The Incentives Code consolidates various tax decrees, incentives, subsidies, and benefits, including . 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. It is important to understand what is excluded for tax purposes and what is not excluded under, It is crucial to understand that in order to exclude the income from capital gains and dividends, it should be accrued. 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. Just be sure to comply with the presence test, the tax home test, the closer connection test, and the residence test if this is the right move for you. Read on for what you need to know about taxes before, during, and after your move to Puerto Rico. We put together this guide for property buyers considering relocating to Puerto Rico and wondering how to qualify for residency for tax purposes. Theyve been delighted to experience the rich culture, delicious food, and wonderful tropical sightseeing opportunities found in Puerto Rico. 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. Basically, to satisfy the tax home test, keep your officeor your home, as the case may bein Puerto Rico. For detailed information directly from the IRS about the residency tests, consult Publication 570. Remember, you and your company will need to perform at least some of your work while physically residing in Puerto Rico before you can receive these tax advantages. and representation are limited. 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. (b) Appreciation after becoming a Resident Individual of Puerto Rico. 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. 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. 1. 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. 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. What if you dont have a primary place of employment? Under Act 60, an eligible business includes export services and commerce. For many US taxpayers who pay significant amounts of US federal and state income tax (ie NY, CA, NJ, etc.) Executed lease or transfer of title-proof of real estate ownership is required. SAN JUAN, Puerto Rico (PRWEB) January 17, 2020. Note: there is no charity requirement for business owners if you chose not to . 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. Fortunately, the IRS provides a special exemption for that first year. Act 20 offers entities a 4% corporate rate on business . /* Add your own Mailchimp form style overrides in your site stylesheet or in this style block. Contrary to popular belief, just getting a Golden Visa without further action does not reduce an Americans tax liability. they want to find a way to legally avoid the overbearing US tax rules, while not necessarily expatriating and renouncing their US citizenship. For example, the salaries of owners and employees are tax deductible. * *This is primarily an issue for US Citizens who do not have citizenship elsewhere. 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. During each year of the 3-year period, you must be present in the relevant territory for at least 60 days. if an individual is granted Puerto Rico tax exemption under the act, long term gains as a result of investments made after becoming a resident will be exempt from tax in Puerto Rico. 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. You had no significant connection to the United States during the tax year. Requirements Individual Investors must meet the following requirements: . 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. This tax haven can easily save taxpayers hundreds of thousands of dollars per year (or more) in federal taxes! 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. 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. 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. 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. The Code shall create a simple, streamlined, and efficient process that focuses on the client, and shall earn the trust of the people and the private sector by having a transparent process for the granting of incentives. Fortunately, upon becoming a bona fide resident of Puerto Rico, you pay no tax on your Puerto Rico-sourced income, but instead just Puerto Rican income tax. Not earn more than $3,000 in earned income in the USA during the tax year and be present in Puerto Rico for more days than in the USA. An individual is treated as a bona fide resident of Puerto Rico under Section 933 if the person (1) meets a physical presence test; (2) does not have a tax home outside of Puerto Rico during the taxable year; and (3) does not have a closer connection to the United States or a foreign country than to Puerto Rico. 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. Firstly, an individual must be present in Puerto Rico for defined period. With beautiful, sunny weather, a vibrant Hispanic culture, and generally lower prices than in the mainland, Puerto Rico offers more than just tax savings. In order to promote investment into Puerto Rico, they developed Act 60 to attract high net-worth individuals and businesses. This is an important point because if your company does business with other entities that are based on the island, youll risk losing your tax exemption. Giving up your connection to organizations in the US is also not mandatory, but it is recommended to make connections with Puerto Rico organizations to establish ties in the local community. The most important consideration for the IRS is that you spend more time in Puerto Rico than in the rest of the United States. Your tax home is the jurisdiction in which your primary place of employment is located. 5%, if such gain is recognized after said 10-year period. Not be present in the USA for more than 90 days during the tax year. Before using any Materials, you should consult with legal counsel licensed to practice in the relevant jurisdiction. Act 20 and 22 tax incentives have been replaced by Act 60 as of January 1, 2020. The purpose of Puerto Rico Incentives Code 60 is to promote investment in Puerto Rico by providing investment residents with tax breaks. 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. Only one of the following conditions must be true: You were present in Puerto Rico for at least 183 days in the tax year. Only, For detailed information directly from the IRS about the residency tests, consult, Educators and Trainers Can See Big Tax Breaks in Puerto Rico Under Act 60, Puerto Rico Tax Incentives: Young Entrepreneurs, 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? Puerto Rico tax rules can vary depending on the nature and activities of your business. 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. Initial consultations We recommend moving this block and the preceding CSS link to the HEAD of your HTML file. We look forward to helping you find your perfect property in Puerto Rico. 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. Puerto Rico is a great investment opportunity, because it does not require a passport for US citizens and it does not require the US citizen to expatriate in order to gain the tax benefits under Acts 20 and 22 (combined into Act 60) but, is it really that easy? What is the GILTI Tax, and How Does It Affect Non-Resident Export Services Tax Incentive Decree Holders? And, if it the income is sourced in Puerto Rico, it would escape tax in the U.S. as well. Bona fide residency is the benchmark to determine commitment to the island, and it is measured by three tests: the presence test, the tax home test, and the closer connection test. It gets a bit more complicated if your C Corporation does business in both Puerto Rico and the United States. However, you cant qualify unless you establish residency on the island. 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; } 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. Weve covered the main ones, but take a look at all of these additional tax incentives that may also apply, depending on the nature of your business. 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. First and foremost, there are some significant tax benefits. If the unrecognized gain is US-sourced, it will still generally be taxable in the US despite Puerto Rico Incentives Code 60. When a US person obtains a Golden Visa, they have a second passport (CBI) or travel privileges (RBI). 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. As you might suspect, its easier to satisfy this requirement if you move to Puerto Rico during the first part of the year. All of these benefits and so much more can be yours if you relocate to Puerto Rico. Additional small fees may apply. Your benefits should not be affected even if there are amendments to the legislation during the term of this agreement. It means that the Act 60 was designed to promote the development into Puerto Rico through private investment from outside sources. The non-profit charitable contribution requirement which was previously at $5,000 has been increased to $10,000. Still, Puerto Rico hopes to lure American mainlanders with an income tax of only 4%. 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. 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. Act 20 and 22 tax incentives have been replaced by Act 60 as of January 1, 2020. 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. Where your personal belongings, such as cars, furniture, clothing, and jewelry, are stored, Where organizations that you affiliate with, whether professional, cultural, social, religious, or political, are located, The jurisdiction for which you hold a drivers license, The jurisdiction in which you are registered to vote, Where charitable organizations that you contribute to are located, Which country you put down as your country of residence on official forms, Which forms or documents you file, such as Form W-8BEN or Form W-9. 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). 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. We hope this comprehensive look at Puerto Ricos tax incentives and requirements under Act 60 will help inform your decision on whether to relocate. Currently, such an eligible business with a tax exemption decree in Puerto Rico under Act 60 will enjoy a: 4% income tax rate (2% for 5 years for small businesses, or 1% for pioneer activity) 100% income tax exemption on dividends or profits generated 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. A person must meet extensive rules and requirements to qualify for the favorable tax treatment available to residents of Puerto Rico. In more ways than one, starting a new life in Puerto Rico can be the best investment you ever make. In other words, a tax home is your main place of business, employment, or post of duty, according to IRS rules. Individual - Residence. Schedule Consultation . 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. 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. 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. To be a bona fide resident of Puerto Rico: The owner must also take out a reasonable salary for him- or herself, which is subject to normal Puerto Rico income tax rates. 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. As provided by Puerto Rico Incentives Code 60: This Code is approved with the conviction that it shall improve Puerto Rico's economic competitiveness. 2. You did not maintain a tax home outside of Puerto Rico for the last 183 days of the year. . Citizenship: The most straightforward qualification is the requirement to be a citizen of the United States, living in Puerto Rico. 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. Spend at least 549 days in Puerto Rico during the 3-year period of the current tax year and the 2 preceding years, including at least 60 days in Puerto Rico during each tax year. It means that under Puerto Rico Incentives Code 60, if an individual is granted Puerto Rico tax exemption under the act, long term gains as a result of investments made after becoming a resident will be exempt from tax in 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 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. Keep in mind that as the owner of an export-service company, you must pay yourself a reasonable salary based on the services you provide. Consulting companies, auditing firms, marketing businesses, and more are eligible business types. However, if your C Corporation derives its revenue from the United States, dividends will be subject to regular federal taxes. In June 2019, Puerto Rico made substantial changes to its tax incentives that came into effect on January 1, 2020. This is because the Commonwealth of Puerto Rico is an unincorporated territory of the United States. 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. Disclaimer: Neither PRelocate, LLC, nor any of its affiliates (together PRelocate) are law firms, and this is not legal advice. . 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. Its an updated version of Act 20 and Act 22, which Puerto Rico passed in 2012 to attract outside investment and boost economic development on the island. 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. 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. Rather, the US person has to become a. This applies to the primary place where you work and create value. This is ensured by Act 60-2019 (formerly known as Act 22). The tax home test is the most straightforward of the three. 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. 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). Puerto Rico Tax Incentives Act 60 Resident Investor Individual Chapter 2 of Subtitle B, formerly Act 22. 957(c)(1) a bona fide resident of Puerto Rico is not treated as a U.S. person (as defined in Sec. To explore your options in more detail, please contact 7th Heaven Properties, the Luxury Caribbean Property Specialist. This is important, because under the previous version of the rule, there was no need to actually purchase property. In addition, every year you must make a donation of $10,000 split evenly between two qualifying nonprofit organizations in Puerto Rico. Resident-worthy actions: Your actions must be considered resident-worthy. Before using any Materials, you should consult with legal counsel licensed to practice in the relevant jurisdiction. A flat 4% corporate tax rate In addition, the Individual Investor must become a resident of Puerto Rico no later than December 31, 2035. 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. 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 core motivation of the IRS in administering the bona fide residency tests is to make sure that you intend to stay in Puerto Rico for an extended period of time and that you spend limited time in the US during your period of bona fide residency. 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. Puerto Rico is a US territory, and as such, all you need to visit is a Real ID-compliant driver's license or another form of photo identification. A Puerto Rican driver's license is required. The tax incentives enjoyed by Individual Resident Investors in Puerto Rico are perhaps the most impressive of all Puerto Rican tax incentives: Just keep in mind that to qualify for these generous incentives, you must become a bona fide resident of Puerto Rico, which involves spending the majority of your time in Puerto Rico, making Puerto Rico your tax home, and establishing closer connections in Puerto Rico than in the US. This property must be the individuals primary residence and not rented out. 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. Note, however, that if youre going for the 549 days in a three-year period condition, you must still physically spend at least 60 days in Puerto Rico each year. We recommend moving this block and the preceding CSS link to the HEAD of your HTML file. Lets take the example of a C Corporation, which the IRS recognizes as an independent legal entity. *This is primarily an issue for US Citizens who do not have citizenship elsewhere. Lets explore each of these in greater detail. Youll also use Form 8898 to inform the IRS of your new residency status. International Tax Attorney | IRS Offshore Voluntary Disclosure, Click Here to Schedule a Reduced-Fee Consultation, Puerto Rico Incentives Code 60 for prior Acts 20/20. Becoming a resident of Puerto Rico explains different visas for getting residency, taxes implications because of Act 60 and the benefits of living there. 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. 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. 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. What It Means to Be a Resident of Puerto Rico. Have no significant connection to the USA during the tax year. Local government has legislated a series of incentives to attract investment, of which EB-5 Visa program participants can also take advantage. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. We recommend moving this block and the preceding CSS link to the HEAD of your HTML file. It has only one requirement: do not have a tax home outside of Puerto Rico during any part of the tax year. 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; } Form 8898 is used to officially declare the beginning or cessation of bona fide residency in a U.S. possession, determined by the three above-mentioned tests. The purpose of these measures is to provide incentives to individuals who have not been residents of Puerto Rico to become residents. 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. Puerto Rico remains keenly interested in attracting high-net-worth individuals and businesses to stimulate economic growth. The purpose of Puerto Rico Incentives Code 60 is to promote investment in Puerto Rico by providing investment residents with tax breaks. Creation of Jobs Requirements Businesses with an annual volume, actual or projected, more than three million dollars equivalent; Manufacturing, three . You should contact an 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; } All capital gains accrued after becoming a New Resident will be 100% exempt from Puerto Rico taxes. You were present in the relevant territory for at least 183 days during the tax year. 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. In order to encourage the transfer of such individuals to . Feb. 9, 2023, 1:45 AM. 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. doing business in Puerto Rico. Of course not. Even if youre only in Puerto Rico for an hour on a certain day, that counts as being present in Puerto Rico. Finally, exceptions are available for special circumstances, such as medical treatment or disasters. We elaborate on that at the end of the post. 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. Act 60 provides tremendous tax benefits to qualified businesses and individual investors. Act 60 Updates from Act 22 (Individuals) 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. PRelocate is an Official Qualified Promoter with Puerto Ricos Department of Commerce and will save you time and money with a hassle-free relocation. 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. 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