Puerto Rico is a U.S. Commonwealth, it’s part of the U.S. but in some ways still independent. The tax system is like a hybrid, part of the U.S. and well, not, is a self governing, unincorporated territory of the United States, located in the northeastern Caribbean, east of the Dominican Republic and west of both the US Virgin Islands and the British Virgin Islands.
ACT 22: TO PROMOTE THE RELOCATION OF INDIVIDUAL INVESTORS TO THE PUERTO RICO, USA.
This specific law was designed to attract new residents to the island offering the total exemption from PR income tax on all passive. The incentives include an income tax in Puerto Rico of only 4%. Compare that to your combined federal and state income tax burden you may pay now!
- Applies to nonresident United States citizens and nonresident aliens that establish their domicile in Puerto Rico.
- Not domiciled in Puerto Rico at any time during the 6-year period ending on January 17, 2012 (January 16, 2007).
- Can also apply if the individual will become a resident within one (1) year from the date of application.
- Individual must have physical presence in the Island for at least 183 days of the year.
- Apply for a tax exemption decree with the Office of Industrial Tax Exemption
- One per individual (spouse would file a separate application)
- Questionnaire (net worth, places of residence, capital to be transferred to local financial institutions, if planning to purchase or lease real estate in the next 12 months, if establishing a business in PR, children, interests, etc.
- Attach curriculum vitae
- Criminal background check release
- If approved, a decree will be sent, which constitutes a contract with the Government of Puerto Rico, with is guaranteed by our Constitution (“No laws impairing the obligation of contracts shall be enacted”)
- Government Fees:
- Filing = $50
- Special Fund (to be paid in full prior to the issuance of the grant) = $5,000
- Annual Report = Investor must submit an annual report to the Exemption Office no later than April 15 of each year
- 0% federal taxes from Puerto Rico source income
- 0% taxes on interest and dividend income for new residents of Puerto Rico
- Interest from US and foreign corporation are exempt from PR tax but may subject to federal taxes
- 0% taxes on all short term and long-term capital gains accrued after becoming a new resident
- Pre-domiciled gains are taxed at PR rates (5% tax may be granted after 10 years)
- 100% Tax exemption applies until December 31, 2035.
- Regular income (salary and professional services) are taxed at PR rate
- Grantor Trusts
- Investor can establish trusts under the laws of Puerto Rico and;
- Elect that such trusts be treated as grantor trusts for purposes of Puerto Rico income taxes.
- Revocable Trusts
- Investor can establish revocable or irrevocable trusts under the laws of Puerto Rico.
- Trusts not including a provision addressing revocability will be presumed irrevocable.
- Trusts Established Outside Puerto Rico
- The provisions of any trust duly executed outside Puerto Rico by an Investor may not be challenged because of inconsistencies with Puerto Rico law or regulations.
- Discretionary Transfers or Donations
- Investor may freely transfer or donate during his/her life, at his/her complete discretion, all or part of his/hers goods to any of the above mentioned trusts.
- Such transfer or donation may be made without regard of Puerto Rico laws or regulations to the contrary (PR laws)
-By Angel L. Noriega, REALTOR®, Attorney
Guidance on the Income Tax Responsibilities of Federal, Military and Other Employees
Forbes Act 22