Investing offshore grants wealthy individuals the opportunity to grow their wealth, tap into new markets, experience a unique style of living, and even save on taxes. While not many look to the United States for this purpose, there are lesser-known incentives found in one of its territories. The US and offshore investors find that tax incentives built to grow the Puerto Rican economy have created the perfect environment for a new or existing business venture.
Puerto Rico is a culturally rich and beautiful island commonwealth of the United States. Many Americans move to Puerto Rico to escape their unfavorable living conditions and spend time in the sun. It is relatively easy for US taxpayers to relocate to the territory since they don’t have to worry about immigration papers and other logistic issues. What many do not realize, however, is that there are tax incentives in place that benefit individuals looking to save money when investing that are meant to strengthen the local economy of Puerto Rico. In this article, we will explore these tax incentives and how you can take advantage of them.
Puerto Rico Tax Incentives
Before you pack your bags and head to Puerto Rico, it is important to understand the tax incentives thoroughly. Below is a guide that covers the basics of many of the wonderful tax incentives, but it is recommended to seek the guidance of a professional.
Act 20, known as the Export Services Act, allows companies to establish and expand the export services business in Puerto Rico. Export Services Income (EIS), which is income that is sourced from eligible services, is only taxed at a rate of 4%. Qualified income is income that is rendered for the benefit of non-residents or foreign entities. Services can include research and development, investment banking, advertisement, and public relations, and so much more. Applicants can consult with the Secretary of Treasury to determine if a service may qualify for these benefits. Further, dividends or benefits distributed out of EIS are exempt from Puerto Rican taxation.
Act 22, the Individual Investors Act, 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. More information can be found below regarding bona fide residency. Any individual who has not been a resident of the territory from January 17, 2006, through January 17, 2012, can request tax exemption.
Acts 20 and 22 are excellent tax incentives that are used to attract international investors to move their business to this beautiful island.
The International Financial Activities Act provides tax incentives to IFEs, or international financial entities, that set up operations in Puerto Rico. In this act, an IFE requests a grant that enumerates and secures a 4% fixed income tax rate and property and municipal exemptions. This grant lasts for 15 years.
Here is a list of other incentives that are offered to strengthen the Puerto Rican economy:
- Act 83- This act pushes Puerto Rico into the age of green investing and diversification. It offers a 4% fixed income tax rate and municipal and property tax exemptions to companies dedicated to the production of renewable energy on a commercial scale.
- Act 399- This incentive is targeted to the establishment of international insurers, branches of global insurers, international reinsurers, and holding companies. The goal is to create an attractive environment for international insurers licensed and regulated by the Puerto Rico Insurance Commissioner.
- Act 185- This incentive provides Puerto Rico businesses that have limited or no access to public capital markets with the opportunity to get equity capital to create economic growth in the jurisdiction.
- Act 73- Act 73 provides a tax incentive for manufacturing. Through this act, applicants can receive a 15-year grant that identifies and guarantees the incentives that the business is entitled to.
- Act 74- This tax incentives involve tourism development in Puerto Rico.
How to Take Advantage of Tax Incentives in Puerto Rico
Do these incentives pique your interest? 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 Puerto Rico residents. This does not apply to federal employees.
To be considered a bona fide resident of Puerto Rico, individuals must meet three essential requirements.
- The individual must be present in Puerto Rico for 183 days in the tax year.
- The resident cannot have a “tax home” that is located outside of Puerto Rico. This means the person should consider Puerto Rico as their primary place of residence or place of employment.
- The individual must prove they have closer connections to Puerto Rico than the US or other countries. This can be shown via the presence of the person’s home, belongings, principal bank, political affiliations, and more.
With the help of a professional, you can be saving money and enjoying the sun in no time.
A Final Thought
While there are excellent incentives for bona fide residents of Puerto Rico, most of these incentives pertain to the income that is earned from sources within Puerto Rico. Also, it is vital to keep track of the time spent in Puerto Rico. When you move assets to Puerto Rico, it is known that you are increasing your chances of an audit by the IRS. With this in mind, it is recommended to cut as many ties with the United States as possible. It is also recommended to seek a professional’s advice to ensure your assets are saving you money in the best way possible.