Puerto Rico Expands Tax Haven Deal For Americans To Its Own Emigrants
Puerto Rico’s Acts 20 & 22, tax incentive laws aimed at luring wealthy American investors to move there and at reviving the Island’s economy, are celebrating their third anniversary this month. While Puerto Rico’s economic situation remains bleak (it currently has more than $73 billion of “junk” status debt, unemployment over 13% and income inequality higher than any of the 50 states), its reputation as a tax haven is beginning to catch on.
Now, the Island is trying to build on this momentum by expanding who can use the tax breaks; one amendment is aimed at enticing successful Puerto Ricans who have left the Island to return.
The original Act 20 & 22 combo
Act 20, the Export Services Act, offers incentives to certain service businesses, including investment and hedge fund managers, to relocate to Puerto Rico and export their services. It does so by taxing their corporate profits at a flat 4%, while making the dividends paid from profits on exported services 100% tax exempt to individual recipients.
Act 22, the Individual Investors Act, was designed to primarily attract high net worth investors to Puerto Rico by providing complete tax exceptions on dividends, interest and capital gains, so long as the individual is present for at least 183 days a year (half the year) in Puerto Rico.
The key to all this, of course, is Puerto Rico’s unique status, compared to other tax havens. Residents of the Island are considered US citizens, even though they’re subject to different tax laws. So Americans don’t have to renounce their citizenship or pay an exit tax of 23.8% on unrealized capital gains when they move to Puerto Rico. While the US taxes its citizens on their world wide income, Section 933 of the U.S. Tax Code, exempts Puerto Rico sourced income from federal tax. Thus by moving their investments and/or their Act 20 eligible investment management companies to Puerto Rico, wealthy investors and money managers can drastically cut their U.S. tax bills.
Approximately 250 high net worth individuals took advantage of Act 22 in 2014, according to Puerto Rico’s Department of Economic Development and Commerce. In 2013, 151 people were granted the tax-exempt status.
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For further information regarding tax incentives, More Puerto Rico tax incentives…