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Research & Development (Exports)
Tax incentive for companies conducting research and development activities in Puerto Rico that serve clients outside the territory, offering a 4% corporate tax rate.
12 min
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Section Code:
2031.01(A)-1 (a)-1
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Purpose:
Exports — 2031.01(A)-1 (a)-1
Overview
The Research and Development export incentive under Section 2031.01(A)-1(a)-1 of Act 60-2019, as amended, provides preferential tax treatment for companies that conduct R&D activities in Puerto Rico while serving clients or parent companies located outside the territory. This designation recognizes the strategic importance of research activities in building Puerto Rico's knowledge economy and supports the establishment of R&D centers that create high-value employment.
Qualifying businesses pay a fixed four percent (4%) corporate income tax rate on income derived from R&D services provided to entities outside Puerto Rico. The program attracts corporate R&D centers, contract research organizations, technology development companies, and other businesses whose primary activity involves research, experimentation, and development of new products, processes, or technologies.
The key distinction of this designation is its focus on research and development as the primary service exported. While other export designations cover consulting, software development, or professional services, this designation specifically addresses companies whose core activity is conducting research. This includes pharmaceutical research, technology R&D, engineering research, scientific testing, and similar activities.
Puerto Rico's history as a pharmaceutical and medical device manufacturing hub provides a foundation of scientific talent and infrastructure that supports R&D operations. The incentive builds on this foundation by encouraging companies to locate research functions alongside or independent of manufacturing operations.
Key Benefits
Corporate Income Tax Rate
R&D companies approved under this designation pay a fixed four percent (4%) tax rate on income derived from qualifying research and development services provided to clients outside Puerto Rico. This rate applies for the full term of the tax decree, typically fifteen (15) to twenty (20) years.
Compared to the standard Puerto Rico corporate rate of thirty-seven and a half percent (37.5%), the four percent rate provides savings exceeding ninety percent (90%). An R&D center generating five million dollars ($5,000,000) in annual taxable income would pay approximately two hundred thousand dollars ($200,000) under this decree, compared to one million eight hundred seventy-five thousand dollars ($1,875,000) under standard rates.
Dividend Tax Treatment
Dividends distributed from decree income to shareholders located outside Puerto Rico are subject to zero percent (0%) withholding tax. This allows multinational corporations to repatriate R&D center profits efficiently and provides favorable structures for privately held R&D companies distributing profits to non-resident owners.
Property Tax Exemptions
R&D facilities receive exemptions from property taxes on laboratory equipment, research instruments, computing infrastructure, and other assets used in research activities. For capital-intensive R&D operations, these exemptions provide meaningful additional savings on top of income tax benefits.
Integration with Federal R&D Credits
R&D activities conducted in Puerto Rico may qualify for U.S. federal research tax credits under Section 41 of the Internal Revenue Code, subject to applicable rules and limitations. The combination of Puerto Rico incentives and federal credits can create a highly favorable overall tax position for R&D investments.
Municipal Tax Exemptions
Decree holders are exempt from municipal license taxes on revenues from qualifying R&D activities, providing additional savings that can reach one and a half percent (1.5%) of gross revenues in some municipalities.
Requirements & Obligations
Business Structure and Registration
Applicants must establish a Puerto Rico legal entity to conduct R&D operations and hold the tax decree. The entity must be registered with the Puerto Rico Department of State, obtain a Puerto Rico employer identification number, and secure all necessary business licenses. Separate books and records must be maintained for decree-related activities.
Export Revenue Threshold
At least eighty percent (80%) of the business's gross income must be derived from R&D services provided to persons or entities located outside Puerto Rico. This is measured annually, and businesses must maintain detailed records documenting client locations and the nature of services provided. For captive R&D centers serving a parent company, intercompany pricing must comply with transfer pricing rules.
R&D Activity Requirements
The primary activity must constitute qualifying research and development. This includes activities intended to discover information that would eliminate uncertainty regarding development or improvement of products, processes, software, techniques, formulas, or inventions. Routine testing, quality control, market research, and similar activities do not qualify as R&D.
Physical Presence and Facilities
The R&D activities must be substantially performed in Puerto Rico using Puerto Rico-based facilities and personnel. The business must maintain appropriate research facilities, laboratories, or development environments in Puerto Rico. The facilities must be genuine operational spaces where research occurs, not nominal presences.
Employment Requirements
R&D companies must employ a minimum number of Puerto Rico residents, typically specified in the decree based on the scale of operations. Research scientists, engineers, technicians, and support staff must be based in Puerto Rico. Given the specialized nature of R&D work, companies may need to develop hiring pipelines with local universities or recruit talent willing to relocate.
Compliance and Reporting
Decree holders must file annual compliance reports documenting R&D activities, employment levels, revenue sources, and client locations. Documentation of the technical nature of activities may be required to demonstrate that work qualifies as R&D. Books and records must be maintained in Puerto Rico and available for audit.
How to Apply
The application process for the Research and Development export incentive typically requires four (4) to eight (8) months, reflecting the technical nature of R&D activities and the need to demonstrate that proposed activities qualify under the designation.
The process begins with assessing whether the company's activities constitute qualifying R&D and whether the business model meets export requirements. Companies should evaluate the nature of their research activities, their client or parent company locations, and their ability to establish genuine R&D operations in Puerto Rico. Consultation with tax and legal advisors familiar with both Act 60-2019 and federal R&D tax rules is recommended.
During the planning phase, companies typically establish a Puerto Rico legal entity and begin developing facilities and hiring plans. R&D operations may require specialized facilities, equipment, and personnel that take time to establish. The application can proceed while facilities are being developed, but operational plans should be concrete and credible.
The formal application is submitted to the Puerto Rico Industrial Development Company (PRIDCO) and includes a detailed description of R&D activities, technical documentation supporting the research nature of the work, client or parent company information, financial projections, employment plans, and facilities plans. The application should clearly explain how the activities constitute R&D rather than routine services.
PRIDCO reviews the application over approximately sixty (60) to one hundred twenty (120) days, potentially consulting with technical experts to evaluate the R&D nature of proposed activities. Additional documentation or clarification may be requested. Applications that clearly demonstrate qualifying R&D activities and genuine commitment to Puerto Rico operations receive favorable consideration.
Upon approval, the tax decree is issued specifying terms, benefits, and obligations. The decree takes effect upon meeting specified conditions, which may include establishing facilities and commencing R&D operations.
After decree issuance, the company must meet employment and operational milestones and establish systems for ongoing compliance reporting. Annual reports documenting R&D activities and qualification are required.
This information is educational and should not be considered legal or tax advice. Applicants should consult with qualified legal and tax professionals familiar with Puerto Rico incentive programs before making any business decisions or submitting applications.
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