[Editor’s Note: This article was written by Sovereign Research team member Joe Jarvis, who lives in Puerto Rico.]
As much as Simon Black and the team here at Sovereign Research tend to beat up on inept governments in this letter, on rare occasions politicians do come up with really great ideas… and actually follow through.
Puerto Rico is a great example.
In 2012, Puerto Rico was in the depths of a nearly decade-long recession, looming debt crisis, and declining population.
The island had lost about 10% of its population— and most of them were young, educated professionals. In other words, Puerto Rico was losing the most lucractive members of its tax base.
So politicians did something radical: they established incredibly attractive tax incentives in order to attract new residents.
Among others, the incentives provide a 4% corporate tax rate to approved businesses, and a 0% tax rate on investment income.
These are unheard of incentives. But for US taxpayers especially, it was a dream come true.
US citizens typically have to pay tax to the US government, no matter where they live, and no matter where they earn their income.
So if you’re a US citizen living in Ireland and earning your income from consulting clients in Spain, and investments in Abu Dhabi, you’ll still pay tax to the IRS.
But enshrined within the United States tax code is a notable exception: section 933 of the code states explicitly that “income derived from sources within Puerto Rico. . . shall be exempt from [US federal] taxation”.
The short summary is that if you move to Puerto Rico and actually become a bona fide resident, and earn your income from Puerto Rico, then you no longer owe federal income tax.
Instead, you’ll owe Puerto Rico tax, which, again, based on the incentive programs, is 0% for certain investment income and 4% for approved corporate income.
I’ll explain more in a minute. But most importantly, you do actually have to move to the island.
We know people who “live” in Puerto Rico. They even do air quotes when they brag to their friends about how they “live” in Puerto Rico. Nudge, nudge. Wink, wink.
Basically they fly in for a few days or a few weeks here and there, stay in a hotel or AirBnb, and pretend that they “live” on the island.
Yeah that’s not going to hold up under scrutiny. The IRS is already targeting people who are abusing these tax incentives, and those guys who are skirting the rules will get nailed.
But for those who actually take the rules seriously, the benefits are great.
For the corporate tax incentive, you need to set up a company that exports services off the island. So manufacturing physical products does not qualify (though there are other manufacturing tax incentives you could enjoy instead).
But this Export Service incentive works extremely well for professionals like consultants, lawyers, digital entrepreneurs, call centers, advertising firms, accountants, investment managers, and so much more.
I have been working with Sovereign Research for several years as a writer, and my writing absolutely qualifies as a service that I export outside of Puerto Rico.
You’ll have to run your business like any other corporation. This includes paying yourself a reasonable salary (by Puerto Rican standards, which might be as low as $1,500 per month), paying estimated taxes, filing payroll reports, etc.
At the end of the fiscal year, your corporation’s profits are taxed at just 4%. At that point, you can take all the after-tax profit as a dividend.
This is the really amazing part because these dividends are tax free!
In the US, you would pay 21% corporate tax (which is likely going to increase). Plus another 15% to 23.8% (including the Obamacare surtax) on your dividend income.
So that’s between 33% and 40% without including state taxes.
In Puerto Rico, your company does not owe US federal tax (again, because of section 933 of the Internal Revenue Code). So you only pay 4%.
Moreover, when you are granted these incentives, you sign a contract with the government. The rules are good for 15 years and cannot be altered, regardless of whether the government changes or eliminates the incentives law.
So even if they get rid of the program next year, you will still have your incentives for the next 15 years.
Additionally there’s an individual investment tax incentive, in which you owe 0% capital gains on investments that you acquired after moving to Puerto Rico.
So if you live in Puerto Rico, your stocks and crypto should qualify as Puerto Rico based. But only the gains accrued after moving to the island are eligible for the 0% rate.
For example, if you have existing gains in your stock portfolio, and you sell everything the day after you move to Puerto Rico, those gains would not be eligible for 0%.
Nor would, say, real estate income from Florida. Or an apartment building in Arizona that you flipped.
But if you buy a bunch of crypto after moving to Puerto Rico, those gains would be tax free as long as you are a qualified resident when you sell.
There are some costs to this incentive, including a flat $5,000 annual filing fee, plus a $10,000 yearly donation to an approved Puerto Rican charity.
Personally I made the move to Puerto Rico and started operating my company under the incentives on January 1, 2020.
After two and a half years, I have to admit there are some obvious negatives to living in Puerto Rico.
Just three months after I moved here, COVID insanity took over, and Puerto Rico was more strict with lockdowns than any US state.
Also, as I write this, I’m on a mobile hotspot, because my main internet service has been out for over 24 hours…
This is separate from the frequent, albeit generally short, power outages.
There are other annoyances like bad roads and sub-par businesses that can make completing normal errands a hassle.
Yes Amazon delivers here… but it takes longer. And some items are not available— the vendors think that Puerto Rico is a foreign country, so they don’t allow their items to be shipped here even though the US Postal Service delivers here just like regular domestic mail.
Also, lately there has been a small group of locals who have been calling out “colonizers” for “extracting” these tax benefits.
They like to spray paint their own cities (so obviously they care a lot…) with graffiti saying “gringos go home”.
Of course their entire ethos is hypocritical. For one, the corporate tax incentives are available to EVERYONE, including Puerto Ricans. And second, nearly everyone living here is descended from Spanish colonizers who brutalized the native Taino tribe.
It’s also pretty ironic since Puerto Rico has lost nearly 12% of its population since 2010 due to outward migration. (I wonder, are they colonizing the areas they moved to?)
Anyhow, taking everything into account, I just extended my lease here.
Nowhere is perfect, and it’s important to weigh the good against the bad. But in my personal assessment, Puerto Rico works very well for me.
It’s important to note that, while I do well, I’m not rolling in riches just yet. I don’t make the kind of money that Simon Black, or many of the other wealthy expats leaving here, makes.
But even for me, the benefits STILL significantly outweigh the costs.
Every Puerto Rican I have met in person has been friendly and welcoming. I am obsessed with the natural beauty of the island. And I’ve never lived in a better climate— the cooler winters with a sea breeze are especially lovely.
I love my apartment and its location— which I could NOT get anywhere in the states for even close to this price.
I live in the three bedroom, three bathroom, two story apartment, well outside of the crowded capital city of San Juan.
I have an upstairs office connected to my own private roof deck overlooking both the ocean, and the mountains of El Yunque rainforest.
Plus my rent costs less than that of, for example, my friends who share a two bedroom one bathroom apartment in suburban Massachusetts, or my friends who rent a two bedroom two bathroom on the outskirts of Orlando, Florida.
And of course, I’m saving a ton of money on taxes, which allows me to invest to set myself up for the future.
A tax incentive like this is too good to last. They have already altered it once to be less favorable, and more adverse changes are probably coming.
But again, you can be grandfathered in and enjoy 15 years of incentives if you apply under current conditions.
Sovereign Confidential members have access to our 57-page Ultimate Guide to Puerto Rico’s Tax Incentives.
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