{"id":16763,"date":"2018-01-19T05:55:38","date_gmt":"2018-01-19T10:55:38","guid":{"rendered":"http:\/\/www.escapeartist.com\/?p=16763"},"modified":"2020-04-07T07:45:52","modified_gmt":"2020-04-07T11:45:52","slug":"benefits-puerto-ricos-act-20-22","status":"publish","type":"post","link":"https:\/\/www.escapeartist.com\/blog\/benefits-puerto-ricos-act-20-22\/","title":{"rendered":"Benefits of Puerto Rico’s Act 20 & 22"},"content":{"rendered":"

This week\u2019s question came from Robert in North Carolina.<\/em><\/p>\n

Dear Ambassador Nagel,<\/strong><\/p>\n

I have been hearing more and more each year about the benefits of Puerto Rico’s Act 20 and 22. What is your thoughts on this program for a US Citizen with a business in the US? <\/span><\/p>\n

Dear Robert,<\/strong><\/p>\n

Puerto Rico is an amazing opportunity for US citizens to reduce their corporate tax to 4% and their personal income tax on capital gains to 0% (yes, zero percent!).<\/p>\n

However, it takes a great deal of effort\u00a0and commitment<\/u>\u00a0to achieve these tax benefits. If you want to pay 4% corporate tax on your ordinary business income and zero on capital gains, you need to work for it. You must leave the comfort of the United States and\u00a0move you and your business to Puerto Rico<\/u>.<\/p>\n

And Puerto Rico is not a \u201cfix all\u201d for your current investments. Act 22 won\u2019t help you with gains in US real estate or with cryptocurrency you purchased before moving to the island. This is because:<\/p>\n

1)\u00a0\u00a0\u00a0\u00a0Puerto Rico\u2019s Act 22 applies to Puerto Rico sourced income<\/strong>. Puerto Rico sourced income is gains on passive investments like stock and bitcoin, but not real estate in the United States, which is US sourced income.<\/p>\n

2)\u00a0\u00a0\u00a0\u00a0Puerto Rico\u2019s Act 22 applies to assets acquired\u00a0after<\/em>\u00a0you become a tax resident of the territory<\/strong>. It does not apply to gains on passive assets purchased before qualifying for Act 22. You can prorate gains after you move and special rules apply to assets held for at least 10 years while you were a resident of PR.<\/p>\n

So, I\u2019ll say it again,\u00a0Puerto Rico\u2019s tax incentive programs<\/a>\u00a0are amazing in the right circumstances. If you\u2019re a day trader, or buying and selling regularly, Act 22 is great. If you\u2019re setting up a hedge fund or cryptocurrency exchange that will operate throughout the United States, Puerto Rico is the place to be.<\/p>\n

On the other hand, if you have appreciated assets, Puerto Rico doesn\u2019t help you. Those gains accrued while you were a US resident and will be taxed in the United States.<\/p>\n

With that said, let\u2019s take a step back and review Puerto Rico\u2019s Act 20 and 22.<\/p>\n

Puerto Rico Act 20<\/strong><\/p>\n

Puerto Rico\u2019s Act 20 allows you to operate a qualifying business from the territory and exchange your US corporate tax rate (21% to 32% depending on your state) for Puerto Rico\u2019s 4% rate. This 4% tax rate applies to Puerto Rico sourced ordinary business income.<\/p>\n

Puerto Rico sourced business income<\/a>\u00a0is earnings and profits from work performed in Puerto Rico by residents of Puerto Rico. Income generated from work performed in the United States is not PR sourced income. Capital gains from investments are not ordinary business income that qualifies for Act 20.<\/p>\n

A qualifying business is one that provides a service from Puerto Rico to persons or companies outside of Puerto Rico. Most Act 20 agencies are internet marketing firms or some other online business selling in to the United States and abroad. The only limitation is that you can\u2019t do business with locals (residents of Puerto Ricans).<\/p>\n

There are provisions of Act 20 for export businesses. However Trump\u2019s new tax laws have called those rules into question. I\u2019ll leave that for another day. For more on Act 20, see:\u00a0Good News from Congress for Act 20 Business in Puerto Rico<\/a>.<\/p>\n

Note that Puerto Rico\u2019s Act 20 is for businesses netting more than $500,000 a year. This is because you must first draw a salary from the business, which is taxed at ordinary rates. Then the balance of the corporate profits are taxed at 4%. For the reasons why, see:\u00a0Foreign Earned Income Exclusion vs. Puerto Rico\u2019s Act 20<\/a>.<\/p>\n

If you\u2019re living and working in Puerto Rico, you can those profits out of your PR corporation as a tax free dividend. This means that the only tax paid in Puerto Rico on corporate profits is 4%. You will not pay PR or US tax on the dividend distribution if you are a resident of the territory.<\/p>\n

Puerto Rico Act 22<\/strong><\/p>\n

Puerto Rico\u2019s Act 22 was passed to bring high networth individuals to the territory. To qualify for this tax incentive, you must be approved by the government, buy a home within your first few years of residency, and spend a minimum of 183 days a year on the island.<\/p>\n

If you travel, you can count up to 30 days abroad as time in Puerto Rico. In that case, you must spend more time in PR than you do in the United States and PR must be your home base. To protect yourself from audit, you should break as many ties to the US as possible and create as many connections to Puerto Rico as you can.<\/p>\n

As a resident of Puerto Rico, you\u2019ll pay zero tax on assets acquired after you become a resident and sold before January 1, 2036. This tax incentive covers appreciation in passive assets during your period of residency.<\/p>\n

For more on Act 20 and 22, see:\u00a0Changes to Puerto Rico\u2019s Act 20 and Act 22.<\/a><\/p>\n

Conclusion<\/strong><\/p>\n

I hope you\u2019ve found this answer to be helpful. For more information on Puerto Rico, you can contact my firm at nagellaw@aol.com. We are experts in the intricacies of Puerto Rico\u2019s tax incentives and will be able to assist you in any ways needed.<\/p>\n

Sincerely yours,<\/p>\n

Ambassador Joel Nagel<\/p>\n","protected":false},"excerpt":{"rendered":"

This week\u2019s question came from Robert in North Carolina. Dear Ambassador Nagel, I have been hearing more and more each year about the benefits of Puerto Rico’s Act 20 and 22. What is your thoughts on this program for a US Citizen with a business in the US? Dear Robert, Puerto Rico is an amazing […]<\/p>\n","protected":false},"author":423,"featured_media":19165,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"content-type":"","om_disable_all_campaigns":false,"footnotes":"","_jetpack_memberships_contains_paid_content":false},"categories":[2],"tags":[],"yst_prominent_words":[3128,2873,3047,2988,3026,3125,2809,2968,3094,2849,2825,2909,2930,2926,2952,2892,3011,3126,3076,1804],"acf":[],"jetpack_sharing_enabled":true,"jetpack_featured_media_url":"https:\/\/www.escapeartist.com\/wp-content\/uploads\/2018\/03\/UN-Vienna-Austria.jpg","_links":{"self":[{"href":"https:\/\/www.escapeartist.com\/wp-json\/wp\/v2\/posts\/16763"}],"collection":[{"href":"https:\/\/www.escapeartist.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.escapeartist.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.escapeartist.com\/wp-json\/wp\/v2\/users\/423"}],"replies":[{"embeddable":true,"href":"https:\/\/www.escapeartist.com\/wp-json\/wp\/v2\/comments?post=16763"}],"version-history":[{"count":2,"href":"https:\/\/www.escapeartist.com\/wp-json\/wp\/v2\/posts\/16763\/revisions"}],"predecessor-version":[{"id":25354,"href":"https:\/\/www.escapeartist.com\/wp-json\/wp\/v2\/posts\/16763\/revisions\/25354"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.escapeartist.com\/wp-json\/wp\/v2\/media\/19165"}],"wp:attachment":[{"href":"https:\/\/www.escapeartist.com\/wp-json\/wp\/v2\/media?parent=16763"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.escapeartist.com\/wp-json\/wp\/v2\/categories?post=16763"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.escapeartist.com\/wp-json\/wp\/v2\/tags?post=16763"},{"taxonomy":"yst_prominent_words","embeddable":true,"href":"https:\/\/www.escapeartist.com\/wp-json\/wp\/v2\/yst_prominent_words?post=16763"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}