This is important, because under the previous version of the rule, there was no need to actually purchase property. If thats the case, the IRS will treat your primary residence as your tax home. Resident-worthy actions: Your actions must be considered resident-worthy. You had no significant connection to the US during the tax year. 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. 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. With fewer close connections to the U.S. mainland, youll minimize your risk of an IRS audit. Thirdly, an individual should not have a closer connection to the USA or to a foreign country than to Puerto Rico. Financial accounts include bank accounts, crypto asset accounts, certain insurance policies or investment accounts. 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; } We look forward to helping you find your perfect property in Puerto Rico. 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. But if they have not actually renounced their own US citizenship they are still subject to US tax on their worldwide income. 1. Golding & Golding, A PLC (2023): LawDog Enterprises - All Rights Reserved - No Legal Advice Intended: This website includes information about legal issues and legal developments. We put together this guide for property buyers considering relocating to Puerto Rico and wondering how to qualify for residency for tax purposes. However, you cant qualify unless you establish residency on the island. 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. 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. This means that Puerto Rico should be your primary place or residence or your primary place of employment. 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. Moving to Puerto Rico can be a dream come true for individual U.S. investors and businesses seeking to lower their taxes, as long as they follow certain requirements. Thousands of Americans have already made the move to Puerto Rico, enjoying a 0% income tax rate on capital gains or a 4% corporate tax rate for their business while indulging in the excitement of Puerto Rican culture and cuisine. TAX EXEMPTION DECREE Your chances of passing improve considerably as you strengthen banking, social, cultural, or religious ties to the island, identify Puerto Rico as your place of residence, and establish your permanent home there. 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. 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. and representation are limited. The first of the three tests is perhaps the most complicated. Most Puerto Rico investors who apply for Act 60 or Act 22 must donate to a Puerto Rico charity each year. Contrary to popular belief, just getting a, When a US person obtains a Golden Visa, they have a second passport (CBI) or travel privileges (RBI). Act 20 offers entities a 4% corporate rate on business . 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. 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. 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. There are always exceptions, exclusions, and limitations to be aware of. When US taxpayers begin researching how to relinquish their US status, oftentimes they will come across Puerto Rico. The IRS' report to Congress calculated that more than 1,924 applicantscorporations, LLCs, partnerships, and other typeshad been granted tax benefits under the Exports Services Act (formerly known as Act 20) as of March 2020 based on partial information provided by Puerto Rico. As a U.S. territory, Puerto Rico is subject to tax rules that are different from those of U.S. states. Before using any Materials, you should consult with legal counsel licensed to practice in the relevant jurisdiction. Golding & Goldingspecializes exclusivelyin international tax, and specificallyIRS offshore disclosure. 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. 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. However, if your C Corporation derives its revenue from the United States, dividends will be subject to regular federal taxes. During each year of the 3-year period, you must be present in the relevant territory for at least 60 days. 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. 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. 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. It is expected that individuals who receive their decree before this date will be grandfathered in. What does this mean? 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. Thats why IRS has introduced a special exception for your first year in Puerto Rico, contingent on three conditions: This means that as long as you move to Puerto Rico before July 1, you can become a bona fide Puerto Rican resident in your first year on the island and reap the benefits of your Act 60 decree immediately. The Incentives Code consolidates various tax decrees, incentives, subsidies, and benefits, including . 5%, if such gain is recognized after said 10-year period. In addition, the Individual Investor must become a resident of Puerto Rico no later than December 31, 2035. Puerto Rico Service Exporters Must Document Well to Avoid IRS Ire. */. Puerto Rico tax rules can vary depending on the nature and activities of your business. marketable Assets acquired prior to the establishment of residence in Puerto Rico. Owners of existing businesses can qualify for the Act 60 business tax incentives in one of two ways: Youll have to pay a one-time fee of $750 when you file your initial application. Additional small fees may apply. A Puerto Rico resident is an individual who is domiciled 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. Disclaimer: Neither PRelocate, LLC, nor any of its affiliates (together PRelocate) are law firms, and this is not legal advice. It is important to note that bona fide residency is not the same thing as residency, and you are not considered a bona fide resident of Puerto Rico simply by living in Puerto Rico. Local government has legislated a series of incentives to attract investment, of which EB-5 Visa program participants can also take advantage. 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. What is the GILTI Tax, and How Does It Affect Non-Resident Export Services Tax Incentive Decree Holders? 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). Before using any Materials, you should consult with legal counsel licensed to practice in the relevant jurisdiction. 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. 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. This gives them more leeway to develop their own innovative tax laws, separate and distinct from US federal/state tax law. 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. Thanks to this code, your income sourced from Puerto Rico can be exempt from both federal and state taxes. 5. What if you dont have a primary place of employment? The amount of said net capital gain means the portion of the gain related to the appreciation of the Securities or other Assets owned by the Resident Individual Investor at the time of becoming a Resident Individual of Puerto Rico and those acquired by him after becoming a Resident Individual of Puerto Rico. 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. 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. 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. To qualify as a resident of Puerto Rico, an individual must essentially pass 3 key tests as follows. 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. 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. 4. PUERTO RICO 787.759.9292 MIAMI 305-677-6626 MCVPR.COM . 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. Neither you nor your relatives can control these nonprofit entities. As provided by Puerto Rico Incentives Code 60: What does this mean? SAN JUAN, Puerto Rico (PRWEB) January 17, 2020. These services must not have a connection with 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. However, note that as of 2022, the Act 60 Individual Resident Investor tax exemption is slated to expire on December 31, 2035. The U.S. will not tax any prior unrealized gains if recognized after 10 years of residence in Puerto Rico. When applying as an individual investor, you must pay a one-time filing fee of $5,005 USD. 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. In order to encourage the transfer of such individuals to . 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. Requirements Individual Investors must meet the following requirements: . 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. Puerto Rico Residency Requirements Benefits of Puerto Rico Residency Find Out More. First and foremost, that means becoming a bona fide resident of Puerto Rico. The tax home test is the most straightforward of the three. 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 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. Contact us today to ask about starting the next exciting chapter of your life on this stunning Caribbean island. 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. 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. A Puerto Rican driver's license is required. 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 . You were present in the United States for no more than 90 days during the tax year. 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. 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. Can a citizen or permanent resident of the USA live in Puerto Rico? We recommend moving this block and the preceding CSS link to the HEAD of your HTML file. 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). 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. When you have satisfied all the requirements to become a bona fide Puerto Rico resident, you must file, It is important to note that bona fide residency is not the same thing as residency, and you are not considered a bona fide resident of Puerto Rico simply by living in Puerto Rico. 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. 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. PRelocate is an Official Qualified Promoter with Puerto Ricos Department of Commerce and will save you time and money with a hassle-free relocation. Due to the territorys legal status, moving to Puerto Rico is considered internal migration as opposed to immigration. How do I become a resident of 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. Of important consequence is the fact that the person cannot have a closer connection to the United States or a second tax home. 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. If youve invested in stocks, securities, or cryptocurrency, this may still be a great move for you. 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 fully exempt from income taxes in Puerto Rico, including the alternate basic tax provided in the Puerto Rico Internal Revenue Code. 7701(a)(30)) and thus is not subject to Subpart F and GILTI inclusions associated with ownership of stock in a Puerto Rican subsidiary (provided dividends received by that individual from that foreign subsidiary would be considered Puerto Rican-source). Act 22 - The Individual Investors Act "Before I spent 30 percent of my time thinking about taxes, and now I don't have to do that." - John Helmers, Act 22 Resident, Money Manager, CEO Long Focus Capital. A C Corporation is separate from its owners. Therefore, there are multiple ways to satisfy the requirements of the presence test. That way, you can satisfy all the tests and achieve bona fide residency even in the year of your move. Nov. 8, 2019, 10:00 AM. There are always exceptions, exclusions, and limitations to be aware of. Bona fide resident of Puerto Rico. Under Act 60, an eligible business includes export services and commerce. Note: there is no charity requirement for business owners if you chose not to . *This is primarily an issue for US Citizens who do not have citizenship elsewhere. It means that the Act 60 was designed to promote the development into Puerto Rico through private investment from outside sources. Before using any Materials, you should consult with legal counsel licensed to practice in the relevant jurisdiction. As you might suspect, its easier to satisfy this requirement if you move to Puerto Rico during the first part of the year. You were present in Puerto Rico for at least 183 days in the tax year. 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. 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. 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. 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. However, individuals deriving income for services performed within Puerto . 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. 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. 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. Read on for what you need to know about taxes before, during, and after your move to Puerto Rico. These individuals have a full Puerto Rico capital gain tax exemption with respect to capital gains accrued after the individual becomes a BFR-PR. If you do not have a primary or regular place of employment, your tax home is considered to be your primary place of residence. Lets explore each of these in greater detail. To qualify for the exemptions, you must become a bonafide resident of Puerto Rico. 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. Only one of the following conditions must be true: To be counted as present in Puerto Rico, you must be physically present on the island during any part of the day. You had no significant connection to the United States during the tax year. Youll also use Form 8898 to inform the IRS of your new residency status. For many US taxpayers who pay significant amounts of US federal and state income tax (ie NY, CA, NJ, etc.) We hope this comprehensive look at Puerto Ricos tax incentives and requirements under Act 60 will help inform your decision on whether to relocate. Foreign Earned Income Exclusion: 0% tax on first $100,000 and 35% tax on $400,000 = $140,000. *Paragraph C refers to the Presence Test. 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. 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. TIP. Individual Investor must not have been a resident of Puerto Rico during any of the 10 years prior to the effective date of Act 60 (July 1st, 2019). Under Chapter 2 of Act 60 . Initial consultations From a technical standpoint, the new version of the act provides a detailed definition of the term securities and what will be covered under the long-term capital gain exemption rules. This comes out to $5,110 in application fees and an ongoing $15,005 in annual report filing fees and charitable contributions. Are you wondering how exactly your business will benefit from relocating to Puerto Rico? It gets a bit more complicated if your C Corporation does business in both Puerto Rico and the United States. 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. In June 2019, Puerto Rico made substantial changes to its tax incentives that came into effect on January 1, 2020. Consulting with a tax advisor would be a good idea as well. 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. Furthermore, the property must remain your primary residence for as long as the decree remains in force. 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. If you think passing the tax home test during the first year of your move to Puerto Rico sounds difficult, youre right. 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. Naturally, it offers tax incentives to attract valuable companies and talented entrepreneurs who do business with those beyond the territorys shores. You can follow one of two paths to make this happen: a total relocation of your business or partial relocation of it to Puerto Rico. Act 20 allows corporations that export services from the island to pay only 4 percent . The goal of tax planning is to legally limit, minimize, and if possible, avoid US tax while also avoiding a tax fraud audit (eggshell or reverse eggshell) or special agent investigation. 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. 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. Puerto Rico seeks to move away from its historical focus on manufacturing and become a major services exporter. Passing the Presence Test 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. 2. If youre unclear on whether youll meet this requirement, check out our Day Tracker Tool. Upon approval, you will be required to pay a one-time $5,000 acceptance fee. 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. This property must be the individuals primary residence and not rented out. Puerto Ricos status as a top tax haven is undisputed. 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. Your tax home is the jurisdiction in which your primary place of employment is located. Be present in Puerto Rico for a minimum of 183 days in the tax year. Tax Exemption Period Act 60. Individual - 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; } 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. Residents of Puerto Rico can also enjoy a high quality of life with a year-round warm climate and breathtakingly beautiful surroundings. 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. Article 7 of Act 22 protects those trusts created by Act 22 grantees from the forced inheritance provisions of the Puerto Rico Civil Code. This tax haven can easily save taxpayers hundreds of thousands of dollars per year (or more) in federal taxes! Its a great bargain. Act 60 provides tremendous tax benefits to qualified businesses and individual investors. Puerto Rico Tax Compliance Guide By TCG, Torres CPA Group, CifrasPR, Torres & Soto Tax . If your export-service company is conducting its activities inside Puerto Rico, it may be eligible for substantial benefits that apply to income received from customers outside of Puerto Rico. 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