For example, if you leave Puerto Rico to receive or accompany a parent, spouse, child, or stepchild to receive a qualifying medical treatment, you are still counted as present in Puerto Rico. Act 60 ensures that this grant will remain a binding contract between you and the Puerto Rican government for at least 15 years. Rather, the US person has to become 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. 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. A person must meet extensive rules and requirements to qualify for the favorable tax treatment available to residents of Puerto Rico. However, this is a rule of thumb, and others have retained their status with fewer than 183 days on the islands soil in the wake of major natural disaster declarations. Lets take the example of a C Corporation, which the IRS recognizes as an independent legal entity. You are a bona fide resident of Puerto Rico for the year of your move plus the two proceeding years. When a US person obtains a Golden Visa, they have a second passport (CBI) or travel privileges (RBI). 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. As provided by Puerto Rico Incentives Code 60: What does this mean? 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. To enjoy this lifestyle and benefit from the tax incentives under Act 60-2019 (the Puerto Rico Incentives Code), individuals should be aware of the complex rules and the various residency requirements which now include buying property in Puerto Rico within a defined time period. Of course not. Local government has legislated a series of incentives to attract investment, of which EB-5 Visa program participants can also take advantage. Act 60 offers a corporate tax rate of 4% to Puerto Rican companies that export services performed in the territory to people or companies . 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. 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. Under Chapter 2 of Act 60 . Due to the territorys legal status, moving to Puerto Rico is considered internal migration as opposed to immigration. The term 'resident individual' means an individual who is domiciled in Puerto Rico. Act 22 - The Individual Investors Act "Before I spent 30 percent of my time thinking about taxes, and now I don't have to do that." - John Helmers, Act 22 Resident, Money Manager, CEO Long Focus Capital. Therefore, there are multiple ways to satisfy the requirements of the presence test. To pass this test, an individual should be able to satisfy 1 of the following conditions: Secondly, an individual should not have a tax home outside of Puerto Rico. We recommend moving this block and the preceding CSS link to the HEAD of your HTML file. 257 of December 10, 2018, which introduced significant amendments to the Puerto Rico Internal Revenue Code ("Puerto Rico Code"); and Act No. We recommend moving this block and the preceding CSS link to the HEAD of your HTML file. 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. During each year of the 3-year period, you must be present in the relevant territory for at least 60 days. 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 . You did not have more than $3,000 in earned income (defined as pay for personal services performed, such as wages, salaries, or professional fees) in the US during the tax year and were present in Puerto Rico for more days than in the US. The report's findings concluded with what was already known; Act 20 and Act 22 led to hundreds of millions of dollars of lost U.S. income tax revenue. Citizenship: The most straightforward qualification is the requirement to be a citizen of the United States, living in Puerto Rico. Individual - Residence. 5%, if such gain is recognized after said 10-year period. 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. If youd like to enjoy these much lower federal and state taxes, you must follow through on a series of Act 60 Puerto Rico requirements. To qualify as a resident of Puerto Rico, an individual must essentially pass 3 key tests as follows. Additional requirements may apply to provide proof of bona fide PR residency-IRS Form 8898. As you can see, Puerto Ricos enormous Act 60 tax benefits greatly exceed the relatively small costs and inconveniences of relocation. Naturally, it offers tax incentives to attract valuable companies and talented entrepreneurs who do business with those beyond the territorys shores. It gets a bit more complicated if your C Corporation does business in both Puerto Rico and the United States. Puerto Rico Residency Requirements Benefits of Puerto Rico Residency Find Out More. Its recommended to sell or rent out your home in the US, which will not only significantly help pass the closer connection test but also provide some extra cash. 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. SAN JUAN, Puerto Rico (PRWEB) January 17, 2020. 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. All capital gains accrued after becoming a New Resident will be 100% exempt from Puerto Rico taxes. Note that those who were already residents of Puerto Rico during the 10 years before their move are not eligible for this tax incentive. Act 60 investors must also submit their donation before December 31 and present proof in their annual report in May. In September 2021, the IRS announced a campaign targeting taxpayers who claimed Puerto Rican tax benefits without meeting the requirements of the bona fide residency rules. What is the GILTI Tax, and How Does It Affect Non-Resident Export Services Tax Incentive Decree Holders? After such individual investor becomes a bona fide resident of Puerto Rico Act 60 provides 100% tax exemption from Puerto Rico income taxes on all interest and dividend income, and on certain capital gains realized and accrued during the period of the exemption. 1. Long-Term Permanent Residents (LTR) tend to not have this issue, since LTRs already have citizenship in another country. Nov. 8, 2019, 10:00 AM. The portion of the net long-term capital gain generated by a Resident Individual Investor attributable to any appreciation of the Securities or other Assets owned by such Resident Individual Investor. If you're a US citizen or legal resident, no. 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. In 2012, Puerto Rico had passed two laws intended to make the island a "global investment destination.". 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. Consequently, the IRS has identified vulnerabilities with certain individuals who may be excluding income subject to U.S. tax on a filed U.S. income tax return or failing to file and report income . The Department of Economic Development and Commerce (DDEC), as . 2. 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. 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? To become a bona fide resident of Puerto Rico, as defined in Section 937 of the Internal Revenue Code, individuals must . 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). 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 . Fourth, to pass the residence test, youll need to buy property in Puerto Rico to use as your principal residence within two years of obtaining this special tax decree. How you choose to pass the closer connections test depends on your individual circumstances, but you should aim to build up a life in Puerto Rico to the best of your ability. You must own it yourself or jointly with a spouse. Would you like to find out more about how to get residency in Puerto Rico? 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. Under Act 60s Investor Resident Individual Tax Incentive (formerly Act 22), an eligible individual investor can receive a 100% tax exemption on interest, dividends, short- and long-term capital gains, and gains on crypto-based assets acquired after moving. 2 This income also would be excluded from Puerto Rican income tax. Lets clarify what we mean when we say these tax breaks apply only to exported services. This property must be the individuals primary residence and not rented out. The factors that the IRS considers when determining whether you have maintained a closer connection to Puerto Rico than the US during the tax year include the following: Essentially, to pass the closer connection test, you need to move your entire life to Puerto Rico, including your family. The Resident Tax Incentive Code, known as "Act 60" provides tax exemptions to businesses and investors that relocate to, or are established in, Puerto Rico. Act 52-2022 requires Puerto Rico resident individuals to report financial accounts that are held outside of Puerto Rico or outside of the United States and had a balance over $10,000 during the tax year. Of course, this is far lower than the 21% corporate tax rate, plus state taxes, that your business would be likely to pay on the mainland. Of important consequence is the fact that the person cannot have a closer connection to the United States or a second tax home. Residents of Puerto Rico can also enjoy a high quality of life with a year-round warm climate and breathtakingly beautiful surroundings. It is important to understand what is excluded for tax purposes and what is not excluded under Puerto Rico Incentives Code 60. 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. However, if your C Corporation derives its revenue from the United States, dividends will be subject to regular federal taxes. 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. And since its generous tax incentives are only available to bona fide residents, enjoying the wonders of a Puerto Rican life is imperative. 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. Finally, exceptions are available for special circumstances, such as medical treatment or disasters. 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. A C Corporation is separate from its owners. Disclaimer: Neither PRelocate, LLC, nor any of its affiliates (together PRelocate) are law firms, and this is not legal advice. SAN JUAN, Puerto Rico, Nov. 8, 2019 /PRNewswire-PRWeb/ -- Former Governor of Puerto Rico, Ricardo Rossell, signed Act 60-2019, commonly known as the Puerto Rico . What It Means to Be a Resident of Puerto Rico. The requirements to qualify under Act 60 include a $10,000 USD annual donation to a charity, the purchase of real estate within a time frame of two years, and filing a yearly report to the . That way, you can satisfy all the tests and achieve bona fide residency even in the year of your move. If you wish, you can follow in their footsteps and escape some of the worst ravages of 2022s surging inflation and anemic economic growth by moving to this low-tax haven. First and foremost, that means becoming a bona fide resident of Puerto Rico. 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. Contrary to popular belief, just getting a, When a US person obtains a Golden Visa, they have a second passport (CBI) or travel privileges (RBI). Before using any Materials, you should consult with legal counsel licensed to practice in the relevant jurisdiction. 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. 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. 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. 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. Noting, the Puerto Rico BFR rules are not the same as the Substantial Presence Test BFR rules but the concept is the same. Initial consultations In addition, the Individual Investor must become a resident of Puerto Rico no later than December 31, 2035. 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. Puerto Rican and foreign companies created investments that transform and accelerate economic development in Puerto Rico thanks to Act 60. Executed lease or transfer of title-proof of real estate ownership is required. Physical Presence: the investor has to be physically present in Puerto Rico 168-183 days per year, and in the United States for less than 90 days in the year. Incumbent will receive assignments in the form of plans and specification covering work to be accomplished by contractors and schedules for completion of the construction work.Qualifications: Who . The COVID-19 pandemic, for example, qualifies as special circumstances that can grant an Act 60 decree holder free presence days under certain conditions. Thanks to this code, your income sourced from Puerto Rico can be exempt from both federal and state taxes. As a US territory, Puerto Rico has a unique tax climate. For detailed information directly from the IRS about the residency tests, consult Publication 570. The tax home test is far more straightforward than the presence test and only encompasses a single condition: maintain your tax home in Puerto Rico throughout the entire tax year. Likewise, the incentives offered shall be continuously reviewed in order to identify those that are not cost-effective and to strengthen those that have proven to have an impact and which generate a return on investment for the Treasury. 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. Each year, the island welcomes new, ambitious Americans and others who wish to keep more of their money while enjoying the island lifestyle Puerto Rico offers. It has only one requirement: do not have a tax home outside of Puerto Rico during any part of the tax year. The first of the three tests is perhaps the most complicated. Long-Term Permanent Residents (LTR) tend to not have this issue, since LTRs already have citizenship in another country. Puerto Rico's Acts 20 & 22, tax incentive laws make living and working in Puerto Rico more enticing than ever before for U.S. Citizens. Contrary to popular belief, just getting a Golden Visa without further action does not reduce an Americans tax liability. 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 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. This tax haven can easily save taxpayers hundreds of thousands of dollars per year (or more) in federal taxes! 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