What do merchant services in Puerto Rico and taxation have to do with your online business? It’s simple.
Are you one of the many affiliate marketers, copywriters, or seasoned merchants who have moved or are planning to move to Puerto Rico from the continental US? Who would blame you?
Working from a tropical climate. Enjoying a nomadic lifestyle with the laidback work-life and sun, sand, and sea at every turn. Plus, it’s a simple one-two to move from the US to Puerto Rico.
Puerto Rico is a US territory, so there’s no problem in moving your business and your merchant accounts with you. Right?
You’re operating in the online space so you can work from anywhere. You deliver your fitness or passive income coaching services online. Your business services, like copywriting and affiliate marketing, are provided online. Your health supplements stores are also e-commerce – no physical store necessary.
So again, there’s no risk of moving. Right?
You couldn’t be more wrong!
If not managed properly, that business move to Puerto Rico could cost you your merchant account. We mean that. It’s not a joke!
Here’s why a move to this US territory can seriously jeopardize the business that you’ve worked so hard to build.
But first, a word about the allure of the island of enchantment. This can be summed up in the somewhat morbid phrase – Two things in life are certain – death and … You get the drift.
That’s right. Business owners, crypto traders, and more are flocking to Puerto Rico because of taxes, or better yet the lack of taxes.
Puerto Rico’s Act 20 and Act 22 Tax Benefits
Not to bring doom and gloom, but taxation is one of the biggest issues that affect US-owned businesses and online entrepreneurs like you.
When you’re making $100,000 or more a year in your business, taxes start adding up quickly when you don’t have expenses to match.
And that’s where Puerto Rico comes in.
Puerto Rico was decimated by the 2008 credit crisis. They have also been hurt by hurricanes. To counter these problems, they implemented tax legislation since 2012 designed to lure potential investors and business owners to relocate their businesses to the island.
Two of the most popular ones are Act 20 and Act 22.
Act 20 – The Export Service Act of 2012
Act 20 targets service-based businesses. These businesses must register in Puerto Rico but sell their services or products outside the territory. They are also required to employ at least 1 Puerto Rican in the business. (The tax incentive was partly created to address high unemployment rates. So, this requirement shouldn’t come as a surprise.)
Some of the businesses which are eligible for reduced taxation under Act 20 include:
- Advertising and public relations
- Consulting services (e.g., copywriting, HR)
- Professional services (e.g., legal, tax, accounting)
- Advice services on matters related to any trade or business
- Creative industries
- Educational and training services
Incentives in this area are corporate income tax rates as low as 4% for qualifying corporations.
Act 22 – The Individual Investors Tax Act of 2012
Act 22 targets investors. Under this law, individual investors have a total exemption from income taxes from passive income. This is quite a draw for persons in the cryptocurrency space, especially day-traders. To access these benefits, they must relocate to Puerto Rico and become bona fide residents.
The big tax rush
So, if these laws have been in place since 2012, why are we now focusing on it?
Well, there’s been an influx of US merchants calling us, because of issues they encounter in moving to Puerto Rico.
They think it is easy to get a US merchant account in Puerto Rico. Then, they run into difficulties and contact us when they’re close to losing their merchant account or can’t get any at all. So, we have to step in to help them manage this process and prevent that from happening.
So, yes, the tax savings are significant. However, one thing we want you to take away from this post is this. Consult an expert in the merchant services space before you make your move. If your merchant services account gets shut down, that will disrupt your entire business.
Plus, there is a rush now because of another element at play.
The Puerto Rican government has passed new legislation that will impact the requirements under Acts 20 and 22. These new requirements come into effect on January 1, 2020. So, persons who had been considering applying under these Acts are now trying to get in before December 31, 2019, so they can be grandfathered in.
The new changes require that, under Act 22, individuals make an annual charitable donation of $10,000. This is a 100% increase from $5,000. They are now also required to buy real estate property as their primary residence – which cannot be leased.
The new amendments also explicitly include cryptocurrencies and crypto-assets as eligible for tax exemption.
Pros and cons of moving to Puerto Rico for Act 20/22
1. Tax breaks
Of course, the tax breaks are the number one reason for moving to Puerto Rico. Under Act 20, you will pay only 4% in taxes compared to at least 20% depending on your state in mainland USA. Under Act 22, you pay zero taxes on passive income earned from investments.
2. The Cost of living
Cost of living is much less expensive than in mainland USA.
3. Still a US Citizen
You enjoy many of the same privileges because, as a territory of the US, you’re treated as a US citizen. So, it’s like moving from New Jersey to Florida to take advantage of some of their tax breaks.
4. The Climate
Moving to Puerto Rico also means a tropical climate with warmer weather year-round. The climate is great, and it’s not that far from mainland USA.
The cons of relocating to consider
- 1. Requirements to qualify for Act 20 or 22
a) You must become a bona fide citizen of Puerto Rico. That means you must move the center of your life to Puerto Rico. As such, you cannot spend 90 days or more in your previous “home” state. And you must spend at least 183 days in Puerto Rico each year.
b) Your business must be registered in Puerto Rico.
- 2. The Climate
Unfortunately, there is the issue of hurricanes. They have been a serious contributing factor to the decline in the island’s economy.
- 3. Accessibility of Merchant Services in Puerto Rico
This has the potential to disrupt your entire business and negate all reasons for relocating. You cannot get a US merchant account with a business registered in Puerto Rico. You can opt for an offshore merchant account, although if you sell mainly to Americans, your conversions will suffer as offshore accounts don’t convert as well as domestic US merchant accounts.
Merchant services in Puerto Rico
It is not a simple matter of just relocating to Puerto Rico. You cannot simply change the company details listed in your merchant profile without consequences. It doesn’t work that way.
Yes, Puerto Rico is a US territory. However, you cannot obtain a US-based merchant account when your business is registered in Puerto Rico. You need to have another operating company with an address in the continental US to get a domestic MID. This is especially the case with high-risk businesses.
You can take advantage of relocation services. These are companies or consultants that make the process seamless for moving your business to Puerto Rico. Specialized accountants and tax lawyers can even help you structure your business so you can have a subsidiary in the US that will allow to keep your domestic MIDs. They can help you relocate your business set-up in terms of business structuring, LLC creation, employment identification number (EIN) filings, etc.
If you prefer to avoid dealing with operating a US company, we at DirectPayNet can assist in setting up a merchant account in another jurisdiction to ensure you enjoy maximum tax benefits of your relocation without the hassle of the IRS. If you want to ensure to keep a domestic merchant processing, with a little bit of help from a tax accountant, your structure can allow you to work with your main company based in Puerto Rico while having an entity in the continental US that can assist with administrative matters involving payments.
So, are you planning to take advantage of the business tax incentives by moving your business to Puerto Rico? Then you need to check your merchant services account requirements.
How to protect your business payment processing systems
All isn’t lost. Nor are we saying you cannot access a merchant account while in Puerto Rico.
As always, a foreign merchant account can only be issued if it’s for a business registered in the region. It must have a local director and a bank account for said business. So, technically, you can still get a US merchant account, if you follow the right processes. Or as we mentioned you can get an account in a tax friendly jurisdiction that will have less maintenance on your end.
Some options of jurisdictions to consider are Canada, Panama or Ireland. These offer different tax advantages depending on your business needs. For example, a Canadian merchant account will help safeguard your US customer conversions as Canadian banks are known to be reputable and there is immense trade between the 2 countries. Also, if you structure your company correctly, taxes can be non-existent in Canada if you don’t sell to Canadians.
Another thing to consider is the product you sell. In the nutraceutical industry, for example, a muscle building supplement may not have the easiest time being approved outside the US. Approval may be dependent on the ingredients and regulations regarding ingestible products in other jurisdictions. So, just because something is legally sold in the US, it doesn’t mean it will be accepted in other countries. In fact, the US has several substances approved that are banned in Canada, Europe and Latin America.
Experts in the merchant account industry
With over 10 years of hands-on expertise in the merchant services industry, it is easy for us to assess your business type and which payment solutions would work for you.
So, if you’re considering the move to Puerto Rico, give us a call before you start the process!
We can help you make the right choice for merchant accounts. And where necessary, help you apply and get approved, even if you operate in a high-risk industry.
Don’t take the chance that you can still do business with your current provider. Don’t jeopardize the business you worked for or your ability to qualify for the tax benefits in Puerto Rico.