Common Small Business Compliance Considerations Under Act 60

Common SME Compliance Considerations Under Act 60

Small and medium enterprises make up a significant portion of Act 60 decree holders. Understanding common compliance challenges may help businesses maintain their decree benefits over time.

Insufficient Economic Substance

One of the most frequently cited compliance concerns is inadequate economic substance. Act 60 generally requires genuine operations in Puerto Rico, not merely a legal structure. Elements typically evaluated include:

• Local employees working from Puerto Rico
• Physical office space (not a P.O. box)
• Business owner presence on the island
• Meaningful operational costs incurred in PR
• Real business relationships with local suppliers and partners

Businesses where the owner spends most of the year outside Puerto Rico or maintains minimal local operations may face increased scrutiny.

Documentation Gaps

Maintaining thorough records is generally considered essential for Act 60 compliance. Common documentation challenges include:

• Incomplete records of client locations for export ratio verification
• Insufficient evidence of employee work activities
• Lack of organized financial records
• Missing receipts and supporting documentation for business expenses

Establishing systematic record-keeping practices from the start of operations is typically more effective than attempting to reconstruct records retroactively.

Export Ratio Misunderstandings

Chapter 3 decree holders are generally expected to derive a substantial portion of income from clients outside Puerto Rico. Common misconceptions include:

• Assuming all US mainland clients automatically qualify as "export"
• Not documenting client locations in contracts and invoices
• Failing to monitor the export ratio on an ongoing basis

Maintaining clear documentation of where services are performed and where clients are located is important for demonstrating export compliance.

Employee Classification

Proper employee classification is an important compliance area. Common challenges include:

• Treating employees as independent contractors when the relationship meets employee criteria
• Not properly classifying part-time versus full-time for FTE calculations
• Under Section 2062.01(j), one FTE equals 2,080 hours per year

Proper payroll processing and labor law compliance are separate obligations from Act 60 but may affect decree compliance if employment minimums are part of the decree terms.

Tax Planning Coordination

Operating under Act 60 involves obligations to multiple agencies (IRS, Hacienda, DDEC). Common tax planning challenges include:

• Coordinating federal and Puerto Rico estimated payments
• Understanding which income qualifies for preferential rates versus standard rates
• Managing multi-jurisdiction reporting requirements
• Ensuring consistent information across all filings

Municipal Compliance

In addition to DDEC and Hacienda obligations, businesses operating in Puerto Rico generally need:

• Municipal business license (patente municipal)
• Applicable construction or zoning permits
• Local tax compliance
• Registro de Comerciante through SURI

Municipal obligations are separate from Act 60 decree requirements but non-compliance may create operational problems.

Banking and Financial Management

Maintaining separate business and personal accounts, establishing relationships with banks experienced with Act 60 decree holders, and ensuring adequate cash reserves for estimated tax payments and compliance costs are commonly recommended practices.

Key Compliance Deadlines

Maximum administrative fine for non-compliance: $10,000 (Section 6020.10(e)).

Frequently Asked Questions

What is the most common reason for decree issues? Insufficient economic substance and documentation gaps are among the most frequently cited compliance concerns.

How many employees does a small business need? Employment requirements vary by decree terms. The specific minimum is defined in each individual decree.

Can I operate from a home office? This depends on decree terms and local zoning regulations. Some decree holders maintain dedicated office space to demonstrate economic substance.

---

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.