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Puerto Rico Tax Breaks: Real, Huge, and Maybe Available for Just a Few More Years

by Lobo Tiggre
Friday, June 29, 09:39pm, UTC, 2018

It’s true. Some investors and business owners can dramatically—and legally—reduce their tax burdens by moving to Puerto Rico.

I did.

My net tax burden decreased by about 60% the year after I moved here.

If you ever wondered why my company is Puerto Rican and based in San Juan, now you know.

There are several laws the Puerto Rican government has enacted to encourage investment and high-net-worth migration to this island. The principal ones are Acts 20 and 22. The government’s economic development website spells out the details.

The devil is in those details, of course, and there are a lot of them. Let me boil it down to essentials.

  • Act 22 is for individuals. It confers a 100% tax holiday on passive income and capital gains for 20 years. The zero tax rate covers both short-term and long-term capital gains. You have to move to Puerto Rico to qualify.

  • Act 20 is for companies. It gives owners of incented new Puerto Rican companies a 3–4% tax on dividended income. You have to pay yourself a normal base salary and pay normal Puerto Rican income taxes on it. To qualify for Act 20, companies have to export services. (Think: consultants and call centers.)

The key to all this is that Puerto Rican income is exempt from US federal income tax. That didn’t matter before, because Puerto Rican taxes were just as high as US taxes. But after the crash of 2008, the Puerto Rican economy never recovered, so the government offered these incentives to attract investors and entrepreneurs.

But there are important caveats…

  • Only Puerto Rican income is exempt, not all income. That means that income from work not done in Puerto Rico is deemed US income and is taxable by the IRS. So are dividends paid by US companies.

  • If you spend more than 90 days in the US, you have to spend more than half the year in Puerto Rico. You have to show that you really have become a Puerto Rican to get the IRS to recognize your exemption in an audit.
  • Assume a 100% chance of being audited. These tax breaks are 100% legal. But you can’t pretend or try to stretch legal definitions and think you’ll get away with it. This is a real deal, but only for people who do it for real.

  • There are $5,000 filing fees, annual reports, and other paperwork. That’s a small price to pay for huge tax savings, but it’s required compliance.

So, given that you really do need to live here to take maximum advantage of these tax breaks, what’s it like living in Puerto Rico? There are many pluses and minuses, of course. Here are a few:

+  Puerto Rico is a gorgeous tropical island. We have coconut palms, beautiful beaches, dramatic seaside cliffs, brilliant green iguanas, the whole works.

-   This is a drug-war hot spot. You may read about the high crime and murder rates in Puerto Rico. They are mostly internal to the drug war. Occasionally innocent bystanders do get hit, but that’s true in New York, Los Angeles, or any large US city. Back that out, and the rest of Puerto Rico is quite peaceful.

+  Many real assets are selling at crisis pricing. Many gorgeous homes here sell for a fraction of what they would cost in, say, Miami.

-   Because this is an island subject to the US Jones Act, pretty much everything consumable is more expensive here. From gasoline to groceries, it all costs more. I understand that we have the second-most expensive electricity in the US (second only to the US Virgin Islands).

+  This is a survivalist’s paradise. It’s impossible to freeze here. Crops grow year-round. Better still, the average police officer here is not an arrogant jackbooted thug. The most visible ones are peace officer protecting tourists.

-   Driving here is like participating in a demolition derby—except that there are no rules. You’re as likely to encounter a Ferrari driving slower than you can walk as a horse and cart breaking the speed limit.

One more thing that could be a plus or a minus is that while Puerto Rico is part of the US and most professionals here speak English, the primary language is Spanish. The culture is distinctly Latin. If you like salsa dancing and Caribbean food, you might love it here. If you hate cracked pavements and the occasional plastic bag floating by in the wind, you might hate it here. If hearing Spanish spoken all the time will bother you, you will be bothered quite a lot. If you always wanted to learn Spanish, this could be perfect for you.

I tell everyone who’s considering making this move that they should come and check it out. It’s not enough to spend a weekend in a fancy hotel and decide everything is nice. You need to rent a car and drive around and see what the island as a whole is like. Even if you were to live in one of the pristine gated communities, you’d still have to deal with rest of Puerto Rico.

It’s not worth it if you’d be miserable here.

I should also say that there has been some pushback from people who don’t think these tax incentives are fair. But after Hurricane Maria caused $100 billion in damage to an already bankrupt island drowning in more than $70 billion of debt, I doubt one of the few sources of cash inflow will be shut down.

On the other hand, if you are considering the move, you might want to make that exploratory trip happen soon. There’s a new push for Puerto Rican statehood. A bill was just introduced in Congress that could make it the 51ststate by 2021.

I’m skeptical that a bankrupt territory is a good candidate for joining the union—but the sympathy generated by the devastation of Hurricane Maria could give this effort a boost.

I doubt statehood for Puerto Rico will happen anytime soon, let alone quickly, but if it does, it would likely put an end to the tax incentives. I don’t see how the other 50 states could tolerate an “equal” Puerto Rico’s exemption from the US income tax. Even if they were willing to, for a time, to help Puerto Rico recover, the Internal Revenue Code might not allow it for a state.

I’ll have to ask a tax expert.

On that point, I should say that I am most definitely not a tax expert. If you’re interested in making use of these incentives, however, I can connect you with people who are. Email me at L@LouisJamesLLC.com, and I’ll put you in touch.

Personally, I didn’t move here expecting my tax breaks to last their full 20 years. I figured that five years was enough to pay for the condo. Our savings in the first year made it worth the effort. But then, we do enjoy living in the tropics.

Your mileage will vary.

Just don’t dally too long if you’re thinking this could work for you.

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