, you can choose for the benefit to be retroactive to the submission date.

Also, having this benefit is quite unique when pitching to investors, because when the time comes to pay dividends, they will be 100% exempt from taxes

So what’s the catch? Well, Puerto Rico wants you to generate economic impact in the island, so they’re going to require a minimum of employees (5 in two years) and the service/product needs to be created in Puerto Rico and sold outside of Puerto Rico. However, you have 6 months to hire 3 employees and 2 years to hire the 5 minimum requirement, after the commencement of operations, which can be a year after you get the final permit. Basically, if you need it, you’ve got time!

Act 73: Not profitable yet, but doing some serious Software Development/R&D/Manufacturing, well this baby is for you

PR Act 73 is the oldest brother of the tax incentive family, yet the most complete. It has pretty much all the benefits and requirements of Act 20 with a big PLUS, the Puerto Rican government will give you 50% of what you invest in Software Development/ R&D/ Manufacturing back in tax credits (you can later sell those tax credits for 80–90% of its price.)

Going back to the example, if you are putting USD $100K in software development (meaning engineers and others) you can get around USD $40K back. Plus you get the same investor benefit of 100% exempt than Act20

Act 135, made for young founders that are residents of PR

If you are still young (between 16 and 35 years old), living on the Island and you’re running a startup that has not begun its operations in the island (meaning that you have not made a dime yet) you pay ZERO income taxes for the first USD $500K in gross income earned during the first 3 years.

Also, if any founder is 26 or younger, any salary paid to him or her up to $40k will be 100% exempt from paying taxes (BONUS!!).

Act 120: the secret weapon that help you hire those much needed employees

If you’ are running a startup that has not begun its operations in the island (again, meaning you have not made a dime yet) and you can’t even think about those big tax breaks and just want money to hire employees, then you can do just that with PR Act 120.

Why? Under this Act, the Puerto Rican Government gives you back 50% of the federal minimum wages paid for up to 15 employees during the first year of operations.

What’s the added bonus? You also get a tax break, paying only 5% over net taxable income of your business for the first year of operations, 10% the second and 15% the third year.

Looking to invest? You might want to read about Act 22

Ok, you did amazingly well in your life and you want to retire. Or maybe your company was acquired recently and you are now in a position to become an investor. In other words, you’re living the dream.

With Act 22, if you accept to relocate to the island as an individual***, you will pay NO taxes on capital gains. Again, you will pay NO taxes on capital gains. Sorry, I just had to write it again. Most of the guys that actually move to the island and want to have their business running from the island, apply for both Act 20 and Act 22

Hope you have enjoyed this summary about the taxes galaxy. However, don’t let this simple summary make you think you can apply tomorrow, there’s a lot of hustle and paperwork that you probably would need to do, but you are entrepreneurs and you know everything takes work so DEAL WITH IT!

As I said in the beginning, I’m not an expert and do not intend to be, but every week that passes we understand a little bit better how these breaks can help entrepreneurs and, because in P18 our mission is to support founders and startups, we are going to keep helping you to apply to the right incentive for your company.

If you are want to know more about this magic, shoot me an email at


*You would pay 4% taxes over profits GENERATED IN Puerto Rico. If you want to relocate those profits to the US, you would need to pay Federal taxes.

**The whole process can take a while (3–6 months), so if you are thinking of doing it, I highly recommend to start the process NOW.

***You need to stay in the island at least 183 days. They have ways to control this, but my 2 cents here are just pack your things and relocate and don’t be a smart a** You will need to buy a property in Puerto Rico within two years of moving.



sebastian vidal

Executive Director at Paralllel18, former Start-Up Chile MD, Born and raised in Chile, currently living in the charming island of Puerto Rico…