March 9, 2015
San Juan, Puerto Rico
[Editor’s note: At the end of the article you’ll find a link to a free report we’ve put together on this important topic.]
It seems almost everywhere you look these days, bankrupt governments are raising taxes.
But no matter where you are, there are always solutions to do something about it.
For example, if you’re an Australian taxpayer, you can move to Norfolk Island and pay minimal tax. If you’re British, you can structure your assets in Gibraltar or the Channel Islands.
What most people don’t realize is that the US tax code, as onerous as it is, provides a no-brainer solution as well.
If they meet certain criteria, US taxpayers with official residency in Puerto Rico – which is a self-governing US territory – are NOT required to pay US federal tax on income they earn in Puerto Rico.
Now, living in Puerto Rico does oblige people to pay taxes in Puerto Rico, which has its own set of tax laws.
And until a couple of years ago it didn’t really make sense to move to Puerto Rico to save on taxes; Puerto Rican taxes used to be just as high, if not higher, than US taxes.
But over the past few years the government of Puerto Rico, desperate to jumpstart its economy, passed a number of attractive tax incentives.
Among these are Act 20 and Act 22, which provide for corporate tax rate of just 4% for companies exporting services outside of Puerto Rico, as well as a full exemption for individuals from taxes on most types of investment income.
Here’s why this is really incredible:
You can set up a Puerto Rican company that provides services to customers worldwide. (This is ideal for online businesses.)
And you’ll only pay tax of 4% on your profit. It’s almost nothing.
Now, you yourself as the owner of the company don’t actually have to move to Puerto Rico to take advantage of this.
You can still live in the United States (or anywhere else, really) and set up a separate company that receives a market-based fee for certain tasks it performs on behalf of the Puerto Rican company.
A US-based company would pay US tax on the fee it charges. But the majority of the profits would accumulate in the Puerto Rican company at just a 4% corporate tax rate.
And those profits held by the Puerto Rican company would not be taxable by the IRS.
Year after year you generate profit, never once paying a dividend to yourself back in the United States.
Over time, the profits build up in the Puerto Rican company. And after a few years you may find that there’s a substantial treasure trove of cash that has never been distributed.
It’s at this point that you can pick up and move to Puerto Rico to take advantage of the second incentive.
Because as long as you follow some basic rules to obtain and maintain official residency, you’d then be able to pay out ALL of the profits to yourself without paying a dime of tax—either to the IRS, or to the Puerto Rican government.
Afterwards, you can head right back to the US in the following tax year having legally paid no tax on your gain.
Let this sink in for a moment.
Moving to the beach for a few months can literally save you hundreds of thousands, even millions of dollars. And it’s a completely legitimate strategy.
Again, there are some straightforward rules to follow—
- In general, you need to spend about 6 months in Puerto Rico in order to be able to receive the dividends tax-free;
- You need to ensure that your official ‘tax home’ is in Puerto Rico once you move
- Part of this entails filing form 8898 to the IRS to notify them of your move
- While you’re living there, ensure you have a ‘closer connection’ to Puerto Rico than to the US. Don’t just move on paper. Move for real.
(Note—you don’t have to be American to take advantage of this; it’s possible for any nationality to capitalize on the tax incentives in Puerto Rico… with the added benefit that Puerto Rico does not have the typical ‘tax haven’ stench.)
One thing that’s important to understand is that it’s not all cookies and rainbows here in Puerto Rico. The island faces some serious fiscal and debt issues.
(That’s why these incentives were created—to attract more capital to Puerto Rico.)
Unemployment here is very high. Banks are starting to fail. And the government has just announced its intention to impose a value added tax in its effort to collect more tax revenue.
But despite these challenges, this strategy does work. It’s completely legal. And, honestly, Puerto Rico is a really nice place to be.
Bottom line: this is definitely something that investors and entrepreneurs should consider.
I’m skeptical that the Puerto Rican government will keep this window open indefinitely.
I think they’ll ultimately stop granting tax incentives to new residents… but existing residents under the program will be grandfathered in.
That’s why it’s always better to act sooner rather than later when a good thing is on the table.
If you’re looking for more information, we have a great that we’re happy to share with you. And if you’re a premium member of Sovereign Man: Confidential, you’ll be hearing more about this soon.
[It’s important to point out that this, or the information contained in the free report, should not be considered as tax advice. Consult your own tax advisors before proceeding.]