Many Americans, including our President, forget or are unaware that the carribean island of Puerto Rico is a part of the United States. Puerto Rico’s relationship with the United States is complicated and can be hard to understand.
Puerto Rico is a territory of the United States, but it is its own self governing entity. Puerto Rico is responsible for its own taxes and revenues, but is a part of the US for various Federal laws. For example, Puerto Rico sourced income is excluded from US taxation. However, US immigration laws apply on the island. So, only a US citizen or green card holder (or someone with a US work visa) is allowed to work in Puerto Rico.
If you were born in Puerto Rico you are a citizen of the United States. Residents of Puerto Rico have their own social security number and are free to work or live in anywhere the United States.
Despite all this Puerto Rico remains separated to the United States because it is not a state. Although many citizens of Puerto Rico want the United States to recognize the island as the 51st state, American businesses and tax experts are not interested in that happening.
Because Puerto Rico is not a state, Federal taxes do not apply to any individual or corporation doing business in the island. Meaning that if you are a resident of Puerto Rico you are exempt from a number of taxes you would normally have to pay. A resident is someone who spends at least 183 days a year on the island.
With the changes that were made to Puerto Rico’s Act 20 and Act 22 last year, Puerto Rico cemented itself as a force to be reckoned with. For decades small island in the caribbean like St. Lucia and Dominica have gained an advantage with great foreign tax programs, but Puerto Rico is looking to emulate them and beat them in their own game.
- For more on Puerto Rico’s tax holiday program after President Trump, see: Big Changes Coming for Puerto Rico’s Act 20 Tax Incentive Program
As opposed to American Sstates, Puerto Rico is free to charge whatever tax rate they want to, making it possible for Act 20 and Act 22 to exist. Both of this Acts can be a little hard to understand, but this are the most important aspects of it:
- Act 22 gives you a zero percent tax rate on capital gains on assets acquired after you move to Puerto Rico.
- Act 20 gives you a 4% corporate tax rate on any Puerto Rico sourced business income earned inside an Act 20 company. Puerto Rico sourced business income is earnings and profits from work performed in the territory.
In order to qualify for both of this Acts a citizen of the United States is required to be a resident of Puerto Rico. To be a resident of Puerto Rico you must live in the island a total of 183 days of the year.
And here is where Puerto Rico beats Dominican, St. Lucia, Belize, Caymans and the rest. When a US citizen lives abroad, and qualifies for the Foreign Earned Income Exclusion, they get to exclude up to $104,100 in 2018 from their Federal income taxes. What if they net $1 million? They pay tax on the excess $895,900.
In Puerto Rico, they pay 4% tax on all of their business income generated from Puerto Rico. This will provide a significantly lower rate than is available from ANY offshore jurisdiction. See:
Puerto Rico Tax Deal vs Foreign Earned Income Exclusion (note that this article was written before Trump’s tax changes came into effect).
This is all to say that it’s not enough to have property or to invest a large sum of money on the island. You will require to prove that you are living properly meaning that you will have to present the proper authorities with medical records and other proof of residence in the island.
We also recommended that when you start doing business in Puerto Rico you cut most of the ties you can with the United States. Sell your property or change the name, draw all of your bank accounts, buy property in the island, etc.
Of course the reason for the existence and the amendments of this acts are to promote businesses to invest in Puerto Rico. Puerto Rico has been trying hard to get back on its feet since the hurricane hit and promoting foreign investment into the island is a great and effective way to do this.
It should be pointed out that only businesses that are earning an income of $500,000 dollars or more will benefit Act 20. This is due to the fact that you must draw a salary from the business taxed at an ordinary rate. After this is done the balance of the corporate profits are taxed at 4%. If you’re netting less than this amount, you will probably do better under the FEIE than Act 20.
Act 22 is a little more expressive than Act 20 and its primary purpose is to attract high net worth foreign investors and create well paying jobs for the residents of the island. It is highly recommended to make as many connections to Puerto Rico as possible.
By following these Acts and all the legal guidelines associated with opening a corporation in Puerto Rico you are well on your way to become a resident of Puerto Rico. Opening a business in Puerto Rico can be complicated and you will require an experienced legal team to fulfill all of the requirements, we will be more than happy to help you with this.
I hope you’ve found this article on Puerto Rico to be helpful. For more information, or for assistance in living and investing in Puerto Rico, please contact us below by filling out the form, Thank you. We’ll be happy to assist you and can connect you with experts in Puerto Rico.