If you want your own piece of paradise, mixed with a good amount of tax breaks, and are willing to tolerate a little bit of risk, Puerto Rico could be just the spot for you.
The Island of Enchantment or “La Isla del Encanto” as it is known in Spanish is Puerto Rico’s well earned nickname. For generations, this
tropical getaway has attracted and astonished visitors from all around the world, thanks to its crystal clear waters, legendary beaches, brilliant surfing offerings, adventurous expeditions, and Spanish architecture from the 17th century.
Puerto Rico is a territory of the United States, though it remains unincorporated. Situated conveniently in the Caribbean just off the southeast coast of Florida Puerto Rico enjoys neighbors such as the US Virgin Islands, the Dominican Republic, and the British Virgin Islands, and is comprised of about 9,000 square kilometers of land.
Hosting a population of over 3.5 million, the island also receives around 4 million visitors every year. This is in large part due to the fact that those visiting from America don’t need a passport or a visa to come to Puerto Rico. The service industry is its second largest industry, giving way only to manufacturing. Both English and Spanish are official languages for Puerto Rico, with Spanish being the most used language on a daytoday basis by a majority of the population (95%). You can land in Puerto Rico within a couple of hours from mainland U.S. and just as easily as relocating from Texas to Florida, or New York to California — no passport, visa, or work permit required.
U.S. Citizens and the Long Reach of the IRS
What do the United States and the littleknown African country of Eritrea have in common? – They’re the only two countries in the world in which citizens are taxed on all of their worldwide income, no matter where they live.
People from every other country in the world can just pack up their bags, move to a friendly minimal tax jurisdiction such as the Cayman Islands or Singapore, and pay virtually no taxes to their country back home. This doesn’t work for Americans. U.S. Citizens are very limited in their options as far as reducing their tax burden is concerned. Examples of these options are:
1. Relocate to a state with low taxes
Many Americans do this on a yearly basis. They move from a taxgreedy state like New York or California to a state with no taxes such as Florida or Texas. This lets people get out of their state tax obligations, but not escape Federal taxes.
2. Move out of the country and use the Foreign Earned Income Exclusion
The Foreign Earned Income Exclusion (FEIE) allows Americans to move to a country with much friendlier taxes such as Panama and avoid paying Federal taxes on up to approximately $100,000 of their income (as long as it’s earned from a foreign source). However, investment income that you earn would still be taxed and of course you would pay taxes on anything above the exclusion limit. There are some deductions that let you invest in taxfree real estate overseas, which bumps up the total possible amount of taxfree income to around $150K.
3. Renounce Your American Citizenship
While doable, this is a drastic measure that takes proper planning and a real evaluation of the consequences of losing your U.S. citizen rights. This may be the most guarantee option to avoid paying U.S. taxes, but it could cause serious rifts in your family and personal life – a matter that could be emotionally draining.
4. Relocate to Puerto Rico
Puerto Rico wasn’t a serious option on the menu for U.S. citizens looking to pay less taxes just a few years back. But recent changes in the government of Puerto Rico have brought laws that offer sizable tax relief. Right now, Puerto Rico is attempting to persuade economically productive individuals and companies to move there. Thanks to PR’s separate tax system, you could claim exemptions on virtually all of your federal US taxes. So how exactly do I qualify for these tax incentives…and what do they offer specifically?
Puerto Rico has declared that if you haven’t resided on the island in the past 15 years, you are eligible to qualify. Furthermore, you would then need to move to Puerto Rico, become a resident, sign a contract with the government which guarantees you 0% taxes on capital gains and income from dividends, in addition to only 4% on corporate income tax (if you form a corporation). They’re taking a page straight from Singapore’s game plan.
They’re anticipating that by reducing their taxes and making it attractive for productive people to live and work in Puerto Rico they can create growth and jobs in the economy. There are two big caveats to the new laws? the first has to do with your business income, and the second has to do with your investment income.
The Export Services Act (Act 20)
Act 20 lets you reduce your taxes to the aforementioned 4% if you meet a variety of criteria. Firstly, you create a company that is Puerto Rican or move your current company to Puerto Rico. Secondly, you must service customers outside of Puerto Rico by performing services in Puerto Rico. The IRS primarily determines how to tax income on services based on where the service is physically performed.
This would allow, for example, to consult for clients in California, as long as you only perform those services on behalf of your company in Puerto Rico via the phone, computer, or other means. This means that you can’t have branches in the U.S. or anywhere else if you want to avoid paying more taxes. This is what “Export Services” refers to: only serving customers from abroad while being located in Puerto Rico.
Additional business models that would fit the criteria are: ecommerce stores, consulting, investing services, web design, internet marketing, legal services, software development, and more. The great part is, you wouldn’t pay U.S. federal taxes on dividends from the company either, as long as you reside in Puerto Rico and not mainland America. Effectively, this takes your tax liability all the way down to an incredible 4%.
It’s the reason that financial tycoon Peter Schiff moved his company to Puerto Rico from California, reducing his tax burden from 50% down to 4%.
Act 22 (Individual Investors Act)
This law is what allows a new resident of Puerto Rico to do away with all of their tax burden on investment income. You would owe tax on investments accumulated before moving, however.
So if you had $50,000 of appreciation on an investment prior to your move to PR, you would pay taxes on that. But if that investment continued to grow after you became a PR resident, you would pay no further tax on the growth since your residence took effect.
So how do you qualify for residency in Puerto Rico? You need to meet three criteria: the physical presence test, the tax home test, and the connection test.
You’ll need to spend 183 days a year in Puerto Rico to qualify as a resident there.
The IRS defines your tax home as the primary place of your work, income, or business. Therefore, the best method is to simply live and work in Puerto Rico.
You’ll need to prove that you have a closer connection with Puerto Rico than another foreign country or with the U.S. To do this, you can use your Puerto Rican address on all forms, change all of your business addresses to Puerto Rico, attend local events, get rid of homes in the U.S., get a doctor in PR, get a lawyer in PR, and learn Spanish.
All of these things will help you establish a strong connection to Puerto Rico. Now you know the incredible tax incentives of moving to Puerto Rico. If you fit the qualifications above, and love the sound of living and working in Puerto Rico then this could be the perfect opportunity for you.
You can enjoy paying less tax, a warm climate, beaches, and a growing business sector that contributes to your financial goals.