In recent years, Puerto Rico has become the best option for many Americans to legally minimize their tax obligations while maintaining their citizenship.
While it is true that Puerto Rico is a territory of the United States, it has its own tax system. This means that its residents are not subject to federal taxes.
However, in 2012, new laws were created with the purpose of attracting more investors to the island. These laws are commonly known as Act 20 and Act 22. For instance, if a company operates in Puerto Rico under Act 20, it must pay a 4% flat tax on the income it generates outside the island. In some cases, Puerto Rico resident investors can generate capital gains profits and even pay no taxes on that income. All of this was unified in the Puerto Rico Incentives Code (“Code” or “Act 60”).
This means that moving to Puerto Rico equals operating in a much more favorable tax climate. Everything looks really good, but what does it take to become a resident and obtain these benefits?
How to Pass the Puerto Rico Bona Fide Residency Tests
It sounds tempting to become a newly qualified resident to obtain a 100% tax exemption from Puerto Rico taxes. However, it is not as simple as it seems. To become a resident and benefit from the accounting and taxation in Puerto Rico, you must meet certain requirements that we will explain below:
- Become a bona fide resident. For this, you must reside on the island for more than 183 days per year. This means that the physical residency must be in Puerto Rico.
- Prove that there is no “closer connection” to the United States or another jurisdiction. The majority of your business must be operated from the island itself.
- Evidence of tax domicile. That is, the applicant to become a resident cannot have a tax domicile outside of Puerto Rico, and certainly not during the tax year. The tax domicile is the place where he/she regularly conducts business, regardless of where he/she actually lives.
- Identify the types of income that may qualify for tax exemptions. Basically, there are two types of income, commonly referred to as “good” and “bad” income. “Good” income is considered to be that which enjoys tax exemptions or is low taxed; and “bad” income is considered to be that which is subject to tax regimes.
What income may be tax-exempt and/or low-taxed?
– Income from services or contracts.
– Capital income.
– Services provided by investment advisory and/or asset management.
– Income generated by online business and/or affiliate marketing.
– Cryptocurrency and blockchain investors.
What type of income is subject to the tax regimes?
– Salary income.
– Retirement and Social Security benefits.
– Traditional Individual Retirement Accounts (IRA).
What types of businesses can benefit from accounting and taxation in Puerto Rico?
Puerto Rico has created this independent tax system in order to create several tax incentives to attract foreign businesses and investors to the island. These laws give companies the opportunity to greatly reduce their tax rates. So it is important to know what types of businesses can benefit from the tax benefits in Puerto Rico.
All companies that provide services such as:
– Legal, tax and accounting consulting services.
– Research and development
– Advertising and public relations
– Creative industries services, such as design, music, art, application development, among others.
– Architectural, engineering and/or project management services.
– Professional services (legal, tax and accounting).
– Electronic data processing centers
– Computer software development.
– Software distribution and licensing (cloud computing, blockchain, all web-based, SAAS and more).
– Telecommunication services and call centers.
– Shared Services Centers
– Educational and training services.
– Investment banking or other financial services.
For more information related to taxation in Puerto Rico, and specifically on how to benefit from the Puerto Rico Incentive Code (“Code” or “Law 60”) you can contact us today. We will advise you and help you identify which incentives apply to your company, how they benefit you and how to apply for them.