Puerto Rico Legal Tax Incentives
For some Americans burdened by federal and state taxes, a move to Puerto Rico may reap huge rewards. In 2012, the territory enacted laws that provide special tax incentives to individuals and businesses that move from the mainland to Puerto Rico. These laws were known as Act 22 (for individuals) and Act 20 (for businesses). In 2019, they were incorporated into a new law known as Act 60, in which Chapter 2 contains modified Act 22 provisions and Chapter 3 contains modified Act 20 provisions. The tax incentives are especially attractive to investors, traders, and entrepreneurs. For example, many people in the cryptocurrency industry have moved to Puerto Rico.
Tax Incentives for Qualifying Individuals Moving to Puerto Rico
A qualifying individual will pay no taxes on capital gains and passive income (such as dividends, distributions, and interest) that accumulate while they are a resident of Puerto Rico. For capital gains and passive income that accumulated before becoming a Puerto Rico resident, tax will be paid at the prevailing tax rate if the gain is recognized within 10 years after becoming a resident. Otherwise, it will be taxed at 5 percent.
Tax Incentives for Qualifying Businesses Moving to Puerto Rico
A qualifying business will be eligible for a very low corporate tax rate of 4 percent. Moreover, a business owner will not pay tax for any dividends paid personally to them from a qualifying business, as long as they are a bona fide resident of Puerto Rico. A 50 percent exemption on municipal license taxes and a 75 percent exemption on real and personal property taxes on property used for the business also apply.
Individual Eligibility for Puerto Rico Tax Incentives
To qualify for tax incentives, an individual taxpayer must be a bona fide resident of Puerto Rico for an entire tax year. They must not have been a resident of Puerto Rico for 10 years prior to July 1, 2019. A taxpayer also must purchase a residential property in Puerto Rico within two years after the incentives become effective. They must donate at least $10,000 per year to a certified non-profit organization. At least $5,000 of that amount must be donated to a non-profit that works to eradicate child poverty.
A taxpayer must take these requirements seriously. For example, they should sell their home on the mainland, discontinue memberships in organizations tied to their current state, move their mailing address, and generally act as they would act if they were permanently changing residence. Failing to genuinely move to Puerto Rico can expose a taxpayer to significant penalties if the IRS investigates and discovers a violation.
Business Eligibility for Puerto Rico Tax Incentives
To qualify for tax incentives, a business must establish its office in Puerto Rico. The business must provide export services, which means that it sells services to people or businesses outside the island. The services must not be related to any business activity in Puerto Rico. If the business receives projected or actual annual revenue over $3 million, it must hire at least one Puerto Rican employee who has full Social Security benefits and pays taxes in Puerto Rico.
