Puerto Rico Company Taxation
The profit of an Act 60 company is taxed at 4%, and profit taken out as a dividend is tax-free. Salary however is taxed at a regular rate and cannot be excluded under the FEIE. You still have to take a reasonable salary and pay your employee a reasonable salary with full benefits, all taxable in Puerto Rico. You pay Puerto Rico income tax plus Medicare and Social Security taxes. Income tax rates depend on the income level.
Now if you have a PR company without being a PR resident, you cannot benefit from the low 4% corporate tax rate. Furthermore, Puerto Rico is considered a foreign country for the new GILTI tax.
The standard US corporate tax rate of 21% applies if over 50% of the company is owned by non-bona fide residents of PR.
So if you dont want to move to Puerto Rico, or have over 50% non-resident owners, there is no tax advantage to a PR company.
How Bona Fide Residents Of Puerto Rico Qualify For Tax Savings
To actually get the great tax breaks, Puerto Rico residents must do more than just meeting the IRS definition of bona fide residency.
From the IRS perspective, to be a bona fide of Puerto Rico during the tax year you must:
- Meet the presence test
- Not have a tax home outside Puerto Rico, and
- Not have a closer connection to the United States or to a foreign country than to Puerto Rico.
Moving to Puerto Rico and being a bona fide resident, however, is not enough to qualify for the Act 60 savings. To benefit from zero tax on capital gains you also have to pay a one-time application fee of $750, an acceptance fee of $5,000, and make an annual $10,000 donation to a PR non-profit and annual compliance filings for $300.
To benefit from the Puerto Rico Act 60 savings, your service business must export the services to individuals and corporations outside of Puerto Rico. In addition, a business over a certain revenue threshold must have at least one Puerto Rico employee, with all benefits and taxation.
Furthermore, you cannot run the company from the US nor have any US office or employees. The office must be in Puerto Rico, even if it is a home office.
Puerto Rico Tax Incentives Relocate And Pay 0% Federal And Puerto Rico Capital Gains Tax
One of the greatest of many Puerto Rico tax benefits is the Act 60 Investor Resident Individual Tax Incentive , which allows you to pay 0% federal or Puerto Rico capital gains tax on all capital gains incurred during the time that you qualify as a bona fide Puerto Rico resident living in Puerto Rico. As you would expect, the key is that the 0% Puerto Rico tax rate for capital gains is only applicable to gains incurred while an individual is a bona fide resident living in Puerto Rico. To enjoy these Puerto Rico tax incentives, you must qualify as a bona fide Puerto Rican resident by passing three teststhe presence test, the tax home test, and the closer connection testto prove your intention for living in Puerto Rico long term.
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Do You Pay Taxes If You Move To Puerto Rico
While American citizens are required to file US taxes on their global income wherever in the world they live, an agreement between the US and Puerto Rico means that Americans who are bona fide residents of Puerto Rico dont have to file US taxes on their Puerto Rican income.
When Did Puerto Rico Become A Us Territory
Puerto Rico was given to the United States after the Spanish-American War ended in 1898, around 124 years ago. The US Constitution allows for US possessions to be only states or territories, and as Puerto Rico is not a state, it is technically a US territory, regardless of its reclassification to commonwealth in the 1950s.
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Opportunities For New Businesses
Agriculture and related business in Puerto Rico seems extremely promising. For 100 years, people in Puerto Rico were into the agriculture-based economy. Similarly, the economy of the country is dynamic and competitive in Latin America. The economy also relies on the federal aid provided by the United States government.
So Is Puerto Rico Part Of The United States
Yes Puerto Rico is a US commonwealth, and Puerto Ricans have freedom of movement throughout the United States. Likewise, you dont need a passport to travel to San Juan, even though moving to Puerto Rico does offer tax haven status.
While Puerto Rico has a certain level of autonomy and its own tax policy hence Act 60 it is still a part of the United States, which means there is always a risk that tax policies change in the future at the hand of Washington.
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Healthcare In Puerto Rico
Since Puerto Rico is part of the U.S., your Medicare card works just as well as it would anywhere in the U.S. Private insurance is also a solid option for retirees. Its typically far less expensive than in the U.S. and carries lower co-pays and youll still have access to the same care you would stateside. Healthcare infrastructure is widespread in Puerto Rico, as there are over 90 hospitals on the island and plenty of clinics and pharmacies. That said, doctors offices and hospitals outside major cities tend to be more run down, with fewer doctors on staff and less equipment. Youll want to look in and around major cities, particularly San Juan, for the best healthcare.
Theres No Telling When The Partys Over
The special rules in Puerto Rico are simply a matter of Puerto Rican law, which can be changed with the stroke of a pen.
Lets look at Puerto Rico and take a guess at how long these tax incentives will stick around:
Its pretty hard to imagine this situation staying the same for the long haul. Its pretty easy to imagine a politician riding into office on a wave of lets stick it to the gringos.
Also, theres some potential for Puerto Rico to become an actual state instead of simply remaining a territory of the United States . If that happens, then living in Puerto Rico will be the same as living in Florida as far as tax is concerned.
Before moving to Puerto Rico, you would have a decree from the Puerto Rican government that is meant to secure your right to Act 60 benefits. However, a contract signed with a government is a very different thing than a contract signed with a private party.
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Reasons The Puerto Rico Tax Incentives Arent All Theyre Cracked Up To Be
Lots of offshore gurus are pushing Puerto Rico these days. As usual, the picture isnt quite as rosy once you dig below the surface.
Time to pull the shovel out on all this Puerto Rico hype. Lets get down below all the fancy marketing to look at how the Puerto Rico tax incentives actually work in the real world.
As youll see, living in Puerto Rico turns out to be a great deal for hedge fund managers, full-time traders, and certain other high net worth professionals. But for most expats and digital nomads, simply living outside the US entirely provides a much better tax deal.
The Puerto Rico Tax Solution To Investment Immigration
Foreigners can secure US citizenship at a reduced cost and pay tax at a reduced rate by moving to Puerto Rico and using the EB-5 Visa program, say Structured Consultings Jeremy Babener and Trusts & Taxes Roberto Santos.
Wealthy foreigners have unique access to US citizenship through the EB-5 Visa program. For many, investing $1 million in a US business can result in a green card and, two years later, citizenship. But as a leading immigration treatise observes, The US tax structure is the main disincentive for prospective . Immigrants who accept EB-5 visas must also accept US taxation of their worldwide passive income.
However, for foreigners ready to spend half their time in Puerto Rico, the disincentive can largely disappear. Puerto Rico offers a range of tax incentives, and the IRS has recognized the importance of Puerto Rican efforts to retain and attract workers and businesses.
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A Final Reality Check
Image Credit: Wikimedia Commons
Now that youre all excited about moving to Puerto Rico, lets take stock what such a move would entail. This isnt so much about curbing your enthusiasm as making sure youre aware of the ramifications and taking them into account.
If you really want no longer to be beholden to the IRS and have all the benefits of Puerto Rican tax incentives, you have to be a bona fide resident of Puerto Rico. This means more than just spending at least 183 days each year on the island. It means that you cannot have a tax home outside of Puerto Rico, nor can you have closer connections to any place other than Puerto Rico. In particular, passing the test of closer connections means that youre going to have to move your whole life to the island to prove that its really your home. This means that Puerto Rico will be:
- The location of your primary and permanent home
- The place where your family lives
- The primary location of your automobiles, furniture, clothing and other personal goods
- The location of your bank accounts and financial activities
- The location of your business activities
- The location of your primary social, religious, cultural, professional, political and other relationship associations
- The primary location for the charitable organizations to which you contribute
- The jurisdiction in which you hold your drivers license
- The jurisdiction in which you vote
- The country of residence that you list on all of your official documents
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How To Get Puerto Rican Citizenship
While Puerto Rico is a country in a sociological context, it is not in the context of international relations. The world recognizes Puerto Ricans as Americans, and while Puerto Rican-born individuals and those who establish residency in Puerto Rico can obtain a Certificado de Ciudadanía Puertorriqueña, this is effectively worthless as formal citizenship.
There is a possible benefit of Puerto Rican citizenship in being able to parlay that into Spanish citizenship, but we havent seen that play out.
It is important that you understand that the tax benefits of living in Puerto Rico derive from residency, not citizenship. You dont need to have any prior connection with Puerto Rico to reduce your taxes there, nor would becoming a Puerto Rican citizen help any more than becoming a resident under Puerto Rico and US tax laws.
Do Americans Living In Puerto Rico Have To File Us Taxes
Puerto Rico seems alluring, where advertisements suggest you dont have to actually ditch your passport but can pay a fraction of the taxes you do now. Forbes
Furthermore, Americans who become Bona Fide residents of Puerto Rico dont have to file US taxes on their Puerto Rican income.
To be considered a Puerto Rican Bona Fide Resident, you must spend at least 183 days in Puerto Rico in a year, not have a tax in home another country, and not have closer connections with another country.
Any income from outside Puerto Rico will still be subject to US taxes, however if you receive income only from a Puerto Rican business that provides services outside the US, your income is considered Puerto Rican only and so not subject to US taxation.
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Can I Become A Citizen Of Puerto Rico And Renounce Us Citizenship
No, this has been tried and failed. Puerto Rico is bound to the United States, and renouncing US citizenship with the intent to reside in Puerto Rico would go against the requirement to acknowledge future non-residence in the United States, which includes its territories.
Will You Continue To Conduct Business Within The United States
If you have built your personal and professional life in the United States, suddenly cutting ties when relocating to Puerto Rico seems nearly impossible. As such, each situation needs to be reviewed and analyzed on a case-by-case basis. For instance, an individual relocating to Puerto Rico whose income is solely from interest, dividends and/or capital gains will have a different situation than an individual who is materially participating in their United States-based business. Consequently, if as part of your business model you need to maintain a connection with the United States , you need to be cognizant of certain important tax provisions, including source of income and engaged in trade or business federal tax rules.
For tax purposes, for example, the key factor in determining the source of income from salaries, wages or compensation for labor or services rendered, is where the services were performed. Therefore, services performed in the United States are generally taxed in the United States.
In addition, if the activities you perform in the United States constitute a trade or business in the United States of a Puerto Rico-based business, the activities conducted by the Puerto Rico business in the United States may trigger federal tax implications for the Puerto Rico business. Conversely, if a United States business is deemed engaged in a trade or business in Puerto Rico, the United States business will have Puerto Rico tax consequences.
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Is Puerto Rico A Cryptocurrency Tax Haven
Image Credit: Wikimedia Commons
Investing in cryptocurrencies and conducting business using them has been an effective way of avoiding taxation, but these glorious days are coming to an end. The IRS has been greedily eyeing the world of cryptocurrencies for a while now, and the U.S. government has increased its efforts to collect taxes on cryptocurrency transactions and investment gains as one of the many bits of hidden legislation in the current infrastructure bill.
The earliest form of the cryptocurrency amendment in the bill was rejected, but its clear that the U.S. government intends to regulate and tax cryptocurrencies. Taxation and regulation are governmental inevitabilities. The invention of mediums of exchange lying outside government regulation and interference are of immense benefit to individuals, but inimical to the interests of government, so when they appear, they will never last long. While it hasnt firmed up its policy yet, the IRS is already asking about cryptocurrency holdings and will be increasing its crypto tax reporting and enforcement efforts.
Real Residence And Opportunities
These benefits very much depend on the taxpayer becoming a bona fide resident of Puerto Rico see IRC Sections933 and 937. In general, a taxpayer must reside in Puerto Rico for at least 183 days of the tax year, have no other tax home, and have no closer connection to the US than Puerto Rico. The second of these rules applies the analysis for deducting traveling expenses see IRC Sections937, 911, and 162.
The IRS, believing that some number of individuals have relied on Puerto Rico tax benefits without satisfying these requirements, recently announced a formal campaign to address noncompliance. Anyone considering the use of these strategies should take particular care to become a bona fide resident of Puerto Rico. Michael Hummel, CEO of Establish, which recently moved headquarters to Puerto Rico, said, We did it right, and our tax savings allowed us to heavily re-invest in our growth.
Provided one truly moves to Puerto Rico, they can take advantage of its substantial incentives. Theyll obtain citizenship for 20% less through the EB-5 Visa program, and under the right circumstances, cut their tax rate to 4% from over 50%.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
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