Investors worldwide are finding that offshore jurisdictions foster a better environment in which to conduct business. While the United States rarely sits at the top of any list about offshore investing, its territory to the south has made significant strides with its attractive tax incentives. Act 20 and Act 22 encourage people from all over the world to consider Puerto Rico in their international asset protection strategies.
Financially savvy individuals worldwide are finding that Puerto Rico is the newest attractive destination for global investors. Many are well aware of the natural beauty that this island territory has, but less are familiar with the tax incentives offered to high net worth investors. While Puerto Rico is part of the United States, it has a separate tax system from the US, which means the Puerto Rico Department of Finance can offer incentives to entice individuals from all over the world to relocate. To take advantage of these incentives, investors will have to move to the territory, but not many complain about the warm weather.
What are Act 20 and Act 22?
Puerto Rico is in a unique situation tax-wise. While it is a territory of the United States that is subject to federal tax laws, Puerto Rico is viewed as a foreign country for federal tax purposes. Because of this, residents of Puerto Rico have special tax treatment. The PR government is allowed to offer tax incentives to individuals living offshore or in the US to help the economy. These incentives can create operations in tourism, manufacturing, international banking, international insurance, and film production, as well as many others. For these listed reasons, in 2012, the Puerto Rican government enacted Acts 20 and 22 to promote economic growth. Investors worldwide are creating businesses or taking existing businesses and setting up operations in Puerto Rico.
Let’s take a look at the tax benefits that are offered.
Act 20- Export Services Act
This act allows companies to establish and expand the export services business on the territory. Income that is sourced from eligible services rendered for the benefit of non-residents or foreign entities- known as Export Services Income (EIS)- is only taxed at a rate of 4%. Dividends or benefits distributed out of Export Services Income are tax-exempt from Puerto Rican taxation. Here is a list of eligible services Act 20 pertains to:
- Research and development
- Advertising and public relations
- Data processing centers
- Scientific, management, information technology, and marketing consulting services
- Professional services
- Development of computer programs
- Shared management services
- Education and training
- Hospital and laboratory services
- Investment banking or other financial resources
- Call centers
- Other services that are not listed may qualify as well. Interested individuals can consult with the Secretary of Treasury to determine if a service may be eligible for these benefits.
Act 22- Individual Investors Act
Another law that was enacted in 2012 was Act 22, which seeks to attract new residents to the island by offering complete tax exemptions from Puerto Rican income taxes on interest and dividends realized after the person becomes a bona fide resident. Any individual who has not been a resident of the territory from January 17, 2006, through January 17, 2012, can request tax exemption.
Along with this enticing tax benefit, new residents can also qualify for other benefits. First, the individual will continue to receive a 100 percent tax exemption on interest and dividends through December 31, 2035. These residents will also receive tax-exempt status on gains from sales of property acquired after becoming a resident if the sale takes place before New Year’s Day of 2035. Last, special rules can apply to the taxation of money earned from the sale of securities acquired before the individual became a resident of Puerto Rico.
For a longer list of Puerto Rican tax incentives, read this article.
How to Benefit from Act 20 and Act 22
To take advantage of these enticing laws, an individual must become a bona fide resident of Puerto Rico. Typically, under the US Internal Revenue Code (IRC), citizens of the United States are taxed on all income, no matter the source. However, according to US IRC Section 933 grants an exception on income sourced from Puerto Rico to residents of Puerto Rico. This does not apply to federal employees.
To be considered a bona fide resident of Puerto Rico, individuals must meet three critical requirements. Note, these requirements apply to US citizens. Further resources for non-citizens can be found below. The first requirement is that an individual must be present in Puerto Rico for 183 days in the tax year. The second requirement is that the resident cannot have a “tax home” located outside of Puerto Rico. Simply this means the person should consider Puerto Rico as their primary place of residence or place of employment. Last, the individual must prove they have closer connections to Puerto Rico than the US or other countries. A test of fact and circumstance determines the connection. This means applicants can prove their strong connection to Puerto Rico via the location of the person’s home, belongings, principal bank, political affiliations, resident jurisdiction in which their family is located, and more.
Those who are not US taxpayers will have to complete the naturalization process after earning permanent residency. One option includes the EB-5 investor visa.
If you are not a US citizen seeking bona fide resident status in Puerto Rico, read this article.
One thing to note regarding these two acts is that any income derived from sources without Puerto Rico by bona fide residents of Puerto Rico is subject to taxation. With the help of a professional, interested investors can find it’s simple to enjoy the beautiful island and enjoy financial freedom.