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Puerto Rico is an unincorporated territory of the United States, a self-governing island located 1,000 miles southeast of Florida. Due, in part, to its status as a U.S. commonwealth, the island has a modern infrastructure, large public sector, a well-educated, bilingual workforce, and an institutional framework guided by the regulations of the United States.
While Puerto Rico's mix of pro-growth policies and structural advantages make it an intriguing market for overseas expansion, there are also some considerations of which businesses should be cognizant. Understanding local laws, rules, and regulations can be challenging, and working with contacts who are well-versed in these areas is essential for successful business expansion.
Check out our guide to learn more about this popular region’s business environment, entity types, taxes, incorporation requirements, and more.
United States federal laws — such as those governing patent protection, intellectual property rights, and banking rules and regulations — apply to the commonwealth. These provide businesses with a degree of stability.
Treaties signed by the U.S. also extend to Puerto Rico. The U.S. currently has 42 bilateral investment treaties in place.
The Puerto Rican government is motivated to attract foreign investors and is doing so through attractive tax incentives, such as partial or nearly-full exemptions from personal and real property taxes, municipal license taxes, and state and local sales and use tax on raw material.
There are also credits for job creation (depending on business location), research and development, and investment in machinery and equipment for the production of energy.
Puerto Rico has a thriving start-up environment, and many entrepreneurs are taking advantage of low taxes, a beautiful work location, and a welcoming government. Most of the island is connected to high-speed internet, and there are undersea fiber-optic cable services and a satellite system to enhance communications.
Puerto Rico has 3 international and 7 regional airports. With a direct flight, it takes approximately two and a half hours to reach Miami and four hours to arrive in New York City.
Puerto Rico has a skilled and bilingual workforce, typically fluent in English and Spanish. The region has some of the lowest labor expenses of any area in the United States, making it an attractive location for businesses looking to reduce labor costs. Employers in this region typically have high retention and low employee turnover rates.
Because of its proximity to the U.S. mainland, Puerto Rico enjoys well-established transportation networks and serves as an access point to the vast U.S. consumer market. The island is also a gateway for businesses interested in being close to the United States, while investing dollars abroad. U.S. citizens can freely travel between mainland U.S. and Puerto Rico.
One potential hurdle is Puerto Rico’s rather complicated administrative organization, which makes doing business on the island is markedly more difficult than operating in the U.S. The region was ranked 65 out of 190 economies for overall ease of doing business by the World Bank Doing Business report. It was also ranked 143 for dealing with construction permits and 161 for registering property.
The island’s government is taking steps to simplify many tasks associated with doing business. The territory’s Department of Economic Development and Commerce (DDEC) has created a single business portal, which is designed to streamline processes such as applying for permits, licenses, certifications, and more.
The government has created an initiative to reduce backlogs of property deeds and other documents required to register a business. They have also consolidated many agencies to simplify and expedite the administrative handling of business operations.
Puerto Rico is vulnerable to a variety of natural disasters, most notably hurricanes and earthquakes. The region was devastated by Hurricanes Irma and Maria in 2017 and experienced major earthquakes in 2019 and 2020. These events have caused serious damage to the island’s infrastructure, creating challenges with power and other important systems and services.
The ongoing economic crisis has also made operating in Puerto Rico more challenging. Puerto Rico entered bankruptcy in May 2017, though the government is currently working on a plan to reduce a large portion of its debt.
In addition to budget problems, Puerto Rico is experiencing continued outbound migration of its residents to the U.S. This "brain drain" effect has deprived Puerto Rican businesses of some of the island's best workers.
The cost of power in Puerto Rico is estimated to be double the cost in the United States. This can be a serious consideration for certain industries, such as the manufacturing, pharmaceutical, and medical sectors.
The power grid is in need of modernization, which still shows the signs of the heavy damage from Hurricane Maria. Infrastructure repair has progressed slowly due to the need for a major overhaul requiring a huge financial investment, and because of the additional strain caused by recent natural disasters.
It can sometimes take years for a company to accrue enough local knowledge to operate without needless difficulty. This interval can be greatly shortened by partnering with experts who have a deep awareness of local laws and regulations. This is doubly important when it comes to the more challenging aspects of expanding operations in a new region.
Having a trusted partner with global reach and experience can help ensure a smooth transition. We know that one size does not fit all. CT can help you get set up, provide a single point of contact, and offer you customized solutions for all your needs.
Why should I consider doing business in Puerto Rico?
Puerto Rico has the benefit of a U.S. framework and U.S. operations and protections, such as patent protection, intellectual property rights, and banking rules and regulations. The local government is motivated to attract new investors through tax incentives and other pro-business programs. The island’s strategic location allows it to serve as a business hub to reach new markets and provides easy travel to the U.S.
What challenges should I consider when expanding to Puerto Rico?
Setting up a business in Puerto Rico can be difficult for outside investors without any experience in the region. Puerto Rico was ranked 65 out of 190 economies overall for ease of doing business by the World Bank Doing Business report. An ongoing recession, plus climate and geographic vulnerabilities, may adversely affect local infrastructure and operations.
What is the local tax rate?
The corporate tax rate in Puerto Rico is 37.5%. Additionally, there is a VAT rate of 11.5%, and other taxes may include withholding tax, municipal gross receipts tax and property tax. There are no tax treaties between foreign countries and Puerto Rico.
What business entity types are available?
There are several entity types to choose from, including limited liability company (LLC), corporation, and foreign branch.
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