If a US person relocates to Puerto Rico and has realized but unrecognized capital gain and waits to recognize the gain until being a resident for 10 years will only be subject to a 5% Puerto Rico tax rate. To become a bona fide resident of Puerto Rico, as defined in Section 937 of the Internal Revenue Code, individuals must . In this blog we will highlight some of the major steps you need to take to qualify for Puerto Rico's Act 22. if an individual is granted Puerto Rico tax exemption under the act, long term gains as a result of investments made after becoming a resident will be exempt from tax in Puerto Rico. The requirements to qualify under Act 60 include a $10,000 USD annual donation to a charity, the purchase of real estate within a time frame of two years, and filing a yearly report to the . The non-profit charitable contribution requirement which was previously at $5,000 has been increased to $10,000. Since this test is essentially assessing your intentions, it is somewhat subjective, and since everyones situation is different, the IRS considers different factors in each case. Consulting companies, auditing firms, marketing businesses, and, How to qualify for the Act 60 Export Services Tax Incentive, Moving the entire company, including employees, to Puerto Rico and ceasing all operations in the United States, Establishing a Puerto Rico subsidiary and recording the percentage of business income and expenses related to the Puerto Rico entity so that it can be taxed under the Act 60 incentives, Individual Resident Investor Tax Incentive, 100% tax exemption from Puerto Rico income taxes on all dividends, 100% tax exemption from Puerto Rico income taxes on all interest, 100% tax exemption from Puerto Rico income taxes on all short-term and long-term capital gains, 100% tax exemption from Puerto Rico income taxes on all cryptocurrencies and other crypto assets, Just keep in mind that to qualify for these generous incentives, you must become a, Be physically present in Puerto Rico for at least 183 days of each tax year, Make Puerto Rico your tax home by establishing your office or primary place of work there, Buy property in Puerto Rico, move your family and possessions there, get a Puerto Rican drivers license, register to vote in Puerto Rico, and do other things that demonstrate your commitment to a life on the island, Capital gains before moving to Puerto Rico, If the gains are recognized within 10 years of your move, they are taxed at the U.S. rate, If the gains are recognized after 10 years of your move, they are taxed at Puerto Ricos preferential 5% flat tax rate, and you do not owe U.S. taxes on them, Applying for the Individual Resident Investor Act, Why EB-5 Investors Should Consider Moving to Puerto Rico, How to Obtain or Renew Your Annual Vehicle Registration (Marbete) in Puerto Rico, A Guide to Puerto Rico Export Services Tax Incentive For Businesses, A Guide to Puerto Rico Investor Resident Individual Tax Incentive, How to Pass the Puerto Rico Bona Fide Residency Tests, Things to Consider Before Living in Puerto Rico, Are Puerto Ricans US Citizens? You dont need to satisfy them allsatisfying just a single one is sufficient. Second, to pass the tax home test, you must not keep a tax home outside of Puerto Rico at any time. Generally, you are a bona fide resident of one of these territories (the relevant territory) if, during the tax year, you: Do not have a tax home outside the relevant territory, and, Do not have a closer connection to the United States or to a foreign country than to the relevant territory. No Article, Blog Post or Page may be reproduced or used without express written consent of Golding & Golding. Citizens and permanent residents of the USA enjoy the right to live in Puerto Rico in the same way that citizens of Puerto Rico may live in the mainland US. You did not maintain a tax home outside of Puerto Rico for the last 183 days of the year. 5. According to Act 60-2019 (known as the Puerto Rico Incentives Code) which replaces various historical incentives including Acts 20 and 22, residents of Puerto Rico can enjoy a 4% flat income tax rate and freedom from taxes on capital gains, dividends, interest and royalties. These services must not have a connection with Puerto Rico. A Guide to Puerto Rico Export Services Tax Incentive For Businesses, A Guide to Puerto Rico Investor Resident Individual Tax Incentive, How to Pass the Puerto Rico Bona Fide Residency Tests, Things to Consider Before Living in Puerto Rico, Are Puerto Ricans US Citizens? Puerto Rico Tax Incentives for Businesses, Puerto Rico Tax Incentives for Individuals, Becoming a Bona Fide Resident of Puerto Rico, Obtaining and Maintaining The Tax Exemption Decree, What Ownership of a Puerto Rico C Corporation Means, What Ownership of a Puerto Rico Export-Service Company Means, Lets Review Key Points and Discuss Next Steps, The Process to Purchase a Used Car in Puerto Rico, How to Obtain Your Puerto Rican Drivers License, A Guide to Puerto Rico Export Services Tax Incentive For Businesses, A Guide to Puerto Rico Investor Resident Individual Tax Incentive, How to Pass the Puerto Rico Bona Fide Residency Tests, Things to Consider Before Living in Puerto Rico, Are Puerto Ricans US Citizens? Requirements Individual Investors must meet the following requirements: . Its worth noting that between previous fee increases as well as rising inflation, these figures could easily rise at some point during the next few years. Lets explore each of these in greater detail. Lets get some clarity on how the tax situation plays out: To begin with, becoming a resident of Puerto Rico is not as simple as purchasing a property and visiting the PR Coast a few times a year. Not be present in the USA for more than 90 days during the tax year. The territory boasts hundreds of miles of golden sand beaches, world-class golf courses and excellent conditions for all kinds of water sports such as scuba diving and snorkeling, surfing, kayaking and paddle boarding. If you have decided to make the move and take advantage of Puerto Ricos generous tax incentives, make sure youre really committed. Carlos Fontn, director of the DDEC's office of business incentives in Puerto Rico, said in April, the agency began the first . Offering a luxurious lifestyle, golden sand beaches and highly attractive tax benefits, this territory of the United States can offer residents a high quality of life and unique advantages without a requirement to renounce citizenship of the USA. To avoid penalties, this would require a transfer pricing analysis and intercompany agreements to determine the share of profits realized in Puerto Rico vs. on the mainland, as laid out in this guide. To be defined as a bona fide resident of Puerto Rico, an individual must be able to demonstrate that he/she satisfies 3 key residency requirements relating to the individuals presence in Puerto Rico, having a tax home in Puerto Rico and having closer connections to the territory than anywhere else. Luckily, you can take your pick from a huge selection of quality housing on the island. Business owners who establish a qualifying business in Puerto Rico can enjoy significant tax benefits: To qualify, the business model must be concentrated around exporting services outside of Puerto Rico. The presence test also grants you 30 automatic presence days of international travel (i.e., travel not to the US) per tax year, which means you actually only need to be present in Puerto Rico for 153 days per year as long as you are traveling outside of the US. Only one of the following conditions must be true: You were present in Puerto Rico for at least 183 days in the tax year. Noting, the Puerto Rico BFR rules are not the same as the Substantial Presence Test BFR rules but the concept is the same. As a side note, this will help solidify US residents in making Puerto Rico their main home because owning property or real estate in a location and claiming it as primary residence goes a long way in showing Puerto Rico is actually the tax home. See District of Columbia House Voting Rights Act, S.160, 111th Congress (passed by the Senate, February 26, 2009) (2009).52 However, the United States has not taken similar "steps" with regard to the five million United States citizens who reside in the other U.S. territories, of which close to four million are residents of Puerto Rico. Disclaimer: Neither PRelocate, LLC, nor any of its affiliates (together PRelocate) are law firms, and this is not legal advice. To explore your options in more detail, please contact 7th Heaven Properties, the Luxury Caribbean Property Specialist. Due to the territorys legal status, moving to Puerto Rico is considered internal migration as opposed to immigration. What is a Board-Certified Tax Law Specialist. (a) Appreciation Before Becoming a Resident Individual of Puerto Rico. Youd be hard-pressed to find a better value home than a U.S. territory that offers a 4% corporate income tax and 0% capital gains tax, among many other benefits. Many companies opt to become C Corporations because of the special tax advantages associated with this status. Youll also use Form 8898 to inform the IRS of your new residency status. Opening a Puerto Rican bank account is helpful not only for the test but also for your daily life on the island, as is a local drivers license. An individual is treated as a bona fide resident of Puerto Rico under Section 933 if the person (1) meets a physical presence test; (2) does not have a tax home outside of Puerto Rico during the taxable year; and (3) does not have a closer connection to the United States or a foreign country than to Puerto Rico. There are many advantages to becoming a resident of Puerto Rico. Long-Term Permanent Residents (LTR) tend to not have this issue, since LTRs already have citizenship in another country. If the unrecognized gain is US-sourced, it will still generally be taxable in the US despite Puerto Rico Incentives Code 60. Miramar Plaza, 954 Avenida Ponce de LeonSuite 205San Juan, Puerto Rico 00907, #mc_embed_signup{background:#fff; clear:left; font:14px Helvetica,Arial,sans-serif; } This means that Puerto Rico should be your primary place or residence or your primary place of employment. Miramar Plaza, 954 Avenida Ponce de LeonSuite 205San Juan, Puerto Rico 00907, #mc_embed_signup{background:#fff; clear:left; font:14px Helvetica,Arial,sans-serif; } It should be presumed that an individual is a resident of Puerto Rico if they have been present in Puerto Rico for a period of 183 days during the calendar year. If saving big on income taxes while soaking up the sun on a U.S.-owned Caribbean island sounds like a dream life to you, relocating to Puerto Rico under the Act 60 tax exemptions may be right for you. Promotion of Puerto Rico as a residency jurisdiction Prevalence of non-resident options via IFEs (discussed below) 1. Can a citizen or permanent resident of the USA live in Puerto Rico? Planning Tip: Puerto Rico income is not taxable in the US but the US still taxes the individual on their worldwide income (other than Puerto Rico Income under IRC 933). Consulting with a tax advisor would be a good idea as well. You had earned income in the United States of no more than a total of $3,000 and were present for more days in the relevant territory than in the United States during the tax year. To qualify for the exemptions, you must become a bonafide resident of Puerto Rico. Currently, such an eligible business with a tax exemption decree in Puerto Rico under Act 60 will enjoy a: 4% income tax rate (2% for 5 years for small businesses, or 1% for pioneer activity) 100% income tax exemption on dividends or profits generated Most Puerto Rico investors who apply for Act 60 or Act 22 must donate to a Puerto Rico charity each year. Spend at least 549 days in Puerto Rico during the 3-year period of the current tax year and the 2 preceding years, including at least 60 days in Puerto Rico during each tax year. To establish residence under the Act, someone must create a presumptive residence in Puerto Rico, live there for at least 183 days of the year, and cannot have a home outside Puerto. That way, you can satisfy all the tests and achieve bona fide residency even in the year of your move. Passing the Presence Test Discover: Best Places to Buy Property in Puerto Rico. For example, if you leave Puerto Rico to receive or accompany a parent, spouse, child, or stepchild to receive a qualifying medical treatment, you are still counted as present in Puerto Rico. Thus, in the most ideal of situations, the taxpayer will move to Puerto Rico and become a Bona-Fide resident without having realized but unrecognized gain already. This Code is approved with the conviction that it shall improve Puerto Ricos economic competitiveness. The restrictions may have been modified to require only that the investor have spent more time in Puerto Rico than any other single place in the world. Lets clarify what we mean when we say these tax breaks apply only to exported services. Its a requirement. Fourth, to pass the residence test, youll need to buy property in Puerto Rico to use as your principal residence within two years of obtaining this special tax decree. Incumbent will receive assignments in the form of plans and specification covering work to be accomplished by contractors and schedules for completion of the construction work.Qualifications: Who . This applies to the primary place where you work and create value. You must acquire a grant of tax exemption by applying through Puerto Ricos Industrial Tax Exemption Office. Youll want to keep meticulous records to ensure you dont jeopardize your eligibility for these generous Act 60 tax benefits. Where your personal belongings, such as cars, furniture, clothing, and jewelry, are stored, Where organizations that you affiliate with, whether professional, cultural, social, religious, or political, are located, The jurisdiction for which you hold a drivers license, The jurisdiction in which you are registered to vote, Where charitable organizations that you contribute to are located, Which country you put down as your country of residence on official forms, Which forms or documents you file, such as Form W-8BEN or Form W-9. However, you cant qualify unless you establish residency on the island. How do I become a resident of Puerto Rico? * *This is primarily an issue for US Citizens who do not have citizenship elsewhere. With the right structuring, one could essentially lower their effective tax rate from as high as 50% or more to 0% under the right circumstances, by moving to the island. Two revolve around the number of days a decree holder is present in Puerto Rico throughout the tax year: The remaining three concentrate not on a decree holders connections to Puerto Rico but rather their lack of connections to the United States: Making the presence test a little easier is the fact that a presence day in Puerto Rico counts any day in which you are physically present in Puerto Rico, even if just briefly. Conditions (1) through (5) above do not apply to nonresident aliens of the United States. While Puerto Rico is considered part of the United States, it is not a state per se and therefore, the US tax treatment rules are different. This incentive is available to any individual that wasn't a bona fide resident of Puerto Rico between January 17, 2006, and January 17, 2012 (these dates have varied at different times and should be confirmed at the time of application to confirm eligibility) and moves to PR. Article 7 of Act 22 protects those trusts created by Act 22 grantees from the forced inheritance provisions of the Puerto Rico Civil Code. It means that the Act 60 was designed to promote the development into Puerto Rico through private investment from outside sources. Act 60 ensures that this grant will remain a binding contract between you and the Puerto Rican government for at least 15 years. Before using any Materials, you should consult with legal counsel licensed to practice in the relevant jurisdiction. We recommend moving this block and the preceding CSS link to the HEAD of your HTML file. What are Puerto Rico Tax Incentives Under New Act 60 (20/22). In addition, every year you must make a donation of $10,000 split evenly between two qualifying nonprofit organizations in Puerto Rico. Miramar Plaza, 954 Avenida Ponce de LeonSuite 205San Juan, Puerto Rico 00907, #mc_embed_signup{background:#fff; clear:left; font:14px Helvetica,Arial,sans-serif; } A C Corporation is separate from its owners. TIP. /* Add your own Mailchimp form style overrides in your site stylesheet or in this style block. The total net capital gain generated by a Resident Individual Investor related to any appreciation of Securities or other Assets after said Resident Individual Investor becomes a Resident Individual of Puerto Rico, that is recognized before January 1, 2036, shall be fully exempt from income taxes in Puerto Rico, including the alternate basic tax provided in the Puerto Rico Internal Revenue Code. What else do you need to do to get this process started? Golding & Goldingspecializes exclusivelyin international tax, and specificallyIRS offshore disclosure. In order to encourage the transfer of such individuals to . Just be sure to comply with the presence test, the tax home test, the closer connection test, and the residence test if this is the right move for you. For example, the salaries of owners and employees are tax deductible. Under GILTI, the minimum tax for any US-owned CFC is 10.5% (max 21%). 5%, if such gain is recognized after said 10-year period. What It Means to Be a Resident of Puerto Rico. 257 of December 10, 2018, which introduced significant amendments to the Puerto Rico Internal Revenue Code ("Puerto Rico Code"); and Act No. Executed lease or transfer of title-proof of real estate ownership is required. attorney to discuss your specific facts and circumstances and to obtain advice on specific legal problems. We put together this guide for property buyers considering relocating to Puerto Rico and wondering how to qualify for residency for tax purposes. Upon approval, you will be required to pay a one-time $5,000 acceptance fee. The IRS offers five different conditions a decree holder can use to fulfill the presence requirement for bona fide residency. doing business in Puerto Rico. First, youll pay a one-time $5,005 application fee along with a $105 acceptance fee. Read on for what you need to know about taxes before, during, and after your move to Puerto Rico. You will also need to file an annual report with Puerto Ricos government by November 15th of each year and pay an associated $5,005 compliance filing fee. The factors that the IRS considers when determining whether you have maintained a closer connection to Puerto Rico than the US during the tax year include the following: Essentially, to pass the closer connection test, you need to move your entire life to Puerto Rico, including your family. Rather, the US person has to become a Bona-Fide Resident of Puerto Rico. PRelocate does not assume any responsibility for the contents of, or the consequences of using, any version of any real estate or other document templates or any spreadsheets found on our website (together, the Materials). Resident Engineer (Construction) About the Position: Incumbent will serve as the Resident Engineer under the general supervision of the Area Engineer. Not earn more than $3,000 in earned income in the USA during the tax year and be present in Puerto Rico for more days than in the USA. Act 22 (as amended by Act 60 of 2019), also known as The Individual Investors Act, was approved by the Legislative Assembly of Puerto Rico during 2012. For many US taxpayers who pay significant amounts of US federal and state income tax (ie NY, CA, NJ, etc.) However, individuals deriving income for services performed within Puerto . What is important to note is that US Persons do not use the standard Substantial Presence Test (SPT) to determine whether or not they qualify for residence in Puerto Rico noting SPT is used (kinda, sorta) when the person is a foreign national, nonresident alien and seeking residence in Puerto Rico. As Puerto Rico is a part of the USA but has an independent tax system, residents of Puerto Rico pay taxes to Puerto Rico rather than to the Federal Government and the tax rates compare extremely favorably. Another bonus is the 30 free international travel days decree holders are eligible for if they spend more time in Puerto Rico than the US. The amount of the net long- term capital gain shall be limited to the portion of the gain related to the appreciation of the Securities or other Assets while the Resident Individual Investor resided outside of Puerto Rico. Puerto Rico tax haven Eligibility under Act 60 an individual must have physical presence in the Island for at least 183 days of the year and must not have been a resident of Puerto Rico from 2009 to 2019 (the 10-year period preceding the effective date of the Incentives Code). The closer connection test can be tricky for some Act 60 decree holders to satisfy because its subjective and offers no hard guidelines on fulfillment. Under certain conditions, you can also satisfy the presence test if you were located in Puerto Rico for at least 549 days during the current year and the preceding two years. And since its generous tax incentives are only available to bona fide residents, enjoying the wonders of a Puerto Rican life is imperative. If a US person relocates to Puerto Rico and has realized but unrecognized capital gain and waits to recognize the gain until being a resident for 10 years will only be subject to a 5% Puerto Rico tax rate. The tax incentives offered by Act 60 have enticed thousands of U.S. citizens to make the move to sunny Puerto Rico, but in order to enjoy these lucrative benefits, Act 60 holders must satisfy three residency tests to prove that they are bona fide residents of Puerto Rico. Youll become a bona fide resident and be eligible for Act 60 tax benefits if you pass four qualifying tests: the presence test, the tax home test, the closer connection test, and the residence test. Then, once becoming a bona fide resident of Puerto Rico, the taxpayer will then begin to acquire income sourced from Puerto Rico so that it is not taxable in the United States. Third, to pass the closer connection test, you must convince the IRS that you have stronger ties to Puerto Rico than to the rest of the United States. Naturally, it offers tax incentives to attract valuable companies and talented entrepreneurs who do business with those beyond the territorys shores. Act 60 Updates from Act 22 (Individuals) The individual cannot have been a resident of Puerto Rico for at least 10 years prior this is increased from previously in which it was six years. While it is meant to test your residency in Puerto Rico, the key concern of the IRS is that you are not spending a lot of time in the US. To qualify as a resident of Puerto Rico, an individual must essentially pass 3 key tests as follows. */, Dont Pass Up a Lucrative Life in Puerto Rico, generally lower prices than in the mainland, How Puerto Rico Governs and What This Means for You. In September 2021, the IRS announced a campaign targeting taxpayers who claimed Puerto Rican tax benefits without meeting the requirements of the bona fide residency rules. You'll become a bona fide resident and be eligible for Act 60 tax benefits if you pass four qualifying tests: the presence test, the tax home test, the closer connection test, and the residence test. Long-Term Permanent Residents (LTR) tend to not have this issue, since LTRs already have citizenship in another country. For all of the Puerto Rico tax incentives, it is necessary to ensure you understand and monitor compliance with residency requirements. The Department of Economic Development and Commerce (DDEC), as . 3. /* Add your own Mailchimp form style overrides in your site stylesheet or in this style block. The purpose of Puerto Rico Incentives Code 60 is to promote investment in Puerto Rico by providing investment residents with tax breaks. they want to find a way to legally avoid the overbearing US tax rules, while not necessarily expatriating and renouncing their US citizenship. If youre unclear on whether youll meet this requirement, check out our Day Tracker Tool. There are always exceptions, exclusions, and limitations to be aware of. Earned income is pay for personal services performed, such as wages, salaries, or professional fees. It means that once the person becomes a resident individual investor of Puerto Rico unde Puerto Rico Incentives Code 60 and until 1/1/2036 any dividend or interest income is exempt from tax in Puerto Rico. Puerto Rico is a sunny Caribbean paradise, and you can enjoy an enriched life in a beautiful culture with beautiful weather, but if youre pining for your life in the US because you left significant connections there, you may not enjoy it. Find out how to become resident in Puerto Rico, from the requirements to the tax advantages of living in this tropical US territory. Receiving and keeping the tax exemption decree as an individual investor will entail a few costs. This is an important point because if your company does business with other entities that are based on the island, youll risk losing your tax exemption. NERA Economic Consulting's Vladimir Starkov offers tips on how businesses that rely on provisions of Puerto Rico Act 60 can prepare documents of related-party transactions to avoid IRS penalties . It has only one requirement: do not have a tax home outside of Puerto Rico during any part of the tax year. With the Act 60 Export Services Tax Incentive (formerly Act 20), it may only have to pay 4% corporate income tax. Of course, this is far lower than the 21% corporate tax rate, plus state taxes, that your business would be likely to pay on the mainland. For detailed information directly from the IRS about the residency tests, consult Publication 570. (b) Appreciation after becoming a Resident Individual of Puerto Rico. All three are easy to satisfy if you truly commit to a new life in Puerto Rico. they want to find a way to legally avoid the overbearing US tax rules, while not necessarily expatriating and renouncing their US citizenship. The contributions of the companies under the Act 20/22 have a positive impact on the local economy. 1 Puerto Rico Resident CFC & PFIC Tax Planning 2 Puerto Rico Act 60 Can Shapeshift and Terminate 3 Avoiding CFC Status in Puerto Rico has Strict Requirements 4 Other CFCs are still subject to 5471, GILTI and Subpart F 5 Foreign Income is Still Taxable 6 Puerto Rico Trust are Foreign (Even if Accounts and Assets are not) This is ensured by Act 60-2019 (formerly known as Act 22). At printing time, the government of Puerto Rico enacted into law: Act No. Residents can also benefit from 75% exemption on property tax and construction taxes. Under Chapter 2 of Act 60 . Rather, the US person has to become a. And, if it the income is sourced in Puerto Rico, it would escape tax in the U.S. as well. Puerto Rico Act 60 Tax Exemptions: IRS Examination and Audits, Key Issues for Individual and Business Taxpayers Treatment of Puerto Rico-Sourced Income, Puerto Rico Act 60 (formerly Act 20 and Act 22) Benefits, Residency Requirements Recording of a 90-minute premium CLE/CPE video webinar with Q&A The IRS will also consider factors such as where your immediate family members and personal belongings are located, where you are registered to vote, and where you hold your drivers license. As you might suspect, its easier to satisfy this requirement if you move to Puerto Rico during the first part of the year. 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