Puerto Rico is close to some of the world’s most prominent markets, like the U.S., Mexico, etc. As the country is accessible from the most prosperous nations, you can set up a subsidiary in Puerto Rico to service all these countries.
Puerto Rico is ranked 65th out of 190 countries in the Ease of Doing Business Index 2020 by the World Bank. Hence, setting up a subsidiary business in Puerto Rico is not that challenging. Moreover, the annual GDP of the country was $103.14 billion in 2020, and it is expected to reach $109.20 billion by the end of 2022. Hence, the country contributes close to 0.01% to the global economy. Also, the unemployment rate is 5.7%, which is quite low compared to other countries. Therefore, you can access educated labor who have experience in conducting business.
The Cost-of-Living Index of the country stands at 130.69 points. Therefore, people here have a high standard of living and are open to trying out new products and services. It allows you to start a subsidiary business in the country. Also, as the territory shares its borders with prominent economies, the workforce here knows how to interact in different global languages like English, Mexican, etc.
You can reap the benefits of this flourishing economy by setting up a subsidiary in Puerto Rico. However, before establishing a subsidiary business in the country, you must know the local laws governing these subsidiaries. Read on to learn what goes into establishing a subsidiary business in Puerto Rico.
What are the Types of Subsidiaries in Puerto Rico?
There are multiple types of subsidiaries that you can set up in Puerto Rico. Depending on the type of subsidiary you opt for, you must fulfill different statutory requirements.
The most common types of subsidiaries incorporated within the territories of Puerto Rico are as follows:
Domestic corporation: This category includes all companies governed by the Laws of the Commonwealth of Puerto Rico. As the name suggests, it is a resident corporation even if the operations are not conducted in the country. This is another name for a limited liability company that has not yet been given the status of a limited liability company.
- The business owners opt for a domestic corporation as they are extremely tax friendly.
- The corporation attracts regular taxes based on the income slab, which ranges from 5% to 39%.
Partnerships: You can also incorporate a partnership firm in Puerto Rico. However, these partners are liable for paying the costs and bearing the burden of the company’s liabilities.
- All the partners have unlimited liability and might have to use their assets to pay off the company’s debts and meet other financial obligations.
- All the activities carried out by a traditional partnership firm are governed by the Puerto Rico Civil Code.
- To form a partnership in Puerto Rico, two or more people must come together and sign the partnership contract.
- All partners enjoy equal rights and access to equal profits unless specified otherwise and agreed upon by all the partners.
- The partnership agreement must consist of the details of the capital brought in and policies that govern the addition of a new partner to the company.
Limited Liability Company (LLC): Limited Liability Companies are the most incorporated subsidiaries in Puerto Rico. This format is popular as creating an LLC is much easier than other subsidiaries.
- The LLC can be incorporated by a natural or legal body by submitting the company’s Articles of Association.
- The LLCs are taxed as domestic corporations in Puerto Rico, and the company owners have the flexibility to run the company as per their wishes.
- There is no cap on the number of shareholders that can be a part of an LLC in Puerto Rico.
- Also, the shareholders are not liable to pay any debts or meet any financial obligations of the company with their assets or money.
- The LLC can be treated as a domestic corporation or a partnership firm in terms of taxes.
- All LLCs in Puerto Rico are considered foreign companies by default.
- The company must designate a manager or a member who will look after the company’s operations daily.
- You don’t need minimum capital to open an LLC in Puerto Rico.
- In Puerto Rico, LLCs have no requirement to file annual reports. However, they must pay an annual fee decided by the Federal Government.
You can choose any business form listed above based on the scale and budget of your operation. However, you must decide on a type before establishing a subsidiary business in Puerto Rico.
How to Set Up Subsidiary in Puerto Rico?
Setting up a subsidiary in Puerto Rico is a simple process. Let’s have a look at the steps involved in establishing a subsidiary in Puerto Rico:
Step 1: Select the company type
- Before you start with the incorporation of the subsidiary, you must be sure of the nature of the business and the kind of activities you want to perform through your business.
- Based on this, you can decide the type of subsidiary you want to incorporate in Puerto Rico.
- Decide on the purpose of the business.
Step 2: Decide on a name
- Once you pick the type of business, you must also choose a name for your business.
- You can visit the Puerto Rico DOS Corporation Search to check if your preferred company name is available.
- You must consider the operations and nature of the business while deciding on the subsidiary name.
Step 3: Address Details
- After deciding on the company’s name, you must include the company’s physical address in the incorporation form.
- All businesses must have a physical address in the country if they want to operate in Puerto Rico.
- You must also appoint a Puerto Rico registered agent that has a registered office address in the country. They can carry out all the formalities during the incorporation of the subsidiary.
Step 4: State the Purpose
- You must highlight the purpose of establishing your company in the incorporation form.
- You can also mention the purpose as “engage in any lawful acts or businesses for which may establish corporations under 14 L.P.R.A. § 3502”, instead of mentioning every detail of the business activity you are planning to conduct.
Step 5: Shareholding details
- You need to provide the details of the shares, such as the number of issued shares, face value, etc., to the Registrar of Companies.
- You must provide the number of shares issued to the shareholders for each class if you have multiple share classes.
- You must also highlight any conditions or restrictions that govern these shares.
Step 6: Sign of the Incorporator
- Once you add all these details to your incorporation form, you must reach out to the incorporator and get it duly signed.
- The company’s incorporator must also mention their credentials like name, address, etc.
- After the signature, you must appoint a director for the company if the incorporator is not a designated director.
Step 7: Duration and effective date
- In Puerto Rico, you need to mention the duration of the existence of the company. You can define these durations as perpetual, indefinite, or for a specific date.
- You must also specify the date the company will start its operations there.
You must collect the employer identification number as you need it while paying your taxes and making social security contributions on your employee’s behalf. Incorporating a subsidiary in Puerto Rico will take around 20 days. Once the company is registered, you can set up a bank account and begin with the operations.
Benefits of Setting Up a Puerto Rico Subsidiary
Opening a subsidiary in Puerto Rico offers great benefits, which are as follows:
- Puerto Rico has a young population with an average age of 44.5 years as of 2020. Hence, you can onboard young and talented individuals to work for the company and contribute to its growth in the country.
- All subsidiary companies in Puerto Rico enjoy the same rights as the local companies in Puerto Rico.
- The country is a part of the United States and is close to economies like Mexico, Canada, etc. Hence, you can easily expand your scale of operations to these countries from Puerto Rico.
- As the territory is a part of the Caribbean Islands, you can set up different ports and establish an export-import subsidiary for your company.
- Puerto Rico enjoys several tax incentives from the US that offers a corporate tax rate of 7%. The country is also exempted from taxes the US imposes on other economies.
- The first year of operations is tax-free when you incorporate a subsidiary in Puerto Rico.
- The best thing about setting up a subsidiary in Puerto Rico is that you don’t have any minimum share capital requirements.
Documents to Prepare When Opening a Subsidiary in Puerto Rico
You must prepare documents to set up a subsidiary in Puerto Rico and carry it while incorporating the company. Some of the important documents include the following:
- The Articles of Association of the company
- The incorporation form of the company. The form must contain the following details:
- Name of the company
- The physical address of the company and the agent appointed by the company
- Details of the shareholders and shareholding pattern like the class of shares, etc.
- The purpose of the company, along with the duration for which the company wants to run its operations
- The passports and other important details of the shareholders of the company
- A receipt supporting the payment of the incorporation fees
- Certificate of Authorization to conduct business as a foreign corporation in the country. The certificate must be signed by the director or the officer of the company.
- Audited financial statements of the parent company
- Form for Reserve of Names to declare the name of the organization
- The Puerto Rico LLC Operating Agreement (for LLCs)
- The corporate bylaws of the company
- Merchant Registry Certificate
- Single-use permit or municipal tax license, depending on the nature of the business.
Once you submit these documents, the Registrar will issue an identification number known as the EIN. You can then use this number to register the company to different tax authorities and social security accounts. You must also obtain the Unemployment and Disability Identification Number, as it is a mandatory requirement to set up the unemployment insurance accounts of the employee.
What Business Forms can Puerto Rico Subsidiaries Take?
You can set up both wholly and partially owned subsidiaries in Puerto Rico. However, if you want to incorporate a wholly-owned subsidiary, you need to buy 100% stakes in that company.
Some popular forms that the subsidiaries in Puerto Rico take are:
- Traditional partnerships
- Limited liability partnerships
- Foreign subsidiary
- Corporations of individuals
The limited liability company is the most common type of subsidiary that different companies open. This is because setting up an LLC in Puerto Rico is quite easy. Also, all the foreign corporations in Puerto Rico are considered LLCs by default.
Puerto Rico Subsidiary Laws
When you establish a subsidiary in Puerto Rico, you must ensure that it abides by all the subsidiary laws defined by the Government. The subsidiary must take care of the health and sanitation of the workplace, along with the applicability of immigration rules to any foreign employees that have come to the country to run the business.
Paying taxes and contributing to social security accounts are mandatory for domestic and foreign subsidiaries. Hence, once you receive your employer identification number, you must register your business with the tax and social security organizations. Also, you must make the tax and social security contributions in time to avoid any penalties and punishments in the country.
You must also set up a bank account for the company and use it to make all the payments. Employers must use the same bank account to pay taxes and make social security contributions. All the employees receive their salaries in US dollars through a bank account opened within Puerto Rico.
Additionally, you should appoint an agent and a director for the company who will act as the custodian and take care of the company’s operations.
Post Incorporation Compliance
You must follow a set of foreign subsidiary compliance in Puerto Rico once your company is incorporated in the country. Some of these compliance requirements include:
- Collect the certificate of incorporation and the employer identification number from the US Internal Revenue Service.
- Register the company with tax, medicare, and social security authorities using the employer identification number or the EIN.
- Protect the company’s assets by buying a business insurance policy
- Register your company and all the employees to the Worker’s Compensation Insurance
- Enroll in liability insurance to safeguard your company against the cost of damages, etc.
- Share all the details of the shareholders with the agencies looking after the company incorporation process.
- Open a bank account.
Taxes on Subsidiaries in Puerto Rico
Like all the local businesses in Puerto Rico, the subsidiaries also must pay a tax on the income they earn from their operations in Puerto Rico. The tax rate applicable to the companies can be as low as 18.5%. Also, the subsidiaries must pay a withholding tax of 29% on the income they earn through their operations outside Puerto Rico.
Apart from the corporate tax, the foreign subsidiaries also pay a graduated surtax on the income earned in the country. The surtax amount is calculated by deducting $25,000 from the taxable income. It can range from 5% to 37.5%.
Tax Incentives for Firms Setting Up a Subsidiary in Puerto Rico
Puerto Rico provides a few incentives to companies setting up their subsidiary in the country. Some of these tax incentives include:
- Per the Incentives Code of Puerto Rico, the country incentivizes companies that enter the manufacturing segment and promote economic development. A 4% CIT will apply to these companies.
- Companies that perform Novel pioneer activities enjoy a CIT of 1% on their income.
- All dividends are exempt from taxes for companies under the Incentives Code.
Other Important Considerations
It takes time to set up a subsidiary business in Puerto Rico. Set aside a few weeks from your schedule to focus on the expansion and travel to and from Puerto Rico as a starting point. You should outsource the work or partner with another corporate leader if your parent company keeps you too busy.
Next, companies must finalize a budget they require to set up subsidiaries in Puerto Rico. While incorporating subsidiaries, companies need to pay several fees.
How Multiplier’s Employer of Record Can Help You Hire and Expand in Puerto Rico
Planning a business expansion, whether domestic or global, takes time and money. However, adhering to labor laws and business customs may prove difficult when expanding to a foreign country.
Why not overcome this roadblock to your company’s expansion by working with a third-party service provider like Multiplier?
You need not worry about anything as Multiplier takes care of all the formalities in entering a new market. We help you onboard local and international personnel while ensuring that all labor laws and customs in Puerto Rico are strictly adhered to. Our team of experts will help you hire highly skilled individuals without setting up a subsidiary in Puerto Rico. We also offer payroll and employee administration services to our clients.