Forbes: Puerto Rico Bids To Become New Age Tax Haven
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Forbes: Puerto Rico Bids To Become New Age Tax Haven

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Forbes: Puerto Rico Bids To Become New Age Tax Haven

 

Original Article @ FORBES - 2/11/2015 @ 6:05AM | By Philip DeMuth and Lauren Gensler 
This story appears in the March 2, 2015 issue of Forbes.

Treasure Island: Puerto Rico Bids To Become New Age Tax Haven

As the U.S. Treasury Department continues to tighten its noose around offshore accounts, a new tax haven has sprung up under its nose in the Caribbean. Welcome to Puerto Rico–island of tropical breezes, and (for new arrivals only) a 0% tax rate on certain dividends, interest and capital gains.

Puerto Rico is about the same size as Connecticut but with more palm trees, twice the unemployment rate, a third the median household income and a tiny fraction of the hedge funds–a deficiency the financially teetering territory aims to correct by turning itself into a refuge for tax-oppressed millionaires and billionaires.

Yes, this is legal. While the U.S. asserts a sweeping right to tax citizens’ income wherever they live and wherever it’s earned, Section 933 of the tax code exempts residents of Puerto Rico from paying U.S. income tax on their Puerto Rico-sourced income. Instead, the Commonwealth of Puerto Rico has the exclusive right to tax local income as it sees fit.

“The way the U.S. tax code is written, I could be on Mars and be taxed on intergalactic income but not if I’m sitting on this island in the Caribbean. It’s kind of in a twilight zone,” – marvels Irvine, Calif. money manager Mohnish Pabrai.

To exploit this special status and help rescue its economy, Puerto Rico’s Legislative Assembly adopted two laws in 2012 and expanded them last year. Act 20 entices hedge funds, family offices, professional service firms and even software developers to locate there by taxing their corporate profits from exported services at a flat 4% rate and allowing those profits to be paid out to the owners free of Puerto Rico income tax. So far the government has okayed 346 export companies, with 400 approvals expected this year.

Pabrai used Act 20 to set up a new private equity venture in Puerto Rico last year and figures he’ll save as much as $10 million in tax a year, as well as half a million in operating costs. (There’s an abundance of educated Puerto Ricans ready to work for less than their California counterparts. Office space is cheaper, too.)

Act 22 grants new Puerto Rico residents (including, after a recent amendment, returning Puerto Ricans who left before 2006) a 0% rate on locally sourced interest and dividends as well as all capital gains accrued after they become residents, a particular benefit for active traders. So far 509 tax refugees have been granted Act 22 status and another 600 will get it this year, Puerto Rico’s Department of Economic Development & Commerce projects.

Puerto Rico? Really? When the property crime rate in the San Juan metropolitan area is six times that of the New York City area?

It depends on how you want your pocket picked. Since 2013, when rate hikes on the wealthy and a 3.8% ObamaCare tax on net investment income both kicked in, the top effective combined federal and state tax rate on long-term capital gains and qualified dividends has been 32.7% for New York City residents, 33% in California and 29% in Connecticut. On short-term gains and taxable interest it’s now a hefty 52.3% in NYC, 52.6% in California and 48.6% in Connecticut.

Sadly, moving to Puerto Rico won’t buy you a total dispensation from the Internal Revenue Service. Uncle Sam still wants his cut on dividends you receive from U.S. public companies, profits from mainland private businesses, pensions and deferred compensation earned in the states, and Social Security benefits.

Plus, any unrealized capital gain accrued before you moved to Puerto Rico–say, on that Apple AAPL +1.94% stock you bought for a split-adjusted $10 a share–is subject to U.S. tax if you sell within ten years after your move. During that period Puerto Rico will also impose a 10% tax on your pre-move gains, which gets credited against what you owe Uncle Sam. After ten years the U.S tax on preexisting gains disappears and the Puerto Rican bite drops to just 5%.

This is a much sweeter deal than you can get these days by renouncing U.S. citizenship. In 2008, after years of stories in FORBES and elsewhere about billionaire tax expatriates, including Campbell Soup CPB +1.01% heir John Dorrance and Styrofoam cup heir Kenneth Dart, Congress decided that anyone worth more than $2 million would have to pay taxes on unrealized gains above a certain amount ($690,000 for 2015) when giving up citizenship–just as if they’d sold all their assets.

If you take up residence in Puerto Rico, you get to keep your citizenship and the dollars in your wallet and you don’t have to ante up any U.S. gains tax unless you sell within the next ten years.

Make no mistake: To benefit from Act 22 you must become a bona fide Puerto Rico resident, which means being on the island at least 183 days a year. You can’t just rent a post office box in San Juan and call it “home” while keeping a $5 million house and your ties back in the States. Your business, family, bank and brokerage accounts, driver’s license and yacht should all move with you to the island.

But you don’t really have to spend 183 full days in Puerto Rico. “If you arrive at 11:59 at night that is counted as a day in Puerto Rico,” says San Juan tax attorney Edgar Rios-Mendez. Conveniently, San Juan is 3 1/2 hours or less by private jet from New York’s LaGuardia Airport.

(Be careful. Remember, you must convince not only Puerto Rico’s friendly officials that your residence is on the island but also the possibly hostile auditors from the high-tax jurisdiction you’ve just fled–and they, too, can count partial days to claim you as a resident.)

See page 2 of this article here: forbes.com

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View Tax Incentives Information Below

Puerto Rico, officially the Commonwealth of Puerto Rico, is a self- governing, territory of the United States, located in the northeastern Caribbean, east of the Dominican Republic and west of both the US Virgin Islands and the British Virgin Islands.

The government of Puerto Rico is composed of three branches: the executive, legislative, and judicial branch. The executive branch is headed by the governor. The legislative branch consists of a Legislative Assembly, made up of a Senate as its upper chamber and a House of Representatives as its lower chamber. The Senate is headed by the President of the Senate, while the House of Representatives is headed by the Speaker of the House. The governor and legislators are elected by popular vote every four years.

Puerto Rico has authority over its internal affairs unless US law is involved. The major differences between Puerto Rico and the 50 states are exemptions from some aspects of the Internal Revenue Code, its lack of voting representation, and the ineligibility of Puerto Ricans to vote in presidential elections.

The island is divided into 78 municipalities (counties/cities) with various degrees of autonomy from the central government. San Juan is the capital and most populated municipality, combined with nine other municipalities which form the San Juan Metropolitan Area. Within the 78 municipalities, 4 are considered major cities.

The island has been part of the U.S. since 1898 and those born in Puerto Rico have been citizens of the U.S. since 1917. Yet, because Puerto Rico is not a state, federal taxes do not apply generally to income generated by individuals or corporations within the Commonwealth. Puerto Rico corporations are treated for federal tax purposes as foreign corporations and are not generally subject to U.S. corporate taxes. Individual bona-fide residents of Puerto Rico are not subject to federal taxes on income derived from Puerto Rico sources. In addition, Puerto Rico has provided incentives for manufacturing operations for over four decades. Products manufactured in Puerto Rico will carry the Made in USA label.

In 2008, a new Economic Incentives Act for the Development of Puerto Rico (herein after, Act 73 or Economic Incentives Act) went into effect. Also during the year 2012, two additional laws were enacted: Act 20 and Act 22, promoting the export of services from Puerto Rico and the transfer of wealthy individuals to Puerto Rico. These new laws established a legal framework of incentives designed to stimulate the establishment and development of a wide array of ventures, among them manufacturing, social media, other internet-based operations, commercial businesses, and the export of services.

Contact us for an introduction to a top Puerto Rico Tax Consultant, who will guide you through the incentives applicable to your company.

To help you navigate this section, to your left are brief overviews of Puerto Rico’s Tax Incentives.

Act No. 20 of 2012, known as the Act to promote the exportation of services, provides attractive tax incentives for companies that establish and expand their export services businesses in the island.

In addition, the law promotes investments on research and development and initiatives from the academic and private sectors by granting credits and exemptions for these activities. Furthermore, it helps to decrease operational and energy spending for companies moving to the island in order to help their operations remain profitable and efficient.

Act No. 22 of 2012, Seeks to attract new residents to Puerto Rico by providing a total exemption from Puerto Rico income taxes on all passive income realized or accrued after such individuals become bona fide residents of Puerto Rico. This relocation should result in new local investments in real estate, services and other consumption products, and in capital injections to the Puerto Rico banking sector, all of which will accelerate the economy of the island.

Act 73 › Economic Incentives for the Development of Puerto Rico

Act No. 73 of 2008, known as the Economic Incentives Act for the Development of Puerto Rico, was established to provide the adequate environment and opportunities to continue developing a local industry, offer an attractive tax proposal, attract direct foreign investment and promote economic development and social betterment in Puerto Rico.

Act – 273 › International Financial Center Regulatory Act

On September 25, 2012 (“Act 273”), Puerto Rico enacted Act No. 273, also known as the “International Financial Center Regulatory Act” (the “Act”). The Act provides tax exemptions to businesses engaged in eligible activities in Puerto Rico. To avail from such benefits, a business needs to become an International Financial Entity (“IFE”) by applying for a permit and license and obtaining a tax exemption decree.

EB5 › Immigrant Investor Program

The U.S. Congress created the fifth-employment based (EB-5) immigrant visa category in 1990 for the qualified foreigner willing to invest in a business that will benefit the U.S. economy and create or save at least 10 full-time jobs. 

The investment requirement is typically US $1,000,000 per foreign investor. A minimum investment of US $500,000 is accepted if the investment is made in a designated Target Employment Area, such as a rural or high unemployment area, and through a designated EB-5 Regional Center. Puerto Rico is a Target Employment Area and therefore all projects offered by Caribbean USA Economic Development Regional Center require only the minimum of $500,000 in investment by the foreign investor.

Contact us for an introduction to our Puerto Rico Business Incentives Partners.

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