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. What is a Board-Certified Tax Law Specialist. Golding & Golding, A PLC (2023): LawDog Enterprises - All Rights Reserved - No Legal Advice Intended: This website includes information about legal issues and legal developments. Local government has legislated a series of incentives to attract investment, of which EB-5 Visa program participants can also take advantage. 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. It is expected that individuals who receive their decree before this date will be grandfathered in. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. Disclaimer: Neither PRelocate, LLC, nor any of its affiliates (together PRelocate) are law firms, and this is not legal advice. Puerto Rico Residency Requirements Benefits of Puerto Rico Residency Find Out More. This is ensured by Act 60-2019 (formerly known as Act 22). 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. 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. We elaborate on that at the end of the post. Puerto Rican and foreign companies created investments that transform and accelerate economic development in Puerto Rico thanks to Act 60. If you are aiming to satisfy the presence test by spending at least 549 days within a three-year period in Puerto Rico, you still must be physically present in Puerto Rico for 60 days per year. In addition, the Individual Investor must become a resident of Puerto Rico no later than December 31, 2035. Initial consultations Those of Act 22 on average pay 12 times more than most taxpayers in PR. Act 60 provides tremendous tax benefits to qualified businesses and individual investors. 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. You are a bona fide resident of Puerto Rico for the year of your move plus the two proceeding years. Puerto Rico operates with some independent from the US government. The core motivation of the IRS in administering the, The first of the three tests is perhaps the most complicated. Consulting with a tax advisor would be a good idea as well. If your C Corporation conducts its business in Puerto Rico, then dividends paid to shareholders will be taxed at 0%. Weve covered the main ones, but take a look at all of these additional tax incentives that may also apply, depending on the nature of your business. Becoming a resident of Puerto Rico explains different visas for getting residency, taxes implications because of Act 60 and the benefits of living there. The most important consideration for the IRS is that you spend more time in Puerto Rico than in the rest of the United States. A flat 4% corporate tax rate 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. Afterward, each year, you will have to make a $10,000 charitable donation and submit an annual report along with a $300 fee. . The owner must also take out a reasonable salary for him- or herself, which is subject to normal Puerto Rico income tax rates. Lets take the example of a C Corporation, which the IRS recognizes as an independent legal entity. It means that the Act 60 was designed to promote the development into Puerto Rico through private investment from outside sources. 2 This income also would be excluded from Puerto Rican income tax. 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. The term 'resident individual' means an individual who is domiciled in Puerto Rico. What is important to note is that US Persons do not use the standard Substantial Presence Test (SPT) to determine whether or not they qualify for residence in Puerto Rico noting SPT is used (kinda, sorta) when the person is a foreign national, nonresident alien and seeking residence in 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. However, if your C Corporation derives its revenue from the United States, dividends will be subject to regular federal taxes. Thirdly, an individual should not have a closer connection to the USA or to a foreign country than to Puerto Rico. Puerto Rico voter registration is required. There are always exceptions, exclusions, and limitations to be aware of. What It Means to Be a Resident of Puerto Rico. */. What It Means to Be a Resident of Puerto Rico. 5%, if such gain is recognized after said 10-year period. When you have satisfied all the requirements to become a bona fide Puerto Rico resident, you must file, 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. In June 2019, Puerto Rico made substantial changes to its tax incentives that came into effect on January 1, 2020. However, if you also have income from sources outside of Puerto Rico, including from U.S. sources, you're required to file a U.S. federal income tax return if such amount is above the U.S. filing . As the US taxes citizens on their worldwide income, some individuals have felt the need to renounce their US citizenship and move abroad to minimize their tax burden. 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 . Golding & Goldingspecializes exclusivelyin international tax, and specificallyIRS offshore disclosure. Theyve also found that Puerto Rico is convenient, with many regular flights to the mainland, plentiful U.S. retailers, and a U.S.-based legal system. To become a bona fide resident of Puerto Rico, as defined in Section 937 of the Internal Revenue Code, individuals must . 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. Under Act 60s Investor Resident Individual Tax Incentive (formerly Act 22), an eligible individual investor can receive a 100% tax exemption on interest, dividends, short- and long-term capital gains, and gains on crypto-based assets acquired after moving. 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). This means that Puerto Rico should be your primary place or residence or your primary place of employment. Thanks to this code, your income sourced from Puerto Rico can be exempt from both federal and state taxes. 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. Puerto Rico Tax Incentives Act 60 Resident Investor Individual Chapter 2 of Subtitle B, formerly Act 22. There are always exceptions, exclusions, and limitations to be aware of. Since this test is essentially assessing your intentions, it is somewhat subjective, and since everyones situation is different, the IRS considers different factors in each case. How about moving just yourself? Therefore, there are multiple ways to satisfy the requirements of the presence test. 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). 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. If youd like to know more about the qualifying tests, consult IRS Publication 570. 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. Read on for what you need to know about taxes before, during, and after your move to 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. The report's findings concluded with what was already known; Act 20 and Act 22 led to hundreds of millions of dollars of lost U.S. income tax revenue. In addition, the income derived by a Resident Individual Investor after becoming a resident of Puerto Rico, but before January 1, 2036, consisting of interest, financing charges, dividends or partnership interest received from International Banking Entities authorized under the Banking Center Act, shall be fully exempt from income taxes in Puerto Rico, including the alternate basic tax provided in the Puerto Rico Internal Revenue Code. Thousands of Americans have already made the move to Puerto Rico, enjoying a 0% income tax rate on capital gains or a 4% corporate tax rate for their business while indulging in the excitement of Puerto Rican culture and cuisine. 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 traverse some of the key points of act 22 for Individuals (Act 20 is for Businesses) (now combined into act 60) as it relates to individuals and investments to US residents who relocate to Puerto Rico and become a bona fide resident (citations refer directly to the act). Puerto Rico is a sunny Caribbean paradise, and you can enjoy an enriched life in a beautiful culture with beautiful weather, but if youre pining for your life in the US because you left significant connections there, you may not enjoy it. This is an important point because if your company does business with other entities that are based on the island, youll risk losing your tax exemption. All of these benefits and so much more can be yours if you relocate to Puerto Rico. Flights to and from Puerto Rico are considered domestic flights, a distinction shared in the Caribbean by only one other island chain: the US Virgin Islands. Under Act 60, an eligible business includes export services and commerce. (a) Appreciation Before Becoming a Resident Individual of Puerto Rico. You dont need to satisfy them allsatisfying just a single one is sufficient. Be present in Puerto Rico for a minimum of 183 days in the tax year. To be defined as a bona fide resident of Puerto Rico, an individual must be able to demonstrate that he/she satisfies 3 key residency requirements relating to the individuals presence in Puerto Rico, having a tax home in Puerto Rico and having closer connections to the territory than anywhere else. A Puerto Rico resident is an individual who is domiciled in Puerto Rico. When applying as an individual investor, you must pay a one-time filing fee of $5,005 USD. You had earned income in the United States of no more than a total of $3,000 and were present for more days in the relevant territory than in the United States during the tax year. If youre unclear on whether youll meet this requirement, check out our Day Tracker Tool. The Governor of Puerto Rico has enacted Act 52 of 30 June 2022 (Act 52-2022), which allows companies to elect a 10.5% tax on industrial development income from sales of goods and services instead of the 4% excise tax on foreign corporations, which the latest United States (US) foreign tax credit rules do not consider creditable. Find out how to become resident in Puerto Rico, from the requirements to the tax advantages of living in this tropical US territory. Of course not. One of these is the low 4% corporate tax rate we touched on earlier. The first of the three tests is perhaps the most complicated. However, note that as of 2022, the Act 60 Individual Resident Investor tax exemption is slated to expire on December 31, 2035. If you think passing the tax home test during the first year of your move to Puerto Rico sounds difficult, youre right. Passing the Presence Test This property must be the individuals primary residence and not rented out. 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. 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. 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. 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 fully exempt from income taxes in Puerto Rico, including the alternate basic tax provided in the Puerto Rico Internal Revenue Code. Neither you nor your relatives can control these nonprofit entities. Act 60 Updates from Act 22 (Individuals) 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. Youll also use Form 8898 to inform the IRS of your new residency status. A Puerto Rican driver's license is required. Resident Engineer (Construction) About the Position: Incumbent will serve as the Resident Engineer under the general supervision of the Area Engineer. 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. 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. Before using any Materials, you should consult with legal counsel licensed to practice in the relevant jurisdiction. Executed lease or transfer of title-proof of real estate ownership is required. attorney to discuss your specific facts and circumstances and to obtain advice on specific legal problems. doing business in Puerto Rico. If your export-service company is conducting its activities inside Puerto Rico, it may be eligible for substantial benefits that apply to income received from customers outside of Puerto Rico. 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. Keep in mind that as the owner of an export-service company, you must pay yourself a reasonable salary based on the services you provide. Rather, the US person has to become a. Finally, exceptions are available for special circumstances, such as medical treatment or disasters. And, if it the income is sourced in Puerto Rico, it would escape tax in the U.S. as well. Therefore, it is important to note that the Taxpayer must plan to try to keep their income sourced in Puerto Rico to avoid any unnecessary pitfalls. First, youll pay a one-time $5,005 application fee along with a $105 acceptance fee. Youll want to keep meticulous records to ensure you dont jeopardize your eligibility for these generous Act 60 tax benefits. 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). 60 of July 1, 2019, known as the Puerto Rico Incentives While Puerto Rico is considered part of the United States, it is not a state per se and therefore, the US tax treatment rules are different. 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. 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. 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. Disclaimer: Neither PRelocate, LLC, nor any of its affiliates (together PRelocate) are law firms, and this is not legal advice. The Code shall create a simple, streamlined, and efficient process that focuses on the client, and shall earn the trust of the people and the private sector by having a transparent process for the granting of incentives. When a US person obtains a Golden Visa, they have a second passport (CBI) or travel privileges (RBI). A C Corporation is separate from its owners. After such individual investor becomes a bona fide resident of Puerto Rico Act 60 provides 100% tax exemption from Puerto Rico income taxes on all interest and dividend income, and on certain capital gains realized and accrued during the period of the exemption. 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. To be a bona fide resident of Puerto Rico: A person must meet extensive rules and requirements to qualify for the favorable tax treatment available to residents of Puerto Rico. Its recommended to sell or rent out your home in the US, which will not only significantly help pass the closer connection test but also provide some extra cash. It is important to understand what is excluded for tax purposes and what is not excluded under, It is crucial to understand that in order to exclude the income from capital gains and dividends, it should be accrued. 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. if an individual is granted Puerto Rico tax exemption under the act, long term gains as a result of investments made after becoming a resident will be exempt from tax in Puerto Rico. 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. No Article, Blog Post or Page may be reproduced or used without express written consent of Golding & Golding. As of 2022, that could result in a tax rate of up to 37%. Financial accounts include bank accounts, crypto asset accounts, certain insurance policies or investment accounts. Contact us today to ask about starting the next exciting chapter of your life on this stunning Caribbean island. Passing Puerto Ricos bona fide residency tests may seem tough, but if you truly move your whole life to Puerto Rico, its not that difficult. Under GILTI, the minimum tax for any US-owned CFC is 10.5% (max 21%). Spend at least 549 days in Puerto Rico during the 3-year period of the current tax year and the 2 preceding years, including at least 60 days in Puerto Rico during each tax year. 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). As provided by Puerto Rico Incentives Code 60: What does this mean? A U.S. taxpayer who is a bona fide resident of Puerto Rico for an entire taxable year is able to exclude from U.S. federal income tax under 933 (1) Puerto Rican-source interest and dividends, and (possibly) worldwide capital gains. Due to the territorys legal status, moving to Puerto Rico is considered internal migration as opposed to immigration. Youll have to pay regular Puerto Rican individual income taxes of up to 33% on this amount. Puerto Rico taxes are very favorable to crypto investors when using Act 60. What are Puerto Rico Tax Incentives Under New Act 60 (20/22). Physical Presence: the investor has to be physically present in Puerto Rico 168-183 days per year, and in the United States for less than 90 days in the 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. Giving up your connection to organizations in the US is also not mandatory, but it is recommended to make connections with Puerto Rico organizations to establish ties in the local community. The tax incentives enjoyed by Individual Resident Investors in Puerto Rico are perhaps the most impressive of all Puerto Rican tax incentives: Just keep in mind that to qualify for these generous incentives, you must become a bona fide resident of Puerto Rico, which involves spending the majority of your time in Puerto Rico, making Puerto Rico your tax home, and establishing closer connections in Puerto Rico than in the US. Residence and not rented out two proceeding years federal taxes an individual who is domiciled in Puerto Incentives. Second passport ( CBI ) or travel privileges ( RBI ) the Internal revenue Code, individuals must a. You need to know about taxes before, during, and after your move plus the proceeding... 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