Common Export Services Compliance Considerations Under Act 60

Export Services Compliance Under Act 60

Chapter 3 of Act 60 provides the framework for export services incentives, potentially including a 4% corporate rate on qualifying income (Section 2032.01(a)). Maintaining compliance with Chapter 3 requirements involves several areas that commonly present challenges.

Export Ratio Documentation

Demonstrating that a substantial portion of income derives from clients outside Puerto Rico is a core Chapter 3 requirement. Common challenges include:

• Not documenting client locations in contracts and invoices
• Assuming all US mainland clients automatically qualify
• Failing to monitor the export ratio on an ongoing basis
• Insufficient records distinguishing local vs. export revenue

Maintaining contracts that specify client location, invoices that identify where services are delivered, and periodic internal reviews of the export ratio is generally considered important.

Employment Requirements

Chapter 3 decree holders typically have minimum employment requirements specified in their decree. Under Section 2062.01(j), FTE is calculated based on 2,080 hours per year. Common challenges include:

• Falling below minimum FTE during business downturns
• Improperly classifying contractors as employees for FTE purposes
• Not documenting that employees work from Puerto Rico
• Informal arrangements that may not meet regulatory standards

Economic Substance

DDEC generally evaluates whether operations have genuine substance in Puerto Rico. Factors typically considered include:

• Physical office space (not a P.O. box or virtual office)
• Business decisions made from Puerto Rico
• Board meetings and strategic planning conducted on the island
• Local suppliers and professional relationships

Service Classification

Not all services may qualify as "export services" under Chapter 3. The classification depends on the nature of the service, where it is performed, and how it is delivered. Services that do not meet the definition of Exportacion de Servicios under the Incentives Code may not qualify for preferential rates.

Transfer Pricing

Businesses with related entities outside Puerto Rico generally need to ensure that intercompany transactions are conducted at arm's length. Transfer pricing documentation may be important for demonstrating compliance.

Reporting and Compliance

• DDEC annual report due November 15 (Section 6020.10(a)(3))
• Annual filing fee: $5,000 (Section 6020.10(d))
• Maximum administrative fine for non-compliance: $10,000 (Section 6020.10(e))
• Corporate tax filings with Hacienda
• Quarterly employment reports

Frequently Asked Questions

What percentage of income must come from export clients? The specific percentage depends on decree terms. Documentation demonstrating the export orientation of the business is a key compliance element.

Can I serve some local clients? Some local revenue may be permissible depending on decree terms, but income from local clients would generally not qualify for the preferential rate.

What if my employee count drops temporarily? Communicating proactively with DDEC about temporary changes in employment levels is generally advisable rather than allowing non-compliance to be discovered during a review.

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Virtus Advisory provides this content solely for informational purposes. Nothing in this article should be construed as a guarantee of any particular tax outcome, an endorsement of any specific tax strategy, or an offer to provide professional services. For personalized guidance, contact a licensed CPA or tax professional.