*/, Export Services Tax Incentive For Businesses, 100% tax exemption on distributions from earnings and profits, 75% tax exemption on municipal and state property taxes (small and medium businesses can receive a 100% exemption during their first five years of operation), To qualify, the business model must be concentrated around exporting services outside of Puerto Rico. Puerto Rico taxes are very favorable to crypto investors when using Act 60. It is important to note that bona fide residency is not the same thing as residency, and you are not considered a bona fide resident of Puerto Rico simply by living in Puerto Rico. A nonresident alien individual (as defined in section 7701(b)(1)(B)) satisfies the requirements of this paragraph (c) for a taxable year if during that taxable year that individual satisfies the substantial presence test of 301.7701(b)-1(c) of this chapter (except for the substitution of the name of the relevant possession for the term United States where appropriate). /* Add your own Mailchimp form style overrides in your site stylesheet or in this style block. . (a) Appreciation Before Becoming a Resident Individual of Puerto Rico. they want to find a way to legally avoid the overbearing US tax rules, while not necessarily expatriating and renouncing their US citizenship. As of 2022, that could result in a tax rate of up to 37%. Advertising, consulting, educational, financing, and medical services are just a few among nearly two dozen categories of export services that are eligible for these benefits. The core motivation of the IRS in administering the, The first of the three tests is perhaps the most complicated. The goal of tax planning is to legally limit, minimize, and if possible, avoid US tax while also avoiding a tax fraud audit (eggshell or reverse eggshell) or special agent investigation. Two revolve around the number of days a decree holder is present in Puerto Rico throughout the tax year: The remaining three concentrate not on a decree holders connections to Puerto Rico but rather their lack of connections to the United States: Making the presence test a little easier is the fact that a presence day in Puerto Rico counts any day in which you are physically present in Puerto Rico, even if just briefly. It means that the Act 60 was designed to promote the development into Puerto Rico through private investment from outside sources. attorney to discuss your specific facts and circumstances and to obtain advice on specific legal problems. If you evacuate or cannot return to Puerto Rico due to disaster, you may also qualify for automatic presence days even though you are physically outside of Puerto Rico. The IRS's new campaign addresses taxpayers who have claimed benefits through Puerto Rico Act 60, without meeting the requirements of section 937, Residence and Source Rules Involving Possessions. Under the latter approach, youd set up a new entity on the island that charges a management fee to the rest of your mainland-based business. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. Puerto Rico Service Exporters Must Document Well to Avoid IRS Ire. 3. Offering a luxurious lifestyle, golden sand beaches and highly attractive tax benefits, this territory of the United States can offer residents a high quality of life and unique advantages without a requirement to renounce citizenship of the USA. Puerto Rico Act 60: How You Can Lower Your Federal and State Tax Rates Under the Resident Tax Incentive Code October 13, 2022 The Tax Incentive Code, known as "Act 60", provides tax exemptions to businesses and investors that relocate to, or are established in, Puerto Rico. Think about how your business can flourish with such a low tax burden. This property must be the individuals primary residence and not rented out. 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. Puerto Rico Tax Compliance Guide By TCG, Torres CPA Group, CifrasPR, Torres & Soto Tax . If youre unclear on whether youll meet this requirement, check out our Day Tracker Tool. Resident Engineer (Construction) About the Position: Incumbent will serve as the Resident Engineer under the general supervision of the Area Engineer. 4. 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. Given that one of the requirements for bona fide Puerto Rican residency is to maintain a tax home in Puerto Rico for the entire tax year, satisfying this test in the year of your move is clearly impossible unless you move on January 1. If saving big on income taxes while soaking up the sun on a U.S.-owned Caribbean island sounds like a dream life to you, relocating to Puerto Rico under the Act 60 tax exemptions may be right for you. Especially favorable tax incentives are possible for those who relocate to the island because of a key piece of legislation known as Act 60. Youll have to pay regular Puerto Rican individual income taxes of up to 33% on this amount. Have no significant connection to the USA during the tax year. To avoid penalties, this would require a transfer pricing analysis and intercompany agreements to determine the share of profits realized in Puerto Rico vs. on the mainland, as laid out in this guide. Youll want to keep meticulous records to ensure you dont jeopardize your eligibility for these generous Act 60 tax benefits. What if you dont have a primary place of employment? Contrary to popular belief, just getting a Golden Visa without further action does not reduce an Americans tax liability. There are always exceptions, exclusions, and limitations to be aware of. If you're a bona fide resident of Puerto Rico during the entire tax year, you generally aren't required to file a U.S. federal income tax return if your only income is from sources within Puerto Rico. 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. Therefore, there are multiple ways to satisfy the requirements of the presence test. 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 . Puerto Ricos bona fide residency tests may seem intimidating, but if youre dedicated to starting fresh in the USs sunny Caribbean island territory, the tests are simple. 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). Only, For detailed information directly from the IRS about the residency tests, consult, Educators and Trainers Can See Big Tax Breaks in Puerto Rico Under Act 60, Puerto Rico Tax Incentives: Young Entrepreneurs, 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? Not earn more than $3,000 in earned income in the USA during the tax year and be present in Puerto Rico for more days than in the USA. Feb. 9, 2023, 1:45 AM. It has only one requirement: do not have a tax home outside of Puerto Rico during any part of the tax year. Act 20 and 22 tax incentives have been replaced by Act 60 as of January 1, 2020. Miramar Plaza, 954 Avenida Ponce de LeonSuite 205San Juan, Puerto Rico 00907, #mc_embed_signup{background:#fff; clear:left; font:14px Helvetica,Arial,sans-serif; } Various factors such as the presence of an individuals permanent home, family, belongings, principal bank and business in Puerto Rico, as well as the existence of professional, cultural, religious, social and political affiliations and links in Puerto Rico, may help to demonstrate a closer connection to Puerto Rico than to anywhere else. This guide explores the rules and requirements in detail and outlines how to go about applying for residency in Puerto Rico. Its worth noting that between previous fee increases as well as rising inflation, these figures could easily rise at some point during the next few years. The IRS' report to Congress calculated that more than 1,924 applicantscorporations, LLCs, partnerships, and other typeshad been granted tax benefits under the Exports Services Act (formerly known as Act 20) as of March 2020 based on partial information provided by Puerto Rico. (b) Appreciation after becoming a Resident Individual of Puerto Rico. Charitable donations as well as renting, repairing, and maintaining facilities may yield additional tax breaks. In order to encourage the transfer of such individuals to . The tax home test is the most straightforward of the three. Puerto Rico voter registration is required. You'll become a bona fide resident and be eligible for Act 60 tax benefits if you pass four qualifying tests: the presence test, the tax home test, the closer connection test, and the residence test. 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. If such appreciation is recognized after December 31, 2035, the net capital gain with respect to said Securities or other Assets shall be subject to income taxes in accordance with the tax treatment provided by the Puerto Rico Internal Revenue Code. Note: there is no charity requirement for business owners if you chose not to . When US taxpayers begin researching how to relinquish their US status, oftentimes they will come across Puerto Rico. Your tax home is the jurisdiction in which your primary place of employment is located. Bona fide residency is the benchmark to determine commitment to the island, and it is measured by three tests: the presence test, the tax home test, and the closer connection test. Act 22 (as amended by Act 60 of 2019), also known as The Individual Investors Act, was approved by the Legislative Assembly of Puerto Rico during 2012. 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. Puerto Rico enjoys fiscal autonomy, which means that it can offer very attractive tax incentives not available on the mainland U.S., with the advantages of being in a U.S. environment. You must own it yourself or jointly with a spouse. Only one of the following conditions must be true: To be counted as present in Puerto Rico, you must be physically present on the island during any part of the day. Act 20 and 22 tax incentives have been replaced by Act 60 as of January 1, 2020. /* Add your own Mailchimp form style overrides in your site stylesheet or in this style block. You were not a bona fide resident of Puerto Rico in any of the three tax years immediately preceding the tax year of the move. 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. If you do not have a primary or regular place of employment, your tax home is considered to be your primary place of residence. To establish residence under the Act, someone must create a presumptive residence in Puerto Rico, live there for at least 183 days of the year, and cannot have a home outside Puerto. You were present in Puerto Rico for at least 549 days in the three-year period of the current tax year and the two previous tax years and were in Puerto Rico for at least 60 days in each tax year during that period. And, if it the income is sourced in Puerto Rico, it would escape tax in the U.S. as well. Individual Investor must not have been a resident of Puerto Rico during any of the 10 years prior to the effective date of Act 60 (July 1st, 2019). Generally, you are a bona fide resident of one of these territories (the relevant territory) if, during the tax year, you: Do not have a tax home outside the relevant territory, and, Do not have a closer connection to the United States or to a foreign country than to the relevant territory. As provided by Puerto Rico Incentives Code 60: This Code is approved with the conviction that it shall improve Puerto Rico's economic competitiveness. Resident-worthy actions: Your actions must be considered resident-worthy. Only one of the following conditions must be true: You were present in Puerto Rico for at least 183 days in the tax year. Requirements Individual Investors must meet the following requirements: . Be present in Puerto Rico for a minimum of 183 days in the tax year. Youd be hard-pressed to find a better value home than a U.S. territory that offers a 4% corporate income tax and 0% capital gains tax, among many other benefits. *Paragraph C refers to the Presence Test. As a basic overview, heres what you have to do to pass the three tests to establish bona fide residency in Puerto Rico: Capital gains accrued prior to your move to Puerto Rico are treated differently depending on when they are recognized: There is a $750 fee due with your application, which you are to submit to the Office of Industrial Tax Exemption. Thus, to reap the benefits of the ever-popular Act 60 Export Services and Individual Resident Investor tax exemptions, you must hold up your end of the bargain and settle into a life in Puerto Rico. Then, youll be required to file an annual report each year along with a $300 fee. Youll also use Form 8898 to inform the IRS of your new residency status. 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. In this blog we will highlight some of the major steps you need to take to qualify for Puerto Rico's Act 22. 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. It means that once the person becomes a resident individual investor of Puerto Rico unde Puerto Rico Incentives Code 60 and until 1/1/2036 any dividend or interest income is exempt from tax in Puerto Rico. Opening a Puerto Rican bank account is helpful not only for the test but also for your daily life on the island, as is a local drivers license. The individual cannot have been a resident of Puerto Rico for at least 10 years prior this is increased from previously in which it was six years. 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. These services must not have a connection with Puerto Rico. We recommend moving this block and the preceding CSS link to the HEAD of your HTML file. 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. With the right structuring, one could essentially lower their effective tax rate from as high as 50% or more to 0% under the right circumstances, by moving to the island. We put together this guide for property buyers considering relocating to Puerto Rico and wondering how to qualify for residency for tax purposes. Earned income is pay for personal services performed, such as wages, salaries, or professional fees. If you think this test sounds impossible to satisfy for the year of your move, thats why the IRS offers a special exemption for the year of your move only. Form 8898 is used to officially declare the beginning or cessation of bona fide residency in a U.S. possession, determined by the three above-mentioned tests. 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. Commit to Puerto Rico, and passing the residency tests will be fairly easy. 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. Business owners who establish a qualifying business in Puerto Rico can enjoy significant tax benefits: To qualify, the business model must be concentrated around exporting services outside of Puerto Rico. Then, under a law referred to as Act 60 (formerly Act 20 and Act 22), Puerto Rico has enacted several tax incentives, the two most popular of which are as follows: a Puerto Rican corporation that's engaged in certain types of service businesses only pays Puerto Rican tax of 4%. Lets take the example of a C Corporation, which the IRS recognizes as an independent legal entity. See District of Columbia House Voting Rights Act, S.160, 111th Congress (passed by the Senate, February 26, 2009) (2009).52 However, the United States has not taken similar "steps" with regard to the five million United States citizens who reside in the other U.S. territories, of which close to four million are residents of Puerto Rico. Passing the Presence Test The purpose of Puerto Rico Incentives Code 60 is to promote investment in Puerto Rico by providing investment residents with tax breaks. Long-Term Permanent Residents (LTR) tend to not have this issue, since LTRs already have citizenship in another country. Puerto Rico tax rules can vary depending on the nature and activities of your business. Thus, in the most ideal of situations, the taxpayer will move to Puerto Rico and become a Bona-Fide resident without having realized but unrecognized gain already. 7701(a)(30)) and thus is not subject to Subpart F and GILTI inclusions associated with ownership of stock in a Puerto Rican subsidiary (provided dividends received by that individual from that foreign subsidiary would be considered Puerto Rican-source). Like with Act 22 donations, the nonprofit entities must operate in Puerto Rico and not be run by the investor or their family, spouse, or partner. What It Means to Be a Resident of Puerto Rico. The total net capital gain generated by a Resident Individual Investor related to any appreciation of Securities or other Assets after said Resident Individual Investor becomes a Resident Individual of Puerto Rico, that is recognized before January 1, 2036, shall be fully exempt from income taxes in Puerto Rico, including the alternate basic tax provided in the Puerto Rico Internal Revenue Code. Act 60 ensures that this grant will remain a binding contract between you and the Puerto Rican government for at least 15 years. Golding & Goldingspecializes exclusivelyin international tax, and specificallyIRS offshore disclosure. Lets get some clarity on how the tax situation plays out: To begin with, becoming a resident of Puerto Rico is not as simple as purchasing a property and visiting the PR Coast a few times a year. Then, once becoming a bona fide resident of Puerto Rico, the taxpayer will then begin to acquire income sourced from Puerto Rico so that it is not taxable in the United States. 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. An individual is treated as a bona fide resident of Puerto Rico under Section 933 if the person (1) meets a physical presence test; (2) does not have a tax home outside of Puerto Rico during the taxable year; and (3) does not have a closer connection to the United States or a foreign country than to Puerto Rico. 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. But if they have not actually renounced their own US citizenship they are still subject to US tax on their worldwide income no matter where they reside. Contact us today to ask about starting the next exciting chapter of your life on this stunning Caribbean island. If youve invested in stocks, securities, or cryptocurrency, this may still be a great move for you. If you have decided to make the move and take advantage of Puerto Ricos generous tax incentives, make sure youre really committed. That way, you can satisfy all the tests and achieve bona fide residency even in the year of your move. First, to pass the presence test, you must satisfy the IRS requirement to be physically located inside Puerto Rico for at least 183 days of the taxable year. 5. Establishing a Puerto Rico subsidiary and recording the percentage of business income and expenses related to the Puerto Rico entity so that it can be taxed under the Act 60 incentives Application costs You'll have to pay a one-time fee of $750 when you file your initial application. Puerto Rico seeks to move away from its historical focus on manufacturing and become a major services exporter. You must acquire a grant of tax exemption by applying through Puerto Ricos Industrial Tax Exemption Office. Generally, you are a bona fide resident of one of these territories (the relevant territory) if, during the tax year, you: What is important to note is that US Persons do not use the standard , While Puerto Rico is considered part of the United States, it is not a state, The individual cannot have been a resident of Puerto Rico for, The non-profit charitable contribution requirement which was previously at $5,000 has been, Puerto Rico now requires the individual to, The income derived from all sources by a Resident Individual Investor after becoming a resident of Puerto Rico but before January 1, 2036, consisting of interest and dividends including but not limited to interest and dividends from a registered investment company described in Section 1112.01 of the Puerto Rico Internal Revenue Code, shall be. The term 'resident individual' means an individual who is domiciled in Puerto Rico. Article 7 of Act 22 protects those trusts created by Act 22 grantees from the forced inheritance provisions of the Puerto Rico Civil Code. Plus, you are obliged to donate at least $10,000 USD to charity. and representation are limited. Puerto Rico is easily accessible from the mainland USA with no need to show a passport when traveling from the mainland USA to Puerto Rico. When filling out the form, you will need to refer to the detailed instructions, which are based on the bona fide residency rules outlined in Publication 570. 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). Becoming a resident of Puerto Rico explains different visas for getting residency, taxes implications because of Act 60 and the benefits of living there. Carlos Fontn, director of the DDEC's office of business incentives in Puerto Rico, said in April, the agency began the first . However, individuals deriving income for services performed within Puerto . Let's explore each of these in greater detail. 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. Under Chapter 2 of Act 60 . 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. 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