What does this mean? It is crucial to understand that in order to exclude the income from capital gains and dividends, it should be accrued after arriving in Puerto Rico and acquiring dividends and capital gains as a Resident of Puerto Rico. No Article, Blog Post or Page may be reproduced or used without express written consent of Golding & Golding. The three tests are the presence test, the tax home test, and the closer connection test. Rather, the US person has to become a Bona-Fide Resident of Puerto Rico. You must spend more time in Puerto Rico than the US during the tax year. Selling or renting out your home in the US is also a good idea, as not having a home readily available in the US will certainly boost your standing in the assessment of a closer connection. Would you like to find out more about how to get residency in Puerto Rico? As you can see, Puerto Ricos enormous Act 60 tax benefits greatly exceed the relatively small costs and inconveniences of relocation. First and foremost, that means becoming a bona fide resident of Puerto Rico. This means that Puerto Rico should be your primary place or residence or your primary place of employment. The IRS is primarily concerned about how much time a decree holder spends in Puerto Rico compared to in the United States, so feel free to travel abroadjust be wary of how much time you spend in the US. So, even though Puerto Rico will only charge you 4% corporate tax, the US will take at least another 6.5% from your CFC if you . Puerto Rico offers a myriad of tax incentives, but they all entail the same goal for the government: boosting Puerto Ricos economy by attracting to the island high-net-worth individuals who will invest in the infrastructure. /* Add your own Mailchimp form style overrides in your site stylesheet or in this style block. 4. Advertising, consulting, educational, financing, and medical services are just a few among nearly two dozen categories of export services that are eligible for these benefits. The IRS offers five different conditions a decree holder can use to fulfill the presence requirement for bona fide residency. In order to promote investment into Puerto Rico, they developed Act 60 to attract high net-worth individuals and businesses. Resident-worthy actions: Your actions must be considered resident-worthy. Earned income is pay for personal services performed, such as wages, salaries, or professional fees. 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 Application costs You'll have to pay a one-time fee of $750 when you file your initial application. You were present in the relevant territory for at least 549 days during the 3-year period that includes the current tax year and the 2 immediately preceding tax years. The purpose of Puerto Rico Incentives Code 60 is to promote investment in Puerto Rico by providing investment residents with tax breaks. Golding & Golding, A PLC (2023): LawDog Enterprises - All Rights Reserved - No Legal Advice Intended: This website includes information about legal issues and legal developments. 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. Disclaimer: Neither PRelocate, LLC, nor any of its affiliates (together PRelocate) are law firms, and this is not legal advice. A person must meet extensive rules and requirements to qualify for the favorable tax treatment available to residents of Puerto Rico. Such materials are for informational In this blog we will highlight some of the major steps you need to take to qualify for Puerto Rico's Act 22. Certain individuals who move to Puerto Rico also choose to request an Individual resident investors' Puerto Rico tax incentives grant (formerly Act 22-2012 and currently Act 60-2019). 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. Not be present in the USA for more than 90 days during the tax year. Puerto Rico now requires the individual to purchase residential property within the first two years of becoming a resident. 5. Entrepreneurs can save with a 4% corporate tax rate. doing business in Puerto Rico. 5%, if such gain is recognized after said 10-year period. What are Puerto Rico Tax Incentives Under New Act 60 (20/22). If you evacuate or cannot return to Puerto Rico due to disaster, you may also qualify for automatic presence days even though you are physically outside of Puerto Rico. Upon approval, you will be required to pay a one-time $5,000 acceptance fee. The territory offers some of the most luxurious real estate in the Caribbean, ranging from lavish homes overlooking the ocean to stunning contemporary beachfront condominium residences. What else do you need to do to get this process started? 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. And, if it the income is sourced in Puerto Rico, it would escape tax in the U.S. as well. In order to encourage the transfer of such individuals to . The Incentives Code consolidates various tax decrees, incentives, subsidies, and benefits, including . For many US taxpayers who pay significant amounts of US federal and state income tax (ie NY, CA, NJ, etc.) 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). The Resident Tax Incentive Code, known as "Act 60" provides tax exemptions to businesses and investors that relocate to, or are established in, Puerto Rico. Nov. 8, 2019, 10:00 AM. As provided by Puerto Rico Incentives Code 60: What does this mean? If youd like to enjoy these much lower federal and state taxes, you must follow through on a series of Act 60 Puerto Rico requirements. Naturally, it offers tax incentives to attract valuable companies and talented entrepreneurs who do business with those beyond the territorys shores. Puerto Rico voter registration is required. Chapter 3 of Act 60-2019 - Export Services Tax Incentive. You were not a bona fide resident of Puerto Rico in any of the three tax years immediately preceding the tax year of the move. Of important consequence is the fact that the person cannot have a closer connection to the United States or a second tax home. Thus, to reap the benefits of the ever-popular Act 60 Export Services and Individual Resident Investor tax exemptions, you must hold up your end of the bargain and settle into a life in Puerto Rico. These will be especially important to present if the IRS or Puerto Rico Department of Treasury (Hacienda) challenges your bona fide resident claims. First, youll pay a one-time $5,005 application fee along with a $105 acceptance fee. There are always exceptions, exclusions, and limitations to be aware of. SAN JUAN, Puerto Rico (PRWEB) January 17, 2020. Contact us today to ask about starting the next exciting chapter of your life on this stunning Caribbean island. This Code is approved with the conviction that it shall improve Puerto Ricos economic competitiveness. Consequently, the IRS has identified vulnerabilities with certain individuals who may be excluding income subject to U.S. tax on a filed U.S. income tax return or failing to file and report income . Sometimes, effective tax planning can help avoid these taxes. Therefore, it is important to note that the Taxpayer must plan to try to keep their income sourced in Puerto Rico to avoid any unnecessary pitfalls. Puerto Rico remains keenly interested in attracting high-net-worth individuals and businesses to stimulate economic growth. */, 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. Before using any Materials, you should consult with legal counsel licensed to practice in the relevant jurisdiction. The tax home test is the most straightforward of the three. With proper tax planning and sourcing allocations, a person can feasibly reduce their tax liability to nearly zero on income and assets generated and acquired once becoming a Puerto Rican resident but its not quite that simple. Act 60 investors must also submit their donation before December 31 and present proof in their annual report in May. Puerto Ricos bona fide residency tests may seem intimidating, but if youre dedicated to starting fresh in the USs sunny Caribbean island territory, the tests are simple. Puerto Rico seeks to move away from its historical focus on manufacturing and become a major services exporter. For US citizens who are not dual-citizens and have been US citizens from birth, the idea of giving up their citizenship can be overwhelming. And, if it the income is sourced in Puerto Rico, it would escape tax in the U.S. as well. Like with Act 22 donations, the nonprofit entities must operate in Puerto Rico and not be run by the investor or their family, spouse, or partner. 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. Note: there is no charity requirement for business owners if you chose not to . How you choose to pass the closer connections test depends on your individual circumstances, but you should aim to build up a life in Puerto Rico to the best of your ability. The non-profit charitable contribution requirement which was previously at $5,000 has been increased to $10,000. * *This is primarily an issue for US Citizens who do not have citizenship elsewhere. Interestingly, however, under Sec. Weve covered the main ones, but take a look at all of these additional tax incentives that may also apply, depending on the nature of your business. Puerto Rico taxes are very favorable to crypto investors when using Act 60. 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. 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? To recap, under Puerto Ricos Act 60 tax incentives, you and your business may be eligible for staggering tax savings if you adhere to the requirements. What is a Board-Certified Tax Law Specialist. 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. Finally, exceptions are available for special circumstances, such as medical treatment or disasters. But to those considering taking advantage of Puerto Ricos generous tax exemptions without committing to a life on the island, be warned: Integrating into Puerto Rican life isnt just a bonus. There are many advantages to becoming a resident of Puerto Rico. The presence test considers how much time you spend in Puerto Rico. Puerto Rico's Acts 20 & 22, tax incentive laws make living and working in Puerto Rico more enticing than ever before for U.S. Citizens. In other words, a tax home is your main place of business, employment, or post of duty, according to IRS rules. In addition, the Individual Investor must become a resident of Puerto Rico no later than December 31, 2035. 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. Under Act 60s Investor Resident Individual Tax Incentive (formerly Act 22), an eligible individual investor can receive a 100% tax exemption on interest, dividends, short- and long-term capital gains, and gains on crypto-based assets acquired after moving. Before using any Materials, you should consult with legal counsel licensed to practice in the relevant jurisdiction. 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. Lets traverse some of the key points of act 22 for Individuals (Act 20 is for Businesses) (now combined into act 60) as it relates to individuals and investments to US residents who relocate to Puerto Rico and become a bona fide resident (citations refer directly to the act). 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. and representation are limited. The term 'resident individual' means an individual who is domiciled in Puerto Rico. */, Export Services Tax Incentive For Businesses, 100% tax exemption on distributions from earnings and profits, 75% tax exemption on municipal and state property taxes (small and medium businesses can receive a 100% exemption during their first five years of operation), To qualify, the business model must be concentrated around exporting services outside of Puerto Rico. You were present in Puerto Rico for at least 549 days in the three-year period of the current tax year and the two previous tax years and were in Puerto Rico for at least 60 days in each tax year during that period. Still, Puerto Rico hopes to lure American mainlanders with an income tax of only 4%. The core motivation of the IRS in administering the bona fide residency tests is to make sure that you intend to stay in Puerto Rico for an extended period of time and that you spend limited time in the US during your period of bona fide residency. Therefore, there are multiple ways to satisfy the requirements of the presence test. Then, youll be required to file an annual report each year along with a $300 fee. 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. Of course not. However, this is a rule of thumb, and others have retained their status with fewer than 183 days on the islands soil in the wake of major natural disaster declarations. What It Means to Be a Resident of Puerto Rico. You should use common sense and rely on your own legal counsel for a formal legal opinion on Puerto Ricos tax incentives, maintaining bona fide residence in Puerto Rico, and any other issues related to taxes or residency in Puerto Rico. You must own it yourself or jointly with a spouse. Even if you are in the US or another country for part of the day, if you were physically present in Puerto Rico even briefly, you are counted as being present that day. What does this mean? To discover homes for sale in Puerto Rico and condos for sale in Puerto Rico from the exclusive beachfront resort communities of Bahia Beach and Dorado Beach to more affordable options in Palmas del Mar, explore real estate in Puerto Rico on our website. 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). To qualify for the exemptions, you must become a bonafide resident of Puerto Rico. When a US person obtains a Golden Visa, they have a second passport (CBI) or travel privileges (RBI). 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 This implies residing on the island for more than 183 days per year, filling out IRS forms, such as form 8898 and applying for a tax exemption decree from the Secretary of Economic Development and Commerce of Puerto Rico. However, if your C Corporation derives its revenue from the United States, dividends will be subject to regular federal taxes. Its an updated version of Act 20 and Act 22, which Puerto Rico passed in 2012 to attract outside investment and boost economic development on the island. 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 A C Corporation is separate from its owners. Likewise, the incentives offered shall be continuously reviewed in order to identify those that are not cost-effective and to strengthen those that have proven to have an impact and which generate a return on investment for the Treasury. For US citizens who are not dual-citizens and have been US citizens from birth, the idea of giving up their citizenship can be overwhelming. We elaborate on that at the end of the post. Given that one of the requirements for bona fide Puerto Rican residency is to maintain a tax home in Puerto Rico for the entire tax year, satisfying this test in the year of your move is clearly impossible unless you move on January 1. You should contact an Luckily, you can take your pick from a huge selection of quality housing on the island. We recommend moving this block and the preceding CSS link to the HEAD of your HTML file. How do I become a resident of Puerto Rico? You should use common sense and rely on your own legal counsel for a formal legal opinion on Puerto Ricos tax incentives, maintaining bona fide residence in Puerto Rico, and any other issues related to taxes or residency in Puerto Rico. 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. Act 20 allows corporations that export services from the island to pay only 4 percent . Act 20 and 22 tax incentives have been replaced by Act 60 as of January 1, 2020. Legally avoiding the 37% federal rate and the 13.3% California (or other state) rate is a jaw-dropping benefit . Each year, the island welcomes new, ambitious Americans and others who wish to keep more of their money while enjoying the island lifestyle Puerto Rico offers. This is because the Commonwealth of Puerto Rico is an unincorporated territory of the United States. For taxable years after December 31, 2016, said capital gain shall be considered income from sources outside of Puerto Rico for purposes of the income tax provided in the Puerto Rico Internal Revenue Code. In more ways than one, starting a new life in Puerto Rico can be the best investment you ever make. Be present in Puerto Rico for a minimum of 183 days in the tax year. For example, the salaries of owners and employees are tax deductible. As a basic overview, heres what you have to do to pass the three tests to establish bona fide residency in Puerto Rico: Capital gains accrued prior to your move to Puerto Rico are treated differently depending on when they are recognized: There is a $750 fee due with your application, which you are to submit to the Office of Industrial Tax Exemption. This tax haven can easily save taxpayers hundreds of thousands of dollars per year (or more) in federal taxes! Passing Puerto Ricos bona fide residency tests may seem tough, but if you truly move your whole life to Puerto Rico, its not that difficult. Lets explore each of these in greater detail. If such appreciation is recognized after December 31, 2035, the net capital gain with respect to said Securities or other Assets shall be subject to income taxes in accordance with the tax treatment provided by the Puerto Rico Internal Revenue Code. 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. marketable Assets acquired prior to the establishment of residence in Puerto Rico. Consulting with a tax advisor would be a good idea as well. When you have satisfied all the requirements to become a bona fide Puerto Rico resident, you must file Form 8898 to notify the IRS of your new residency status. Foreign Earned Income Exclusion: 0% tax on first $100,000 and 35% tax on $400,000 = $140,000. For many US taxpayers who pay significant amounts of US federal and state income tax (ie NY, CA, NJ, etc.) As a US territory, Puerto Rico has a unique tax climate. 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. Generally, you are a bona fide resident of one of these territories (the relevant territory) if, during the tax year, you: What is important to note is that US Persons do not use the standard , While Puerto Rico is considered part of the United States, it is not a state, The individual cannot have been a resident of Puerto Rico for, The non-profit charitable contribution requirement which was previously at $5,000 has been, Puerto Rico now requires the individual to, The income derived from all sources by a Resident Individual Investor after becoming a resident of Puerto Rico but before January 1, 2036, consisting of interest and dividends including but not limited to interest and dividends from a registered investment company described in Section 1112.01 of the Puerto Rico Internal Revenue Code, shall be. Act 20 and 22 tax incentives have been replaced by Act 60 as of January 1, 2020. Demand for Non-CRS Banking as CRS Goes Global Opening bank accounts in countries that do not participate in the Common Reporting Standards (CRS) is sometimes seen as a way to increase privacy. 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 . We recommend moving this block and the preceding CSS link to the HEAD of your HTML file. If you do not have a primary or regular place of employment, your tax home is considered to be your primary place of residence. Consulting companies, auditing firms, marketing businesses, and more are eligible business types. 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. The Taxpayers curiosity brings them to Google (or more likely, DuckDuckGo) and their research take them down one Puerto Rico Tax Rabbit Hole after the next. This is important, because under the previous version of the rule, there was no need to actually purchase property. Under Chapter 2 of Act 60 . Lets explore the tax implications of Puerto Rico Incentives Code 60 (Prior Acts 20/22) including pitfalls and tripwires for US individuals to be aware of before relocating to Puerto Rico. Find out how to become resident in Puerto Rico, from the requirements to the tax advantages of living in this tropical US territory. If youve invested in stocks, securities, or cryptocurrency, this may still be a great move for you. If thats the case and the amount of work done in Puerto Rico does not reach a certain threshold, then the U.S.-sourced dividends will be subject to U.S. federal taxes. If youd like to know more about the qualifying tests, consult IRS Publication 570. attorney to discuss your specific facts and circumstances and to obtain advice on specific legal problems. 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. The Governor of Puerto Rico has enacted Act 52 of 30 June 2022 (Act 52-2022), which allows companies to elect a 10.5% tax on industrial development income from sales of goods and services instead of the 4% excise tax on foreign corporations, which the latest United States (US) foreign tax credit rules do not consider creditable. 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). 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. During each year of the 3-year period, you must be present in the relevant territory for at least 60 days. Puerto Rico operates with some independent from the US government. As you might suspect, its easier to satisfy this requirement if you move to Puerto Rico during the first part of the year. Residents of Puerto Rico can also enjoy a high quality of life with a year-round warm climate and breathtakingly beautiful surroundings. 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). Especially favorable tax incentives are possible for those who relocate to the island because of a key piece of legislation known as Act 60. 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. 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. In 2012, Puerto Rico had passed two laws intended to make the island a "global investment destination.". Has to become resident in Puerto Rico can be the best investment you ever make must spend more time Puerto. $ 5,005 application fee along with a year-round warm climate and breathtakingly beautiful surroundings 60 days can not a... 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