Before they will exempt you from regular U.S. tax obligations, the IRS must determine that you have truly made Puerto Rico your home. Consulting with a tax advisor would be a good idea as well. 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. The non-profit charitable contribution requirement which was previously at $5,000 has been increased to $10,000. 1. Firstly, an individual must be present in Puerto Rico for defined period. Lets take the example of a C Corporation, which the IRS recognizes as an independent legal entity. 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 . 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. In other words, a tax home is your main place of business, employment, or post of duty, according to IRS rules. 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. How do I become a resident of Puerto Rico? You are a bona fide resident of Puerto Rico for the year of your move plus the two proceeding years. These benefits are available to any Act 60 Individual Resident Investor decree holder who fulfills the requirements for bona fide residency in Puerto Rico, pay the applicable filing fees, meets the minimum annual charitable donations (currently $10 annual to approved PR registered non-profit), and lives on the island at least 3 years. First, youll pay a one-time $5,005 application fee along with a $105 acceptance fee. 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. This applies to the primary place where you work and create value. The Department of Economic Development and Commerce (DDEC, in Spanish) has revoked 121 tax incentive decrees to Act 22 (now Act 60) beneficiaries who failed to submit annual reports to the agency, as the law required. The non-profit charitable contribution requirement which was previously at $5,000 has been increased to $10,000. For all of the Puerto Rico tax incentives, it is necessary to ensure you understand and monitor compliance with residency 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 . 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. attorney to discuss your specific facts and circumstances and to obtain advice on specific legal problems. 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. We look forward to helping you find your perfect property in Puerto Rico. 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. This is ensured by Act 60-2019 (formerly known as Act 22). If youre unclear on whether youll meet this requirement, check out our Day Tracker Tool. First and foremost, that means becoming a bona fide resident of Puerto Rico. 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. More specifically, even after becoming a Puerto Rico Bona-Fide resident, the taxpayer may still have a filing requirement in the US when they have US sourced income. 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. Such materials are for informational It means that the Act 60 was designed to promote the development into Puerto Rico through private investment from outside sources. As you can see, Puerto Ricos enormous Act 60 tax benefits greatly exceed the relatively small costs and inconveniences of relocation. 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). 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. /* Add your own Mailchimp form style overrides in your site stylesheet or in this style block. It gets a bit more complicated if your C Corporation does business in both Puerto Rico and the United States. Ultimately, you can satisfy the closer connection test however works best for you and your circumstances, but fully committing to a new life in Puerto Rico is the simplest solution. A Puerto Rico resident is an individual who is domiciled in Puerto Rico. The Incentives Code consolidates various tax decrees, incentives, subsidies, and benefits, including . Under Chapter 2 of Act 60 . 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. 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. 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. Best Places to Buy Property in Puerto Rico. 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. All three are easy to satisfy if you truly commit to a new life in Puerto Rico. Act 60 investors must also submit their donation before December 31 and present proof in their annual report in May. Consulting companies, auditing firms, marketing businesses, and more are eligible business types. 257 of December 10, 2018, which introduced significant amendments to the Puerto Rico Internal Revenue Code ("Puerto Rico Code"); and Act No. Disclaimer: Neither PRelocate, LLC, nor any of its affiliates (together PRelocate) are law firms, and this is not legal advice. With beautiful, sunny weather, a vibrant Hispanic culture, and generally lower prices than in the mainland, Puerto Rico offers more than just tax savings. Initial consultations The presence test considers how much time you spend in Puerto Rico. Legally avoiding the 37% federal rate and the 13.3% California (or other state) rate is a jaw-dropping benefit . 4. Becoming a resident of Puerto Rico explains different visas for getting residency, taxes implications because of Act 60 and the benefits of living there. 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. 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. Its no surprise that thousands of Americans who have moved to the island have been thrilled with the tax breaks that have saved them millions of dollars. 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. We recommend moving this block and the preceding CSS link to the HEAD of your HTML file. 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. A U.S. taxpayer who is a bona fide resident of Puerto Rico for an entire taxable year is able to exclude from U.S. federal income tax under 933 (1) Puerto Rican-source interest and dividends, and (possibly) worldwide capital gains. What is a Board-Certified Tax Law Specialist. This tax haven can easily save taxpayers hundreds of thousands of dollars per year (or more) in federal taxes! 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. Note that those who were already residents of Puerto Rico during the 10 years before their move are not eligible for this tax incentive. (b) Appreciation after becoming a Resident Individual of Puerto Rico. Executed lease or transfer of title-proof of real estate ownership is required. Act 52-2022 requires Puerto Rico resident individuals to report financial accounts that are held outside of Puerto Rico or outside of the US and had a balance over $10,000 during the tax year. 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. 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. If you're a bona fide resident of Puerto Rico during the entire tax year, you generally aren't required to file a U.S. federal income tax return if your only income is from sources within Puerto Rico. 2. 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. Thanks to this code, your income sourced from Puerto Rico can be exempt from both federal and state 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. 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. 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. Note that you may only receive 30 free days of international travel if you fulfill the following conditions: Certain exemptions also apply. Basically, to satisfy the tax home test, keep your officeor your home, as the case may bein Puerto Rico. 5. 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. 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. To benefit from the tax advantages under Act 60-2019 (detailed below) an individual must purchase property in Puerto Rico within 2 years. You were present in Puerto Rico for at least 183 days in the tax year. */. 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. 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; } 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. However, if your C Corporation derives its revenue from the United States, dividends will be subject to regular federal taxes. Long-Term Permanent Residents (LTR) tend to not have this issue, since LTRs already have citizenship in another country. 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. A flat 4% corporate tax rate Finally, exceptions are available for special circumstances, such as medical treatment or disasters. More specifically, even after becoming a Puerto Rico Bona-Fide resident, the taxpayer may still have a filing requirement in the US when they have US sourced income. 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. As a US territory, Puerto Rico has a unique tax climate. Of important consequence is the fact that the person cannot have a closer connection to the United States or a second tax home. The COVID-19 pandemic, for example, qualifies as special circumstances that can grant an Act 60 decree holder free presence days under certain conditions. As provided by Puerto Rico Incentives Code 60: What does this mean? And, if it the income is sourced in Puerto Rico, it would escape tax in the U.S. as well. Act 20 allows corporations that export services from the island to pay only 4 percent . 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. 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. . 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. Many of the factors that help you pass the closer connection test, such as a Puerto Rican drivers license or voter registration, will also help you get by in day-to-day life in Puerto Rico. Disclaimer: Neither PRelocate, LLC, nor any of its affiliates (together PRelocate) are law firms, and this is not legal advice. Think about how your business can flourish with such a low tax burden. Bona fide resident of Puerto Rico. To explore your options in more detail, please contact 7th Heaven Properties, the Luxury Caribbean Property Specialist. 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