This article looks into the various tax breaks that Puerto Rico offers to investors and examines the question of whether or not the territory technically classifies as a tax haven.
Increasingly, the number of Puerto Rico residents includes wealthy investors drawn to island life by the prospect of lower taxes. But does that necessarily mean it’s the right choice for you?
By understanding the precise nature of Puerto Rico taxes, you can make the choice whether or not you want to move to Puerto Rico to take advantage of these or whether your interests would be better served elsewhere.
At Nomad Capitalist our job is to save you time and money by making sure you make the right choice first time round. If you’re a US citizen looking for up-front, straight-shooting advice on legal tax reduction strategies, talk to our team of experts today.
Puerto Rico – Economic Background
Puerto Rico is an unincorporated United States territory.
It’s a small island in the Caribbean Sea, some 1,014 miles (1,631 km) southeast of the US mainland.
Puerto Rico became a US territory at the end of the 19th century, following Spain’s defeat in the Spanish-American war. Later, in the 20th century, legislation was enacted extending US citizenship to all individuals born on the island of Puerto Rico.
For decades the US provided direct support to Puerto Rico, with government subsidies helping to alleviate many of the problems on the island.
When some of these were rolled back, and Washington’s training wheels were taken off, the country quickly racked up high debts. The solution to the problem? Foreign investment.
And the way to get that? By providing investors with highly alluring tax benefits.
Taxes In Puerto Rico
On the surface, taxes in Puerto Rico are similar to taxes in the US.
There are still federal taxes, though the majority of residents pay local taxes based on Puerto Rican-sourced income, which includes a local federal tax, which is progressive, with different tax brackets depending on the income.
The only exception to this is on income generated from the US mainland (e.g. they’re paid directly from a US company, they work for the federal government, or they work for a company that’s contracted by the government), in which case they need to pay federal income taxes.
State income taxes and state taxes, in general, are something of a misnomer since Puerto Rico is not a state, but it does have a sales tax of 11.55 on most items.
Since Puerto Rico has its own tax laws, it’s empowered to provide tax benefits to investors to help stimulate growth.
Puerto Rican Tax Incentives – Overview
By taking advantage of Puerto Rico’s tax incentives, US citizens can enjoy tax reductions of up to 90%.
Not only can you enjoy exceptions on federal income tax, but individuals also get the advantage of zero capital gains, zero dividends tax, plus a corporate tax rate of just 4%. There is still, however, tax on salaries with progressive tax rates from 0-33%
There is a catch, however, you will have to physically move to Puerto Rico.
This is because the whole point of these tax incentives in the first place is to stimulate economic development and create some much-needed jobs for the island.
In 2012, Puerto Rico’s government created two specific changes to its tax code.
The first, known as Act 20, was aimed at multinational corporations, while the second, Act 22, was aimed at wealthy individuals.
These acts were later merged into the new Act 60, though the essentials are exactly the same.
By moving to Puerto Rico or moving both yourself and your business to Puerto Rico, you can avail of these significant reductions in taxes.
If you are not a US citizen, you need to establish residency first, properly set down roots in the country, and spend most of your time there, unlike many other, more traditional tax havens that have minimal physical presence requirements. This does not apply to US citizens who have the right to reside in Puerto Rico.
Puerto Rico Act 60 Export Services Act (previously Act 20)
The Export Services Act of 2012, originally referred to as Act 20, was created to help diversify Puerto Rico’s economy and stimulate its export market while also attracting more investment and jobs.
Companies were induced to move their operations to Puerto Rico and establish a bona fide office there.
Businesses with a base in Puerto Rico exporting services to other markets are able to reduce their corporate taxes to as little as 4%.
Puerto Rico makes sense for US citizens, particularly in high-tax states, who are looking to set up an offshore company but still want to remain in the US system. However, requirements include a 183-day physical presence and closer connections to Puerto Rico.
For a business to be considered qualified for an export decree, it must be purely export-focused, have a revenue of $3 million a year and employ at least one local.
Better still, this can be combined with additional tax benefits aimed at individuals whereby dividend payments from the company are paid tax free.
Puerto Rico Act 60 – Individual Investor Act (previously Act 22)
The second piece of legislation, the Individual Investors Act (previously referred to as Act 22) was, as its name suggests, aimed at individual investors.
More specifically, it was aimed at high-net-worth individuals, exactly the same as our target customer base here at Nomad Capitalist.
In addition to zero taxes on dividends, as mentioned above, it also means zero tax on interest, rent and all capital gains, short-term and long-term, made while residing in Puerto Rico.
In many cases, entrepreneurs would often times take advantage of both acts simultaneously, so it makes sense that both acts were later combined under the new umbrella of Act 60.
There are significant requirements to qualify for the benefits under Act 60, including satisfying the presence test, which requires an individual to:
- be resident in Puerto Rico for at least 183 days during the tax year
- be present in the United States for no more than 90 days
- earn no more than $3,000 in the US
- have no significant connection to the US during the tax year
Puerto Rico Act 60 (Incentives Code)
The updated Incentives Code, known as Act 60, essentially combined the original Acts 20 and 22 together but with the same principle.
That is the provision of significant tax reductions to companies and/or individuals who are prepared to move to Puerto Rico and establish their bona fide residence there.
But that means you really do need to move there and live there, and if you ever move away, you lose those privileges, which means, as an American, you’re right back where you started in the American tax system.
Is Puerto Rico Technically A Tax Haven?
In the technical sense, not really, it’s not generally listed as one, and so Puerto Rico instead falls under the more accurate category of a low-tax jurisdiction.
You can enjoy favourable tax treatment in Puerto Rico, allowing you to escape the high taxes of the US mainland, or at least, you’re free to do so for as long as you decide to stay there.
So in a sense, Puerto Rico exists as a compromise solution for those who aren’t willing to “go all the way” – i.e., for those who don’t want to renounce and instead remain US citizens.
By doing so, however, they limit their options significantly, particularly since they don’t necessarily have to go that much further afield to find a more inviting offshore tax haven.
Some of Puerto Rico’s other Caribbean island neighbours offer zero income taxes and are more than willing to issue you a brand new passport in a matter of months. Plus, since the physical requirements aren’t anywhere near as strict, you’re free to come and go as you please, making this a far superior offshore solution for Americans in the long term.
The Truth About Tax Havens
One thing to note about tax havens, however, is that they’re not all created equally, and you need to know what you’re doing. Otherwise, you risk making your current situation worse.
The fact is the world is full of tax havens, all competing for your custom. You can speak to a lawyer in Puerto Rico and get told that it’s the best option since that’s the only option that the lawyer is selling. You can move there and pay almost no taxes, but if you decide later that living there’s not for you, you end up right where you started.
Similarly, you could go to another tax haven and be told the same thing. Take Vanuatu, for example, a tiny island nation right in the middle of the Pacific Ocean. It offers zero income tax, which sounds great in theory, but you need to renounce to get the full benefit, even though you can just pay to obtain citizenship, you would lose out on your travel freedom.
Moving to a tax haven that offers zero taxes can work in some cases, but with more in-depth research, you may well find that jurisdictions with low taxes have more to offer. At the end of the day, you need to weigh up the pros and cons and find the best solution for your needs. As a Nomad Capitalist client, we help make that process a lot quicker and easier.
Wondering whether to move to Puerto Rico?
There are many options available for high-net-worth individuals who want to reduce their tax burden.
Puerto Rico exists as a compromise solution for those who want to retain their US citizenship but pay less taxes. The downside, though, is that you have to be 100% committed to living in Puerto Rico to qualify, which doesn’t suit everybody.
It’s also not an option for those who just don’t want to pay taxes and would rather move to a zero tax jurisdiction.
Ultimately, the best tax haven is the one that suits your needs, providing the best possible investment opportunities and lowest possible taxes balanced with the citizenship options that allow you to travel when, where and however you please. This is the essence of our slogan, “go where you’re treated best.”
Puerto Rico Tax Haven – FAQ
Yes, Puerto Ricans by birth are US Citizens. However, they have different rights to those on the mainland and can’t, for example, vote in US elections.
Yes, Puerto Rico does have an income tax. However, you can enjoy exemptions on income tax under Act 60.
Yes, Puerto Rico does have capital gains tax. However, exemption on all capital gains is available under Act 60.
This all depends on what you are hoping to achieve. As a US citizen, Puerto Rico offers significant tax reductions while still allowing you to maintain your US citizenship. The only caveat is that you will have to live on the island full-time.
For those who want more flexibility and/or enjoy the benefits of a true, zero-tax jurisdiction, the better option is renunciation and applying for a second citizenship.