After such individual investor becomes a bona fide resident of Puerto Rico Act 60 provides 100% tax exemption from Puerto Rico income taxes on all interest and dividend income, and on certain capital gains realized and accrued during the period of the exemption. This guide explores the rules and requirements in detail and outlines how to go about applying for residency in Puerto Rico. 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. However, if you also have income from sources outside of Puerto Rico, including from U.S. sources, you're required to file a U.S. federal income tax return if such amount is above the U.S. filing . Disclaimer: Neither PRelocate, LLC, nor any of its affiliates (together PRelocate) are law firms, and this is not legal advice. 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. Still, Puerto Rico hopes to lure American mainlanders with an income tax of only 4%. 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. 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? Disclaimer: Neither PRelocate, LLC, nor any of its affiliates (together PRelocate) are law firms, and this is not legal advice. To be a bona fide resident of 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 . If such appreciation is recognized at any other time, 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. *This is primarily an issue for US Citizens who do not have citizenship elsewhere. /* Add your own Mailchimp form style overrides in your site stylesheet or in this style block. Now, under Act 52-2022, if a nonresident employer employs a remote employee who works from Puerto Rico, then the employer is not regarded to be engaged in trade or business within Puerto Rico for tax years beginning after December 31, 2021, provided that all of the following requirements are met: As a US territory, Puerto Rico has a unique tax climate. If you are a U.S. citizen or resident alien, you will satisfy the presence test for the tax year if you meet one of the following conditions. Long-Term Permanent Residents (LTR) tend to not have this issue, since LTRs already have citizenship in another country. * *This is primarily an issue for US Citizens who do not have citizenship elsewhere. Promotion of Puerto Rico as a residency jurisdiction Prevalence of non-resident options via IFEs (discussed below) 1. 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. Requirements Individual Investors must meet the following requirements: . If that sounds ideal to you, read on for a brief overview of the benefits Puerto Ricos Act 60 offers. SAN JUAN, Puerto Rico, Nov. 8, 2019 /PRNewswire-PRWeb/ -- Former Governor of Puerto Rico, Ricardo Rossell, signed Act 60-2019, commonly known as the Puerto Rico . Rather, the US person has to become a Bona-Fide Resident of Puerto Rico. The U.S. will not tax any prior unrealized gains if recognized after 10 years of residence in Puerto Rico. The closer connection test is perhaps the most reliable in determining your loyalty to Puerto Rico. 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. PUERTO RICO 787.759.9292 MIAMI 305-677-6626 MCVPR.COM . 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. You were present in the relevant territory for at least 183 days during the tax year. What does this mean? You had no significant connection to the US during the tax year. Before they will exempt you from regular U.S. tax obligations, the IRS must determine that you have truly made Puerto Rico your home. SAN JUAN, Puerto Rico (PRWEB) January 17, 2020. The non-profit charitable contribution requirement which was previously at $5,000 has been increased to $10,000. What is a Board-Certified Tax Law Specialist. 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. 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 are a bona fide resident of Puerto Rico for the year of your move plus the two proceeding years. With beautiful, sunny weather, a vibrant Hispanic culture, and generally lower prices than in the mainland, Puerto Rico offers more than just tax savings. First, youll pay a one-time $5,005 application fee along with a $105 acceptance fee. In more ways than one, starting a new life in Puerto Rico can be the best investment you ever make. Due to the territorys legal status, moving to Puerto Rico is considered internal migration as opposed to immigration. 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. 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. 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; } First, to pass the presence test, you must satisfy the IRS requirement to be physically located inside Puerto Rico for at least 183 days of the taxable year. In addition, the income derived by a Resident Individual Investor after becoming a resident of Puerto Rico, but before January 1, 2036, consisting of interest, financing charges, dividends or partnership interest received from International Banking Entities authorized under the Banking Center Act, shall be fully exempt from income taxes in Puerto Rico, including the alternate basic tax provided in the Puerto Rico Internal Revenue Code. 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. However, individuals deriving income for services performed within Puerto . 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. You dont need to satisfy them allsatisfying just a single one is sufficient. Don't Pass Up a Lucrative Life in Puerto Rico The IRS's new campaign addresses taxpayers who have claimed benefits through Puerto Rico Act 60, without meeting the requirements of section 937, Residence and Source Rules Involving Possessions. What It Means to Be a Resident of Puerto Rico. 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. 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. And since its generous tax incentives are only available to bona fide residents, enjoying the wonders of a Puerto Rican life is imperative. 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 portion of the net long-term capital gain generated by a Resident Individual Investor attributable to any appreciation of the Securities or other Assets owned by such Resident Individual Investor before becoming a Resident Individual of Puerto Rico, which appreciation is recognized ten (10) years after becoming a Resident Individual of Puerto Rico and before January 1, 2036, shall be subject to a five percent (5%) tax, in lieu of any other tax imposed under the Puerto Rico Internal Revenue Code and shall not be subject to the alternate basic tax provided in Subsection A of the Puerto Rico Internal Revenue Code. Puerto Rico Tax Incentives Act 60 Resident Investor Individual Chapter 2 of Subtitle B, formerly Act 22. Are you wondering how exactly your business will benefit from relocating to Puerto Rico? We recommend moving this block and the preceding CSS link to the HEAD of your HTML file. To pass this test, an individual should be able to satisfy 1 of the following conditions: Secondly, an individual should not have a tax home outside of Puerto Rico. Schedule Consultation . When applying as an individual investor, you must pay a one-time filing fee of $5,005 USD. Many companies opt to become C Corporations because of the special tax advantages associated with this status. 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. If you're a US citizen or legal resident, no. To qualify as a resident of Puerto Rico, an individual must essentially pass 3 key tests as follows. 5%, if such gain is recognized after said 10-year period. The tax home test is the most straightforward of the three. 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. Your benefits should not be affected even if there are amendments to the legislation during the term of this agreement. Noting, the Puerto Rico BFR rules are not the same as the Substantial Presence Test BFR rules but the concept is the same. */, 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. Such materials are for informational Even if youre only in Puerto Rico for an hour on a certain day, that counts as being present in Puerto Rico. 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. Not least among them are the high thresholds to qualify as a bona fide resident; however, these requirements are beyond the scope of this item. 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. If you think this test sounds impossible to satisfy for the year of your move, thats why the IRS offers a special exemption for the year of your move only. 2 This income also would be excluded from Puerto Rican income tax. Those of Act 22 on average pay 12 times more than most taxpayers in PR. 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). 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. 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. 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. Theyve also found that Puerto Rico is convenient, with many regular flights to the mainland, plentiful U.S. retailers, and a U.S.-based legal system. Puerto Rico voter registration is required. And, if it the income is sourced in Puerto Rico, it would escape tax in the U.S. as well. The report's findings concluded with what was already known; Act 20 and Act 22 led to hundreds of millions of dollars of lost U.S. income tax revenue. Under the latter approach, youd set up a new entity on the island that charges a management fee to the rest of your mainland-based business. and representation are limited. Puerto Rico operates with some independent from the US government. 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. */, To avoid paying regular U.S. taxes on their Puerto Ricanearned income and instead pay the reduced Act 60 rates, Act 60 holders must prove to the Internal Revenue Service (IRS) that they are bona fide residents of Puerto Rico. Puerto Rico Service Exporters Must Document Well to Avoid IRS Ire. If you are aiming to satisfy the presence test by spending at least 549 days within a three-year period in Puerto Rico, you still must be physically present in Puerto Rico for 60 days per year. Puerto Rico now requires the individual to purchase residential property within the first two years of becoming a resident. Let's explore each of these in greater detail. they want to find a way to legally avoid the overbearing US tax rules, while not necessarily expatriating and renouncing their US citizenship. What if you dont have a primary place of employment? Its important to keep considerations like funding, location, how to search for a property, and how to close the transaction in mind, so be sure to review these tips for buying a home in Puerto Rico. We hope this comprehensive look at Puerto Ricos tax incentives and requirements under Act 60 will help inform your decision on whether to relocate. Before using any Materials, you should consult with legal counsel licensed to practice in the relevant jurisdiction. This is because the Commonwealth of Puerto Rico is an unincorporated territory of the United States. If you think passing the tax home test during the first year of your move to Puerto Rico sounds difficult, youre right. What It Means to Be a Resident of Puerto Rico, Spending at least 183 days in Puerto Rico throughout the tax year, Spending at least 549 days in Puerto Rico throughout the current and previous two tax years, including at least 60 days per tax year, Spending no more than 90 days in the US throughout the tax year, Having no significant connections to the US throughout the tax year, Where they spouse and children, if any, live. Conditions (1) through (5) above do not apply to nonresident aliens of the United States. 257 of December 10, 2018, which introduced significant amendments to the Puerto Rico Internal Revenue Code ("Puerto Rico Code"); and Act No. 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. In addition, the Individual Investor must become a resident of Puerto Rico no later than December 31, 2035. However, in the case of Puerto Rico, all the above tax and other benefits are legally available to residents of Puerto Rico without having to renounce US citizenship. 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. Flights to and from Puerto Rico are considered domestic flights, a distinction shared in the Caribbean by only one other island chain: the US Virgin Islands. You must own it yourself or jointly with a spouse. Golding & Golding, A PLC (2023): LawDog Enterprises - All Rights Reserved - No Legal Advice Intended: This website includes information about legal issues and legal developments. For many US taxpayers who pay significant amounts of US federal and state income tax (ie NY, CA, NJ, etc.) 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. Can a citizen or permanent resident of the USA live in Puerto Rico? 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. However, you cant qualify unless you establish residency on the island. Act 60 provides tremendous tax benefits to qualified businesses and individual investors. Act 52-2022 expands and clarifies the existing compliance rules under Act 60-2019. 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. 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. Various factors such as the presence of an individuals permanent home, family, belongings, principal bank and business in Puerto Rico, as well as the existence of professional, cultural, religious, social and political affiliations and links in Puerto Rico, may help to demonstrate a closer connection to Puerto Rico than to anywhere else. What It Means to Be a Resident of Puerto Rico. The purpose of these measures is to provide incentives to individuals who have not been residents of Puerto Rico to become residents. TAX EXEMPTION DECREE Youll also use Form 8898 to inform the IRS of your new residency status. You must spend more time in Puerto Rico than the US during the tax year. Puerto Rico Act 60: How You Can Lower Your Federal and State Tax Rates Under the Resident Tax Incentive Code October 13, 2022 The Tax Incentive Code, known as "Act 60", provides tax exemptions to businesses and investors that relocate to, or are established in, Puerto Rico. (b) Appreciation after becoming a Resident Individual 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). Note that you may only receive 30 free days of international travel if you fulfill the following conditions: Certain exemptions also apply. Under Chapter 2 of Act 60 . 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. Puerto Rico taxes are very favorable to crypto investors when using Act 60. How do I become a resident of Puerto Rico? 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. A Puerto Rican driver's license is required. Theyve been delighted to experience the rich culture, delicious food, and wonderful tropical sightseeing opportunities found in Puerto Rico. Article 7 of Act 22 protects those trusts created by Act 22 grantees from the forced inheritance provisions of the Puerto Rico Civil Code. Puerto Rico's Act 60: 30% tax on first $100,000 = $30,000 and 4% of $400,000 = $16,000, for a total tax of $46,000. Of important consequence is the fact that the person cannot have a closer connection to the United States or a second tax home. There are always exceptions, exclusions, and limitations to be aware of. Luckily, you can take your pick from a huge selection of quality housing on the island. Before using any Materials, you should consult with legal counsel licensed to practice in the relevant jurisdiction. To avoid paying regular U.S. taxes on their Puerto Ricanearned income and instead pay the reduced Act 60 rates, Act 60 holders must prove to the Internal Revenue Service (IRS) that they are bona fide residents of Puerto Rico. 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. Qualified businesses can also receive a 100% tax exemption on distributions from earnings and profits, a 50% tax exemption on municipal taxes, and a 75-100% tax exemption on municipal and state property taxes. Additional small fees may apply. 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. 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? 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. First and foremost, that means becoming a bona fide resident of Puerto Rico. Puerto Rico seeks to move away from its historical focus on manufacturing and become a major services exporter. A Puerto Rico resident is an individual who is domiciled in Puerto Rico. In addition, every year you must make a donation of $10,000 split evenly between two qualifying nonprofit organizations in Puerto Rico. You were present in the United States for no more than 90 days during the tax year. Physical Presence: the investor has to be physically present in Puerto Rico 168-183 days per year, and in the United States for less than 90 days in the year. For all of the Puerto Rico tax incentives, it is necessary to ensure you understand and monitor compliance with residency requirements. We elaborate on that at the end of the post. 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. It is important to understand what is excluded for tax purposes and what is not excluded under Puerto Rico Incentives Code 60. If you do not have a primary or regular place of employment, your tax home is considered to be your primary place of residence. 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; } 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. Note: there is no charity requirement for business owners if you chose not to . Puerto Rico Incentives Code 60 for prior Acts 20/20: Many high-net worth Taxpayers are (understandably) upset about the massive U.S. taxes levied on their employment, investment, and corporate income. Would you like to find out more about how to get residency in Puerto Rico? 3. Act 20 and 22 tax incentives have been replaced by Act 60 as of January 1, 2020. The most important consideration for the IRS is that you spend more time in Puerto Rico than in the rest of the United States. Passing the Presence Test Puerto Rico Tax Compliance Guide By TCG, Torres CPA Group, CifrasPR, Torres & Soto Tax . 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. As you might suspect, its easier to satisfy this requirement if you move to Puerto Rico during the first part of the year. In June 2019, Puerto Rico made substantial changes to its tax incentives that came into effect on January 1, 2020. 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. The closer connection test simply seeks to determine whether an Act 60 decree holder maintains closer connections to Puerto Rico or the United States and uses a number of factors to determine ones national ties, such as the following: Naturally, some of these factors are more important than othersthe IRS will especially consider where a decree holders spouse and children live. Feb. 9, 2023, 1:45 AM. 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. purposes only and may not reflect the most current legal developments. Its recommended to sell or rent out your home in the US, which will not only significantly help pass the closer connection test but also provide some extra cash. */, 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 must acquire a grant of tax exemption by applying through Puerto Ricos Industrial Tax Exemption Office. If you have decided to make the move and take advantage of Puerto Ricos generous tax incentives, make sure youre really committed. Tax Exemption Period Act 60. To become a bona fide resident of Puerto Rico, as defined in Section 937 of the Internal Revenue Code, individuals must . Discover: Best Places to Buy Property in Puerto Rico. During each year of the 3-year period, you must be present in the relevant territory for at least 60 days. As provided by Puerto Rico Incentives Code 60: What does this mean? At printing time, the government of Puerto Rico enacted into law: Act No. All three are easy to satisfy if you truly commit to a new life in Puerto Rico. 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. That at the end of the special tax advantages associated with this status business will benefit from relocating to Rico. Commit to a new life in Puerto Rico operates with some independent the! The Commonwealth of Puerto Rico is an individual must essentially pass 3 key as. Exemption DECREE youll also use form 8898 to inform the IRS of your move to Puerto Rico your business benefit! Promotion of Puerto Rico incentives Code 60: what does this mean during the tax.! 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