Puerto Rico Tax Incentives:
Ultimate Guide & My Personal Experience With Act 20 & Act 22

When I wake up and see the ocean in front of me, I have to pinch myself.

Here I am, living in a beautiful place that’s part of the United States… yet I pay ZERO US federal income tax, only a 4% corporate tax for my businesses and ZERO capital gains and dividends tax.

And this is all perfectly legal.

I’m still a US citizen, but I’m not hiding out from the IRS, nefariously dodging Uncle Sam’s taxes. What I’m doing is 100% in line with tax codes and regulations. I’m simply using the existing rules to live a comfortable lifestyle in paradise.

You too can have this type of lifestyle and tax advantages… right here in beautiful Puerto Rico.

Impossible! How could these tax incentives be true?

I’ll be up-front. Sure, Puerto Rico has its share of challenges.

As you probably recall, Hurricane Maria pummeled Puerto Rico in September 2017. And the repercussions are still keenly felt.

Puerto Rico estimates that $132 billion is needed to repair infrastructure and services. The hurricane drove many of the island’s residents away: About 130,000 people – nearly 4% of the population – have left.

The capital of San Juan has recovered, but some parts of the island are still in total disrepair. 

The aftermath of the hurricane isn’t the only issue, as Puerto Rico’s problems started well before Maria arrived.

The island has some serious economic problems. Puerto Rico has $74 billion in bond debt and another $49 billion in unfunded pension liabilities. Back in 2010, the unemployment rate was nearly 17%. And the unemployment rate didn’t drop below double-digits until 2018.

To deal with these kinds of issues, other governments would probably follow the usual playbook, starting with oppressive tax hikes. They would try to squeeze the remaining residents for more revenue.

But not Puerto Rico. They got creative.

The view from my balcony...

Smart, local leaders have responded to these challenges in a unique, promising way: They’ve created these amazing tax incentives to lure productive individuals and their successful businesses to the island.

Puerto Rico is a commonwealth of the US. That means that most things here fall under US federal law, like immigration and customs and border enforcement. 

But Puerto Rico’s tax system is independent from the US. Puerto Rico has its own tax agency, like the IRS. That’s what makes Puerto Rico unique. It’s a part of the US, but tax-wise, it’s not. And that’s a big advantage…

Because the US is one of only two countries in the world – the other being the tiny east African country of Eritrea – that taxes its citizens on their worldwide income. But Puerto Rico, with its independent tax system, grants you an exception.

If Puerto Rico is the only source of your income, the US government effectively says, “Okay. We won’t touch any income in Puerto Rico. We won’t even look at it.”

And since the island has extended these generous tax incentives, business owners, self-employed individuals, independent contractors, traders and investors who relocate to Puerto Rico have the opportunity of a lifetime

If you’re a regular employee, don’t be discouraged. If you can work anywhere – which is increasingly common these days – see if you can switch to be a contractor for your company. You’ll be able to enjoy the same tax privileges.  

When successful businessmen and women, wealthy hedge fund managers, investors, etc. are running like mad to Puerto Rico, you know the government here is doing something right. 

Let me share specifically what Puerto Rico is doing to attract these productive people.

 

Puerto Rico has introduced two pieces of legislations that allow you to reduce your corporate and investment income taxes…

And both can be combined to slash your entire tax obligation to just 4%.

But let’s start with…

Act 20:
How to slash your corporate tax rate to only 4%

The first is Puerto Rico’s Act 20, known as the Export Services Act, available to citizens of any country.

The Export Services Act is interesting, because of its extremely broad legislation. Here’s the idea behind it… 

You incorporate a business in Puerto Rico that’s providing a service. And that service is being sold to people outside of Puerto Rico. Your service could be management consulting, accounting, legal services, information technology services, etc.

Regardless of your particular specialty, your businesses’ service – provided to clients anywhere in the world – is considered “qualifying activity” under Act 20. So, your business is eligible for a special corporate tax rate of just 4%.  

Again, the key to obtaining this 4% corporate tax rate is that you’re providing a service or services exported outside of Puerto Rico. A clinic providing healthcare services to only Puerto Rican residents wouldn’t qualify. But if you’re providing telemedicine consultations to patients in the mainland US, Europe, or Asia, then your business meets the “qualifying activity” criteria.

Even if your primary business doesn’t fit within the “services” space, there’s a way to qualify for the 4% corporate tax rate. 

I know people here, for example, who sell products online through Fulfillment by Amazon (FBA), where Amazon’s customer service centers pack and ship their inventory.

Since marketing is a service, they set up a Puerto Rico Act 20 company to provide that marketing service. Their Puerto Rican Act 20 company exports its marketing services to their FBA business.

The marketing company in Puerto Rico only pays a 4% corporate tax rate, and their FBA business can write off these marketing expenses.

Other people I know have a manufacturing business incorporated overseas, and they also use these Act 20 companies to reduce their taxes.  

Some of them use their Act 20 company to provide management services in Puerto Rico, or ‘shared services’ like payroll, accounting, etc. to their manufacturing business overseas.

These management and shared service fees are completely legitimate services to provide. And the setup is similar as the previous marketing services example. The Puerto Rican management company pays a 4% corporate tax, and the manufacturing business writes off the management expenses.

And remember, if you follow the proper rules, your Puerto Rican company won’t pay any US tax. So instead of a 21% corporate tax in the mainland US, plus another 20% dividend tax, all you’ll be paying in Puerto Rico is a measly 4% corporate percent tax.

This is an absolutely incredible deal.

The Act 20 legislation is very broad. Again, regular employees cannot benefit, but if you can arrange to work remotely, then you can transition to being an independent contractor operating out of Puerto Rico. And as an independent contractor, you’ll now be exporting your services – whatever they may be.

If you have a skill where you can work anywhere – copywriting, digital marketing, telemedicine, investment management, consulting, design, coding, paralegal work, medical transcription, accounting, recruiting, etc. – then you owe it to yourself to check out Puerto Rico’s Act 20.

Keep reading to see how much it costs to set up and maintain an Act 20 company.

Act 22:
How to reduce your capital gains and dividends tax to ZERO

The second piece of legislation is Act 22, the Individual Investor Act.

If you’re an investor based in the US, you’re paying a top 20% tax on dividends and capital gains, potentially the 3.8% Obamacare surcharge tax (for those married filing jointly with $250,000 in annual income) and a host of state and local taxes. 

But if you pack up and move down to sunny and beautiful Puerto Rico, then your capital gains and dividends are considered Puerto Rican-sourced income. And after you become a bona fide Puerto Rican resident (a process we’ll detail later), you’ll pay… 0% on dividends and capital gains

That’s right. The IRS won’t touch any of your investment income. 

If you’re expecting big capital gains in the future, you need to seriously consider Act 22. (Again, you can’t avoid tax on your capital gains before you become a Puerto Rican resident, only after.) 

 

Combine Acts 20 & 22 for maximum tax savings

And, yes, if you move to Puerto Rico, you can also combine Acts 20 and 22.

Here’s how it works: On the corporate side, you’ll pay the 4% corporate tax.

And individually, you’ll pay yourself a small salary

Don’t think that you can pay yourself $1 per year. Your salary has to be reasonable.

But you don’t have to pay yourself mainland US wages, either. You’ll find that wages in Puerto Rico are much lower than the US mainland, so you can pay yourself a commensurate regular salary. We advise to check with your accountant on this rate.

And you can take the rest of your compensation as a qualified dividend, taxed at… 0%. Yes, imagine that. You can take all this money that you earned and put in your pocket tax-free.

Other benefits of Puerto Rico

Puerto Rico also comes with amazing travel benefits for Americans.

It’s just like traveling from state to state. Let’s say you get on a plane in Miami and fly to Puerto Rico’s capital of San Juan. When you arrive, you don’t have to go through immigration or customs. You just get off the plane and go on your way… because according to the US government, you never left the US.

The same goes for moving.

Moving to Puerto Rico is just like moving from California to Texas or from New York to Florida. You arrange the movers and off you go. No customs or border patrol to deal with. No hassles or headaches like when you move from country to country.

Puerto Ricans also enjoy the same travel and moving benefits as Americans. Again, that’s because they ARE Americans.

How did you like this article?
Click one of the stars to add your vote...

Other readers gave this article an average rating of 4.6 stars.

Why now is the BEST TIME EVER to apply for Acts 20 & 22

I cannot emphasize this enough…

YOU SHOULD STRONGLY CONSIDER ACTS 20 AND 22 TODAY.

There has never been a better time to secure these amazing tax incentives… and you may never again have the exact opportunity as you do right now.

Here are two reasons why I’m so thrilled about Puerto Rico:

1. Puerto Rico made the tax incentives even more attractive

Puerto Rico modifies the incentives from time to time. They are now more attractive than they’ve ever been. Ever.

A few years ago, Act 20 companies used to have a requirement to hire a minimum number of employees. They’ve recently changed that requirement, so you don’t have to employ anyone except for yourself.

Act 22 beneficiaries used to have to purchase property in Puerto Rico. Now you don’t. (Instead there’s a $5,000 annual charitable donation.)

It’s possible that they might change these requirements again, possibly making them more expensive and onerous.

Right now, the current versions of both laws is the best they’ve ever been. That might not last.

2. You’ll be grandfathered in for the next 20-30 YEARS!

Once you’re approved, you have a twenty year contract to pay 4%/0% tax with Acts 20/22. Even if they change the legislation later, you’ll be grandfathered in under today’s laws for the next two decades.

And there’s even a section of the decree that states- if you comply with all the rules for the next 20 years, you can even apply for an ADDITIONAL TEN YEARS of the same tax incentive.

So, even if you’re not ready to move to Puerto Rico right now, if you think there’s a chance that you might move there some time in the next few years to take advantage of these tax incentives, you can still set up an Act 20 company today.

The company can’t be completely dormant. But as long as it has some basic commercial activity, you can lock in today’s incentives, and then move down in a few years’ time to really boost your tax benefits.

If they change Act 20 in the future and increase the corporate tax rate from 4% to 8%, or if the legislature brings back the employee requirement, then it would still be a great deal. And if Act 22’s tax rate goes from 0% to 10%, then it too is still a great deal.

But neither deal will be as good as today.

 

How to set up an Act 20 company

I’ve already covered that your Act 20 company must be a service-based business that exports some type of service to global customers… 

Obviously, your first step is to have a business that meets this requirement. If you don’t have an existing business that meets the criteria, remember, you still have options to qualify under Act 20. For example, you can structure a marketing or management company that provides these services.

Next, to actually set up an Act 20 company, you’ll need an attorney to help with the application. All-in, it takes the Puerto Rican government four to five months to approve your tax exemption (which they’ll retroactively date to when you applied).

Expect the attorney fees to start at $9,000, which includes incorporation and the Act 20 tax exemption filing. I paid around $15,000 for mine, using one of Puerto Rico’s top firms.

And you’ll pay a few hundred dollars per year to maintain the company, between accounting fees and renewal costs.

You can either set up an LLC or a corporation. I personally set up an LLC. But for tax purposes, I elect my LLC to be treated as a corporation. To do this, you simply need to check the box IRS Form 8832

How to file for Act 22’s tax incentive

You can hire an attorney to file the paperwork for Act 22, or, you can file yourself through Puerto Rico’s Economic Development & Commerce website.

I’m well-versed in legal matters, but I still used an attorney. Expect to pay about $3,000 to $5,000 in legal fees.

It should take Puerto Rico about three months to process your application. When approved, they’ll retroactively date your residency so you get the tax benefit from when you applied.

The three tests to become a bona fide Puerto Rican tax resident

To be exempt of US federal income taxes you have to become a bona fide Puerto Rican tax resident.

The Internal Revenue Code has specific guidelines for what qualifies individuals as bona fide residents of a US possession. And as a resident, you’re eligible for the Act 22 exemption.

(You can start an Act 20 company without being a Puerto Rican resident.)

1. Physical presence test

This is straight forward. You can pass this test by spending six months per year in Puerto Rico.

If you spend any part of a day in Puerto Rico, that counts as the entire day. So, let’s say you fly from San Juan to Miami on a Monday night at 10:00pm. You meet some clients on Tuesday in Miami, and then you fly back to San Juan that afternoon. In this situation, both days count as time in Puerto Rico. It’s like you never left the island.

You can also meet the physical presence test if you spend less than 90 days per year in the United States.

Or, if during the tax year, you earned less than $3,000 in the US and were present in Puerto Rico for more days than in the US.

It’s also possible to pass the physical presence test if you had ‘no significant connection’ to the United States during the tax year.

This means that you did not have a permanent home in the US, that your spouse and dependent children under the age of 18 are not in the US, and that you are not registered to vote in the US.

(That’s one of the reasons why most people who move to Puerto Rico register to vote down here—it helps prove that they’re residents.)

2. Tax home test

This one, too, is relatively straight forward.

To pass the tax home test, your tax and business activities need to be located in Puerto Rico. If your primary business activities are located anywhere else in the world, you won’t pass this test.

Now, the IRS defines ‘tax home’ as your regular place of business or employment.

So by setting up an Act 20 company, you go a long way in proving that your primary business activity is in Puerto Rico.

3. Closer connection test

The final test is more qualitative, and it’s similar to the ‘significant connection’ criterion I mentioned with the physical presence test.

Remember, you’re proving to the IRS that you’re not liable for US federal taxes on your qualified income.

So, consider these questions:

  • Is your family with you in Puerto Rico or back home in the mainland US?
  • Are you renting an Airbnb or do you have an apartment or house?
  • Do you have a Puerto Rican driver’s license?
  • Are you registered to vote in Puerto Rico?

While I search for a house or apartment to buy, I’m renting a beautiful place that’s right on the beach. I have a Puerto Rican driver’s license. And for the first time in my life, I’m actually registered to vote.

View from my rental apartment in Puerto Rico

When I fill out an IRS Form 8898, all these things I’ve done count for the closer connection test. I can check those boxes on the form and say, “Yes, IRS. I’m living in Puerto Rico and it’s my legitimate home base.” 

If all this sounds too good to be true…

It’s not.

I’ll admit that a few years ago when my friend and fund manager Peter Schiff mentioned Puerto Rico’s tax incentives, I initially had my hesitations. 

Hesitation #1: What if the government breaks its promises?

My primary concern was what would happen if the Puerto Rican government breaks its promises.

You, too, might have this concern. After all, we are talking about a promise made by a bankrupt government.

But I assure you not to worry about the Puerto Rican government breaking its promise. For one, the government needs productive people – and their tax revenue – more than productive people need Puerto Rico. So, there’s an advantage there for individuals.

And second, Puerto Rico issues a binding contract between the government and individuals who qualify for Act 20. The government is contractually obligated to honor its commitments well out into the future.  

There’s also a growing case law that prevents the Puerto Rican government from breaking contracts.

For example, over the last few years, there was a famous case involving Walmart in Puerto Rico. Puerto Rico had extended a special tax incentive. But the government felt like Walmart wasn’t keeping up its end of the bargain. So, the government sued Walmart for additional tax revenue that wasn’t part of the contract.

The case went to court here in Puerto Rico. And the government lost. The Puerto Rican judge who ruled against the government said the government must honor the signed contract.

So, with that hesitation answered, let’s move on to the next one…

Hesitation #2: I’m not a multi-millionaire. Can I still qualify?

YES.

There are plenty of wealthy people here. But I also know people in Puerto Rico who make $60,000 per year and are doing well.

Also, there are expensive areas around the capital of San Juan. But there are also pockets of San Juan perfectly suited for middle class people. And if you get out to the west and southern coasts or to the island’s interior, your tax savings and a lower cost of living means a nice life here.

Hesitation #3: Is it worth it?

There’s no better risk-adjusted return than saving money on taxes.

Otherwise, to achieve an extra 30% return on investment, you’ll have to take some serious risk. Or break the law.

But saving on taxes means no investment risk. Instead of handing over that money earmarked for Uncle Sam, it’s now earmarked for your pocket.

And if you compound tax savings over years and decades, that’s a life-changing amount of money. For example, after several years, just your tax savings would be enough to buy a house.

And Puerto Rico’s tax incentives are not just helping the Act 20 and 22 individuals get wealthier…

You can help boost the Puerto Rican economy

All this capital injection is also doing wonders for the island’s economy and for fellow Puerto Rican residents. For starters, Puerto Rico is able to recapitalize its banks. The surge in deposits allows banks to make additional loans for long-term projects. And this translates into more economic activity and job creation.

Puerto Rico is also generating economic activity from its newcomers’ spending. For example, a new arrival needs a car, which means a sales commission for the car salesman. And this salesman celebrates by going to dinner with his or her spouse. They may leave a big tip for the waiter or waitress, and so on down the line…

I saw a study that each individual who moved to Puerto Rico has created eight jobs.

I’m incredibly proud to be a part of Puerto Rico’s turnaround story. It’s a win-win. I get to keep the money I earned through hard work, and I can invest in Puerto Rico or spend as I wish.

And that’s the power of just my tax savings. Multiplied by the number of newcomers, we’ve got the opportunity to really make an impact here in Puerto Rico.

Conclusion

Here’s what I recommend you do next…

Book a flight and get down here as soon as possible. Puerto Rico is only a short flight from cities on the US east coast. So, you can even take a weekend trip. (Although, if you can, I recommend spending several weeks on the ground before you move down.)

And something you can do immediately is sign up for our free Notes From the Field daily dispatch

I frequently travel around the world to find exciting business opportunities, discover risks in our financial system and economies, and offer solutions, like Puerto Rico, that make sense no matter what happens next.

Puerto Rico is now my official home base, so I usually check in from Dorado – just west of San Juan – and from time to time, I also write about what’s developing here.

I’m really optimistic about Puerto Rico’s future. And I’m excited that I can legally maximize my tax savings in such a beautiful place.

Think what we’re doing makes sense?
Get to know us more...

Join over 100,000 subscribers who receive our free Notes From the Field newsletter, where you’ll get real boots-on-the-ground intelligence as we travel the world and seek out the best opportunities for our readers.

It’s free, it’s packed with information, and best of all, it’s short… there’s no verbose pontification here – we both have better things to do with our time.

And while I appreciate all the visitors who stop by our website, I provide special bonuses to our email subscribers… including free premium intelligence reports and other valuable content that I only share with them.

It’s definitely worth your while to sign-up, and if you don’t like it, you can unsubscribe at any time with just one click.

How did you like this article?
Click one of the stars to add your vote...

Other readers gave this article an average rating of 4.6 stars.

Share via:

2.8K Shares
2.8K Shares
Share via