Tax-Friendly Puerto Rico Approves Non-Lawyer Owners of Law Firms

The Supreme Court of Puerto Rico adopted a new rule that allows non-lawyers to own an interest in a law firm, according to a trial lawyers group in the US territory.

“Paired with the tax free environment in Puerto Rico, I think it’s going to end up being the litigation finance hub of the country in the next year because it’s so much less regulation and more lawyer-friendly than the other jurisdictions,” said Paul Napoli, a partner at Napoli Shkolnik and chairman of the Trial Lawyers of Puerto Rico.

Most US states ban non-lawyers from having ownership interests in law firms but Arizona, Utah, and Washington, DC are among the jurisdictions that have loosened the restrictions, allowing versions of so-called “alternate businesss structures.” Arizona in particular has become a popular locale for litigation funders and outside capital sources to partake in owning law firms, thereby having equity in the business and freeing law firms from accruing loan interest rates. Big Four accounting, tax and consulting company KPMG gained approval to practice law in Arizona earlier this year.

Napoli’s group, which represents the interests of 80 trial law firms, has been submitting comments and requests on the Puerto Rico rule. He said one of the highlights is that the process is far less arduous than Arizona’s, which requires an application and approval from the Committee on Alternative Business Structures established by the state’s supreme court.

Instead, the Supreme Court of Puerto Rico requires notification upon initiation of the agreement and must receive a sworn statement each year detailing the number of lawyers in the firm, dates and amounts of investments and income from the non-lawyer owner.

“It’s a very streamlined process,” said Napoli. “The onus is on the Puerto Rican lawyer partner to make sure that everybody’s compliant. It’s more self-regulation than overregulation, which is always a better mechanism.”

The law includes provisions that require an attorney admitted to practice in Puerto Rico operate the firm and represent the non-lawyer owner in all rights related to voting and legal matters concerning the firm. Non-lawyers cannot own more than 49% of law firm shares and all clients must be informed about their ownership interest.

Puerto Rico also has tax incentives that have drawn US lawyersto open businesses on the island. Lawyers and business owners who comply with certain guidelines have access to a 4% corporate tax rate and a 0% tax rate on capital gains. They must buy real estate on the island, live there for at least half of the year, and make $10,000 in charitable donations to a Puerto Rico nonprofit.

The growing popularity of nonlawyer ownership has met with some pushback. In March, a California bill was introduced that would ban California lawyers and firms from sharing legal fees with “out-of-state alternative business structures.” Groups in support of the bill said its aim is to prevent large corporations, private equity companies, and hedge funds participating in the Arizona alternative business structure system from entering California through alliances with lawyers in the state. It passed the state assembly and has since been referred to the Committee on the Judiciary.

In 2020, Utah created a “sandbox” for nonlawyer-owned firms that is monitored by the Office of Legal Services Innovation. After a year, if it meets certain thresholds, an entity may be granted an annual license. Washington D.C. allows nonlawyer ownership for individuals who perform professional services that further the firm’s legal services to a client. Arizona has gone the farthest by eliminating the rule entirely.