Since the United States taxes based on citizenship, if you’re an American citizen or permanent resident, the IRS will follow you all over the earth, demanding you pay taxes on everything yous earn, even if no US resource were involved in generating your income. Even moving to a country with no income taxes won’t reduce what y'all have to pay to Uncle Sam on the income y'all generate. If you determine y'all’ve had enough of this and want to expatriate, yet, the procedure is complicated and yous’ll have to pay a substantial go out taxation.
- Renunciation of U.Southward. Citizenship (Do you really want to do this?)
- IRS: The Expatriation Tax (Yikes!)
There has to be a better solution.
[NOTE: This commodity is a chapter in our
Comprehensive Guide to Taxation Havens.]
The adept news is that, for the next few years, in that location is a way for overtaxed Americans to pay less tax without dumping their citizenship: establish primary residence in Puerto Rico. If you move to Puerto Rico nether the provisions of contempo legislation, you tin retain your American citizenship and still pay
taxes to the IRS. You will have to pay
in Puerto Rico, but these are
Allow’south swoop deeper into this scenario.
A Legislature in Search of Financial Incentives
How did Puerto Rico become a haven for over-taxed Americans?
It all started when the U.Due south. territory went bankrupt in 2017. Puerto Rico issued too much municipal bond debt and began relying on the funds borrowed from its bond issuance to meet its budget and pay its debts. The crisis leading to defalcation began in 2014 when the regime couldn’t pay its debts and Puerto Rican government-issued bonds were downgraded by iii credit agencies to “junk” status. The downgrade prevented the government from issuing any more bonds, and so to pay its debts before it ran out of savings, it began to enhance taxes and cut services, which provoked social unrest and distrust. Finally, Puerto Rico filed for bankruptcy in 2017, having over $seventy billion in bond debt and $49 billion in unfunded pension liabilities.
- The Origins of the Puerto Rican Debt Crunch
- Puerto Rico Files for Largest U.S. Municipal Bankruptcy
Anticipating such problems, Puerto Rico introduced legislation in 2012 designed to attract high net worth individuals and businesses to the isle. Act 22 of the Puerto Rican legislature specifies zero percent taxation from capital gains on assets caused after moving to the isle. This includes stocks and fund investments and dividends every bit well as local real manor. It does not include capital gains on real manor yet owned on the mainland. Furthermore, Act 20 specifies a 4% corporate tax charge per unit on net business income earned on the island. This includes internet businesses or other businesses providing services to people living exterior of Puerto Rico.
- Act 20 of the Puerto Rican Legislature
- Human action 22 of the Puerto Rican Legislature
In 2019, Acts twenty and 22 were combined under Act lx with some additions and changes.
- The Puerto Rico Incentive Code (Act 60)
The goal of the legislation is two-fold: (1) extend the benefits of Deed xx to make Puerto Rico an international financial center by encouraging businesses that offer services to clients outside of Puerto Rico to establish the island as their operational base of operations; and (2) extend the benefits of Act 22 to incentivize individuals with passive income to relocate to Puerto Rico.
Although U.S. citizens are usually taxed on their worldwide income no thing where they alive, the U.South. revenue enhancement code (IRC §933) makes an exception for all income derived from all not-U.S. government sources for bona fide residents of Puerto Rico.
- Income from Sources inside Puerto Rico (IRC §933)
Establishing bona fide Puerto Rican residency requires being physically nowadays in Puerto Rico at least 183 days during the taxation year, non having a revenue enhancement abode exterior Puerto Rico during the taxable yr, and not having a closer connectedness to the Usa or whatever other foreign land than to Puerto Rico.
Business Incentives under Act sixty
To do good from the incentives under Act lx, eligible businesses have to request and receive a taxation exemption prescript signed by the Secretarial assistant of the Department of Economic Evolution and Commerce of Puerto Rico. This exemption has a term of 15 years and is renewable for another 15 years if certain conditions are satisfied, and the contract it represents is non subject field to amending by any subsequent legislation. Beyond this, the only requirement is that the concern have at least one employee if its annual book exceeds $3 one thousand thousand U.S.
Eligible businesses must have a real office located in Puerto Rico, perform services for not-resident or foreign entities with no connection to Puerto Rico, and not in any manner exist related to merchandise, concern, or other action inside Puerto Rico. Whatsoever service that the Secretary of Economic Development and Commerce determines, in consultation with the Secretarial assistant of the Treasury, to be in the all-time social and economic involvement of Puerto Rico, will exist treated as an eligible service. But consign service industries that are currently recognized as eligible are equally follows:
- Financial services, including investment banking and brokerage services
- Economic, environmental, technological, scientific, managerial, marketing, human resource, computer, and auditing consulting services
- Legal, tax, accounting, and other professional services
- Centralized management services for accounting, finance, tax, auditing, marketing, engineering, quality control, human being resources, communications, electronic data processing, and any other centralizable services
- Advertising and public relations services
- Electronic data processing centers
- Figurer plan development
- Telephone call centers
- Vocalization and information telecommunications services amongst persons located
- Artistic goods and services industries for a non-Puerto Rican customer base in the following sectors: architectural and environmental design; arts (music, visual arts, performing arts, and publishing); mode, graphic, industrial, interior, and video game design; and online media, digital, and multimedia content development
- Construction, drafting, engineering, architectural, and project direction services for projects outside Puerto Rico
- Storage and distribution centers for companies engaged in the business organization of transportation of items and products that vest to third parties, otherwise known as “hubs”
- Medical and laboratory services for non-Puerto Rican sourced testing
- Research and evolution for projects exterior Puerto Rico
Equally regards the incentives, any American citizen who becomes a bona fide resident of Puerto Rico and moves his or her business there volition enjoy the following business benefits:
- Eligible businesses will have a 4% apartment corporate income tax rate on internet income related to their services
- Dividends are 100% tax exempt
- There is a 50% exemption on municipal taxes
- There is a 75% exemption on belongings taxes
- Distribution from earnings and profits derived from an eligible business concern are 100% exempt from Puerto Rican income tax
Individual Incentives nether Deed lx
Human activity 60, as an extension of Act 22, as well incentivizes high-net-worth individuals (HNWI) to relocate to Puerto Rico. To exist eligible for private taxation exemptions, an individual investor must have established concrete residency in Puerto Rico for at least 183 days of the taxation year and not have been a resident of Puerto Rico during the ten-yr flow preceding the effective date of the legislation (2009 to 2019).
Further eligibility requirements for individual investors are as follows: (one) before the revenue enhancement exemption decree nether Deed 60 can exist signed, a one-time fee of $five,000 U.S. must be paid to the “Special Fund under the Human activity to Promote the Transfer of Individual Investors to Puerto Rico”; (2) every individual investor holding tax exemption under Act 60 must make a $10,000 U.Southward. contribution to an appropriately registered not-profit organization located in Puerto Rico (that is non controlled by that investor); and (iii) within ii years of obtaining the decree, the individual investor must purchase a residential property in Puerto Rico (no minimum cost is specified) that is classified and used as a permanent residence.
One time individual investors have jumped through these qualifying hoops, the tax benefits they will enjoy are as follows:
- Capital gains from securities and digital assets are 100% tax exempt
- Any and all capital gains from eligible investments accrued after condign a new resident of Puerto Rico are 100% revenue enhancement exempt
- Dividends and interest on investments are 100% taxation exempt
The post-obit restrictions apply:
- Any capital letter gains generated
to becoming a new resident merely realized
moving to Puerto Rico may be subject area to Puerto Rican tax at the standard rate
- In gild for gains to be exempted from tax under Act lx, they must be realized and recognized prior to Jan one, 2036.
Traders, investors, and other financial professionals who are thinking long-term and expecting to realize large upper-case letter gains are platonic candidates for relocating to Puerto Rico under Human activity 60, since securities trading and cryptocurrencies are free from capital gains taxation. Unfortunately, as noted, this 0% rate only applies to the belongings period subsequently Puerto Rican residency is established. For publicly traded securities, including stocks also as options and commodities futures contracts, the toll must be recorded the mean solar day its owner moves to the isle. All profits accumulated prior to that date are considered to accept been generated before the move and are taxable by both Puerto Rico and the United States. In light of this, some investors choose to liquidate their portfolio prior to moving, so reinvest after their residency is established.
Is Puerto Rico a Cryptocurrency Taxation Haven?
Investing in cryptocurrencies and conducting business concern using them has been an effective way of avoiding taxation, but these glorious days are coming to an finish. The IRS has been greedily eyeing the globe of cryptocurrencies for a while now, and the U.Southward. government has increased its efforts to collect taxes on cryptocurrency transactions and investment gains as one of the many $.25 of hidden legislation in the current infrastructure neb.
The primeval grade of the cryptocurrency subpoena in the nib was rejected, just it’s clear that the U.Due south. regime intends to regulate and tax cryptocurrencies. Taxation and regulation are governmental inevitabilities. The invention of mediums of exchange lying outside government regulation and interference are of immense benefit to individuals, but inimical to the interests of government, then when they appear, they volition never last long. While it hasn’t firmed up its policy yet, the IRS is already asking near cryptocurrency holdings and volition exist increasing its crypto revenue enhancement reporting and enforcement efforts.
If you accept substantial cryptocurrency holdings and are distressed almost the latest government maneuvers, moving your principal residence to Puerto Rico can provide relief. The IRS has classified crypto as a upper-case letter asset, so any transaction involving its liquidation—which could be as simple as exchanging one cryptocurrency for another—is a taxable event. Individuals able to take advantage of Act 60, however, will not exist taxed on cryptocurrency gains at all.
Since Puerto Rico’s 0% tax on capital gains applies but to those gains realized
moving there, your best option may be to sell your crypto and and so
it later you have relocated. Some other possibility is to retain your electric current crypto holdings and
buy more than
subsequently moving to Puerto Rico. Gains on crypto purchased
the move volition
be taxed, and if you take the patience, once y'all’ve been a resident of Puerto Rico for ten years, you can receive a 50% reduction in taxation on majuscule gains on assets possessed prior to your move.
Must I Really Institute Physical Residency in Puerto Rico?
Normally, a tax oasis does not require foreign individuals or businesses to establish a substantial as opposed to a legal local presence. Tax benefits are doable past setting upward the requisite accounts and instruments in the legislative structure of the revenue enhancement haven without really being there. In practice, this can lead to thousands of strange businesses sharing the same local address.
In reality, nonetheless, acquiring actual residency is a very useful component in a taxation avoidance strategy. For this reason, many taxation havens offering “citizenship through investment” to loftier net worth individuals too equally various less expensive ways of establishing a long-term residency that can lead to citizenship. By investing in a revenue enhancement oasis in these specified ways, citizenship and a local passport tin be acquired, leaving individuals free to consider establishing businesses nether their new nationality, and even more than drastically, every bit noted earlier, renouncing citizenship in their home country and living abroad nether their new citizenship to avoid tax liabilities that might otherwise follow them around the world.
- Why You Need a Second Tax Residency in a Tax Haven
- The Best Citizenship by Investment Programs: Getting a Second Passport
The fact remains that very few Americans surrender their citizenship for tax reasons, nonetheless. Fifty-fifty then, before you make up one's mind that Puerto Rico is your all-time taxation-reduction strategy while retaining your citizenship, y'all should evaluate other tax haven options—Panama, for instance. Offshore Panamanian companies are allowed to conduct business tax-free both within and outside the jurisdiction of Panama. Neither the offshore companies nor their owners are subject to income taxes, corporate taxes, or local taxes, and there are no nationality restrictions on who may establish a corporation in Panama.
If you lot want a Panamanian passport, yous volition need to proceed past establishing residency in Panama. Residency tin can be obtained either through a friendly nations visa, a retirement visa, or a residency-by-investment visa. For wealthy investors, permanent residency in Panama can be expedited in a calendar month or less. If you lot maintain Panamanian residency for 5 years, yous are eligible to use for citizenship through naturalization and get a Panamanian passport. Having Panamanian citizenship is advantageous because information technology provides for visa-free travel, or visa-upon-arrival, in 121 dissimilar countries around the world, including about of Europe, Asia, and Latin America. Once you have acquired Panamanian citizenship, your spouse, children, grandchildren, and descendants besides volition all exist entitled to Panamanian citizenship.
If you retain your American citizenship, U.S. persons living and working in Panama are entitled to the Foreign Earned Income Exclusion, but if your net profits from business exceed $250,000, y'all may actually be better off seeking revenue enhancement residency in Puerto Rico. If you’re making $100,000 or less from your business, however, it’s a better strategy to motion its location exterior of
U.S. jurisdiction and pay zero tax using the Foreign Earned Income Exclusion. Panama is one of the best tax havens for this purpose
- The Top 10 Caribbean Tax Havens
- The Foreign Earned Income Exclusion Tax Reward
- IRS: The Foreign Earned Income Exclusion
If you decide that Puerto Rico is your best option, you lot demand to come to terms with the fact that you will have to move there. Some offshore investment advisors may suggest to y'all that Human action sixty benefits can be bachelor to y'all while you remain in the U.S. For example, they say that y'all can establish a Puerto Rican corporation, hire employees in Puerto Rico if y'all need to do then, and acquit business from your home in the U.s.a.. The thought would be that you would only pay tax to the IRS on the salary you lot draw from the company, while the income of the company itself would be taxed at Puerto Rico’due south four% rate. Not then. While this describes the Puerto Rican taxation consequences adequately, it grossly misunderstands the U.S. tax code.
A corporation based in Puerto Rico is classified as a non-U.Due south. corporation by the IRS and is subject to the rules that govern such corporations. When such a corporation has employees on the ground in the U.S. operating its business concern, information technology is regarded as an “ETBUS,” that is, a visitor that is “engaged in merchandise or business in the U.s.a..” A non-U.S. corporation is subject to tax on any income that is effectively connected with its conduct of business organisation inside the Us.
In short, considering you lot would be running the company from your dwelling house in the U.S., there would have to be an allocation assessment determining how much of the visitor’s income was attributable to your role compared to what was owing to any employees in Puerto Rico. The portion of the income attributable to your work in the U.S. would then be discipline to U.S. tax at rates up to 35%. If that income were then removed from the U.S. in order to run the operation in Puerto Rico, it would be subject to an additional branch profits revenue enhancement of 30%, yielding an effective maximum tax rate of 54.5% (35% on the U.Due south. allocation plus 30% on the remaining 65%). The bottom line is that, if you lot’re looking to reduce your taxes, y'all don’t desire to exist running an ETBUS based in Puerto Rico out of your home in the United States.
Avoiding these consequences ways that you’re going to have to move to Puerto Rico to run your business and then that you’ll no longer have employees on the basis in the United States. That is the but way yous will avoid having to pay taxes to the IRS, since American citizens living
U.S. jurisdiction are subject to Foreign Account Tax Compliace Human activity (FATCA) legislation.
- Strange Account Revenue enhancement Compliance Deed (FATCA)
As mentioned, moving to Puerto Rico is actually best suited to those netting more $250,000 because y'all are required to pay yourself a bacon from your concern—which is taxed at the ordinary progressive territorial rates that aren’t negligible—before yous tin then pay iv% on net corporate profits after yous’ve paid yourself. Those making $100,000 or less from their business are better living outside U.Southward. jurisdiction entirely and taking reward of the Foreign Earned Income Exclusion.
Is Puerto Rican Real Manor a Good Investment?
The Puerto Rican real estate market is coming back with a vengeance subsequently being in a downward slide that has lasted over a decade. The debt crisis, which had been edifice since the turn of the millennium, combined with a shrinking GDP and unemployment that reached every bit high equally xvi.iv% in 2010, led to a loss in net worth amid Puerto Ricans of $30 billion, much of it associated with the plummet of real estate prices.
When the lesser dropped out of the real estate market place, the mortgages of many Puerto Rican families went underwater and, in difficult fiscal times, they were unable to secure approving for refinancing at lower rates and were in danger of foreclosure. And then hurricane Maria struck in 2017, killing almost 3,000 people, severely damaging the isle’s infrastructure, destroying thousands of small businesses, and destroying or damaging over 350,000 homes, leaving in its wake $90 billion of destruction.
At this point, the only place to go was up. Subsequently hurricane Maria, response measures and the legislative initiatives of Acts xx and 22 (later consolidated nether Human action 60), began to have an effect. The U.S Department of Housing and Urban Development (HUD) approved $1.v billion for disaster relief and customs development in July 2018, followed by another $8.2 billion in funds to the program in March 2019—both installments of which provided substantial assistance to vulnerable households and the elderly—and rejuvenated the housing market. Changes to Puerto Rican law that expedited business licensing, certification, and land-use authorizations, paved the way for economic recovery and property sales, and the growing recognition of Puerto Rico as a taxation haven for wealthy Americans and American businesses has created a steadily growing demand, peculiarly in the luxury market (homes over $500,000) and in the sale of pleasure boats.
With the exception of a minor slowdown for a couple months in the commencement quarter of 2020 due to the pandemic, Puerto Rican real estate is now booming. Prices are rising steadily, and in some cases steeply, simply they have a long way they tin can become, and now is however a bully time to become into the action, especially as part of a tax-motivated move to Puerto Rico.
Part of the issue, especially with the luxury market place, is that the need greatly exceeds the supply. Luxury properties in some areas of Puerto Rico are seeing prices of more than than $1,000 per square foot, which puts Puerto Rico in the same real estate league every bit New York, San Francisco, or Miami. Earlier this year, the sale of the most expensive house in the history of Puerto Rico was reported. It is located in the municipality of Dorado, about 20 minutes outside of the capital, San Juan, near the Ritz-Carlton Reserve Resort. It sold for a cost of $thirty meg.
- Expensivity by the Square Foot: Palaces, Castles, and Mansions
Hundreds of wealthy Americans take been moving to Puerto Rico, commencement under the provisions of Acts 22 and Act twenty, and now nether the updated provisions of Act 60, and in the procedure saving themselves millions in revenue enhancement dollars that would otherwise accept been paid to the IRS. They are too acquiring real estate that is affectionate in value, much similar what is happening in other Caribbean area revenue enhancement havens. For example, on Saint Barthélemy, a state with no income taxes, a house recently sold for $90 meg.
Such exorbitant properties, of course, are way out of the league fifty-fifty of many relatively wealthy individuals, but in that location is a fundamental economical principle at work here: a rising tide lifts all boats. In the two years subsequently hurricane Maria in 2017, the Puerto Rican housing marketplace experienced a 78% rising in new habitation sales and a 17% ascension in the sale of existing properties. The island real manor market is ascension beyond the demographic board, with home prices increasing fourteen.59% in 2020.
is a dandy fourth dimension to become involved.
- Everything You Need to Know nearly Puerto Rican Real Estate
A Last Reality Check
Now that you’re all excited well-nigh moving to Puerto Rico, allow’south take stock what such a move would entail. This isn’t so much virtually curbing your enthusiasm as making sure you’re enlightened of the ramifications and taking them into business relationship.
If you really desire no longer to be beholden to the IRS and have all the benefits of Puerto Rican tax incentives, you lot accept to be a bona fide resident of Puerto Rico. This means more than just spending at least 183 days each year on the island. It means that y'all cannot accept a “tax dwelling” outside of Puerto Rico, nor can you have “closer connections” to any place other than Puerto Rico. In particular, passing the test of closer connections means that yous’re going to accept to move your whole life to the isle to evidence that information technology’southward actually your home. This means that Puerto Rico volition be:
- The location of your primary and permanent dwelling
- The place where your family unit lives
- The chief location of your automobiles, piece of furniture, vesture and other personal goods
- The location of your bank accounts and financial activities
- The location of your business activities (though these will be export businesses to have advantage of the business revenue enhancement incentives)
- The location of your primary social, religious, cultural, professional, political and other human relationship associations
- The primary location for the charitable organizations to which you contribute
- The jurisdiction in which you agree your driver’due south license
- The jurisdiction in which you vote
- The country of residence that you list on all of your official documents
This is no small deal. Some other things you lot demand to remember are that you cannot easily avoid paying U.S. tax on the appreciation of your assets before you movement to Puerto Rico. If yous move with appreciated stock, crypto, or other investments, when y'all cash information technology in you will have to pay U.S. tax on it unless y'all look a total ten years after you lot move. Waiting 10 years may not be an easy thing to do and it certainly isn’t a quick fix. Your best option is probably going to be to liquidate all your investments, pay the taxes that are owed, then repurchase them once you’ve established bona fide residence on the island.
If you own real estate on the mainland and sell it to buy a home in Puerto Rico, equally long every bit you don’t make more than $250,000 capital gains filing individually, or $500,000 filing jointly with your spouse, you will not owe whatever majuscule gains tax. If your home on the mainland is worth considerably more than this, however, if you’re able to practise and then, it may be worthwhile to buy a carve up home as your main residence in Puerto Rico, and maintain your home on the mainland as an investment property. The pitiful fact, however, is that the sale of U.South. real estate will always be U.S.-sourced income that will be fully taxed when y'all sell information technology, even if you expect ten years.
caveat emptor: any time a new tax strategy emerges, the sharks aroma fresh blood and outset to circle with all manner of schemes and scams that are harmful to unwary participants and that compromise the long-term viability of the tax incentives themselves. It is the responsibility of every investor and entrepreneur seeking to take every
reward of the wonderful opportunity these tax incentives stand for to
exercise due diligence. Practise your enquiry and become the professional person communication you need!
This much said, if you’re an net entrepreneur or have plans to outset a business in ane of the Human action lx-eligible export service industries, or if y'all brand a living trading securities or managing a hedge fund for clients who pay you fees for your services, Puerto Rico is offering y'all a pretty
sweet deal. You lot should expect into it.
Bienvenido a Puerto Rico!
[NOTE: This article is a chapter in our
Comprehensive Guide to Revenue enhancement Havens.]