How Puerto Ricans Are Fighting Back Against Using The Island As A Tax Haven

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Finally, Puerto Rico filed for bankruptcy in 2017, having over $70 billion in bond debt and $49 billion in unfunded pension liabilities. Richard Shapiro, Tax Director and member of EisnerAmper Financial Services Group, has more than 40 years’ experience in federal income taxation, including the taxation of financial instruments and transactions, both domestic and international. While it may make sense from a U.S. federal income tax perspective for high income U.S. taxpayers to consider expatriating from the U.S., many people do not want to give up their citizenship or green card simply to reduce their federal income tax liabilities. Additionally, expatriating U.S. citizens are subject to certain immediate tax consequences as a result of the expatriation tax regime.Puerto Rico holds a unique position as an unincorporated U.S. territory. Under Internal Revenue Code §933, Puerto Rico source income is excluded from U.S. federal tax. In 2012, enduring economic hardship and seeking a means to boost its economy, Puerto Rico enacted two laws, Act 20 and Act 22-intended as major tax incentives to promote foreign investment. While Acts 20 and 22 are only applicable for Puerto Rico income tax purposes, U.S. citizens willing to become bona fide residents of Puerto Rico (implicating IRC §933) stand to benefit tremendously.

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“EisnerAmper” is the brand name under which EisnerAmper LLP and Eisner Advisory Group LLC, independently owned entities, provide professional services in an alternative practice structure in accordance with applicable professional standards. EisnerAmper LLP is a licensed CPA firm that provides attest services, and Eisner Advisory Group LLC and its subsidiary entities provide tax and business consulting services. The taxpayer moving to Puerto Rico is required to file Form 8898 with the IRS and file Form 1040 for the year of move. Form 8898 requires the taxpayer to provide information concerning compliance with the above requirements. how puerto ricans are fighting back against using the island as a tax haven Still, for people who want to live on the island, Puerto Rico taxes offer an incredible deal. Years ago, the company needed to have a minimum number of 5 employees, which then changed to one employee. But now, only companies with $3 million or more in revenue must have one employee.

Limitations Of Puerto Rico Tax Incentives

For Torres-López and others fed-up with the influx of rich mainlanders, the internet celebrity’s announcement was a fresh call to action. The grassroots activist collective #AbolishAct60, whose name refers to the tax break laws, has started to ask for “gringos to go home,” and for Governor Pedro Perluisi to end the incentives. “The governor of Puerto Rico Pedro Pierluisi is trying to make our patria into Singapore,” the collective, whose members are anonymous, wrote on Instagram in March. Prior to the 2017 Tax Cuts and Jobs Act, you could have a Puerto Rico company, but not be resident there. You would have paid 4% tax in PR and defer US tax on retained earnings. how puerto ricans are fighting back against using the island as a tax haven But once again, you actually have to move the company, employees, etc. In addition, if you are an entrepreneur with a service-oriented online business, you may move to and incorporate in Puerto Rico. This is because Section 933 of the US Tax Code excludes Puerto Rico-source income from US tax. If you are considering Puerto Rico as a tax savings strategy book a call with our structuring expert. He will help you evaluate if this is the best move or if other offshore structuring offers you better tax optimization while maintaining more flexibility. So if you don’t want to move to Puerto Rico, or have over 50% non-resident owners, there is no tax advantage to a PR company.Revisions to these Acts in 2017 arguably made Puerto Rico an unmatched tax haven for qualifying U.S. citizens. Indeed, the news has spread, and a growing number of tax-weary U.S. citizens are considering Puerto Rico as their solution. Of special note, on January 27, 2021, the Large Business and International Division of the IRS announced that it had opened an audit campaign addressing taxpayers who have claimed Puerto Rico tax benefits without meeting the bona fide resident requirements. For example, according to the IRS, these individuals may be excluding income subject to U.S. tax on a filed U.S. income tax return or failing to file and report income subject to U.S. tax. This campaign will also address those individuals who have met the bona fide resident requirements but may be erroneously reporting U.S.-source income as Puerto Rico-source income in order to avoid U.S. taxation. Thus, taxpayers moving to Puerto Rico will need to maintain the appropriate recordkeeping and obtain appropriate tax advice, in view of anticipated heightened IRS scrutiny.Act 60, as an extension of Act 22, also incentivizes high-net-worth individuals to relocate to Puerto Rico. Although U.S. citizens are usually taxed on their worldwide income no matter where they live, the U.S. tax code (IRC §933) makes an exception for all income derived from all non-U.S.

Is Relocating To Puerto Rico The Right Move For You?

The incredibly low 4% corporate tax rate stipulated by Act 60 applies only to businesses that perform eligible services on the island to customers and clients outside the island. As a US taxpayer abroad with the right offshore structure, you could draw a salary of about $100,000 tax-free. If you qualify for the FEIE you would pay no federal income tax and no Social Security/Medicare taxes. You would still pay tax on capital gains and dividends from the company.

  • 1Each of these requirements require careful consideration of various factors.
  • If you’re a bona fide resident of Puerto Rico during the entire tax year, you generally aren’t required to file a U.S. federal income tax return if your only income is from sources within Puerto Rico.
  • Even though Puerto Rico is a US territory, Puerto Rico residents enjoy special tax benefits.
  • But now, only companies with $3 million or more in revenue must have one employee.
  • Normally, a tax haven does not require foreign individuals or businesses to establish a substantial as opposed to a legal local presence.
  • Under Act 20, export service companies that set up an office on the island can get a 4% corporate tax rate and full tax exemption on all dividends.
  • If you are considering Puerto Rico as a tax savings strategy book a call with our structuring expert.

It was never pleasant to pay huge amounts of state taxes in California, New York, or anywhere else. But now that you can deduct only $10,000 on your federal tax return, there is even more lemon juice in that paper cut. Some focusing on state taxes move to tax-free states like Texas, Florida, Washington or Nevada.

A Legislature In Search Of Financial Incentives

This means that moving to Puerto Rico will not shield you from paying taxes on capital gains or passive income earned before becoming a resident. No matter if you want to exit your company with a big distribution or have amassed huge capital gains, a one-year residency in Puerto Rico will not make any difference in your US tax burden. Even though Puerto Rico is a US territory, Puerto Rico residents enjoy special tax benefits. To be eligible for these tax advantages, you must become a bona fide resident of Puerto Rico. The fact remains that very few Americans give up their citizenship for tax reasons, however. Even so, before you decide that Puerto Rico is your best tax-reduction strategy while retaining your citizenship, you should evaluate other tax haven options—Panama, for instance.While the first test counts the number of days spent in foreign countries vs the United States, the second test looks at the ties to the new home country. Avoiding these consequences means that you’re going to have to move to Puerto Rico to run your business so that you’ll no longer have employees on the ground in the United States. That is the only way you will avoid having to pay taxes to the IRS, since American citizens living outside U.S. jurisdiction are subject to Foreign Account Tax Compliace Act legislation.

Residency Requirements And More To Qualify For Tax Breaks

If you move with appreciated stock, crypto, or other investments, when you cash it in you will have to pay U.S. tax on it unless you wait a full ten years after you move. Waiting ten 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. After hurricane Maria, response measures and the legislative initiatives of Acts 20 and 22 , began to have an effect. When the bottom dropped out of the real estate market, the mortgages of many Puerto Rican families went underwater and, in difficult financial times, they were unable to secure approval for refinancing at lower rates and were in danger of foreclosure.

Can you move to Puerto Rico to avoid capital gains tax?

U.S. citizens who become bona fide residents of Puerto Rico can maintain their U.S. citizenship, avoid U.S. federal income tax on capital gains, including U.S.-source capital gains, and avoid paying any income tax on interest and dividends from Puerto Rican sources.Storage and distribution centers of companies engaged in the business of transportation of items and products that belong to third parties, known as “hubs”.That means that manufacturing or other non-service businesses don’t qualify. In reality, however, acquiring actual residency is a very useful component in a tax avoidance strategy. For this reason, many tax havens offer “citizenship through investment” to high net worth individuals as well as various less expensive ways of establishing a long-term residency that can lead to citizenship. Thus, 0% tax on capital gains will only apply to the capital gains incurredafteryou move to Puerto Rico. Any capital gains incurred before you move there will still be subject to U.S. tax treatment. In most cases, you will need to sell your crypto and re-buy it once you are in Puerto Rico.

Is Puerto Rico A Cryptocurrency Tax Haven?

Tourism is another of its main sources of wealth, with about 5 million tourists visiting the territory annually. The financial sector is an economic bloc of great importance for its economy, which is integrated into the American financial system, being governed under its regulations, and part of the jurisdiction of the Federal Reserve Bank of New York. You are not required to renounce your previous nationality to become a citizen of Puerto Rico.Puerto Rico is an unincorporated territory of the United States and does not have its own citizenship and passport. You are not required to renounce your previous nationality to become a citizen of United States. By taking these steps to capitalize on Puerto Rico crypto taxes, you will satisfy the physical presence test, make Puerto Rico your tax home, and establish your closest connections to Puerto Rico. Beneficiaries of the laws say the money they’ve brought has helped the island. He has since started the 20/22 Act Society, a private group for those who have relocated to the island under the incentives.

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Published by Dick Rice on January 26, 2022 See all author posts