15 Things to Know Before Moving to Puerto Rico
- Posted: August 2, 2018
- Posted by: Travis Lynk
- Last Reviewed: January 17, 2021
This post was authored by Puerto Rico resident Sean King on July 24, 2018, and updated for Act 60 on March 13, 2020.
We did years’ worth of diligence before moving to Puerto Rico, and it mostly panned out. We absolutely love PR and San Juan and are so very grateful for the experience and how welcoming everyone has been to us.
However, there are a few things I wish I had known and planned for that simply didn’t come up during our diligence. I’ll post most of them here in case any readers considering a move can benefit from knowing them in advance. (If I have any of these wrong, I welcome being corrected by those more knowledgeable or experienced.)
1. Your Act 60 (formerly Act 20 and Act 22) decrees only offer the lower tax rate on certain types of income, not all types.
The Individual Resident Investor tax incentive applies only to any interest or dividends, or to any capital gains, on the sale of valores. Valores is a Spanish word that translates as “values” or “valuables,” but it can also have the narrow, technical meaning of “securities.” Most decrees, which are, in theory, binding contracts with the Puerto Rico government, currently translate it simply as “investment assets,” which is a pretty broad term. In this case, broad is good. The Export Services tax incentive only applies to “export services income”—that is, to income earned for providing certain types of pre-approved services from Puerto Rico to people or entities outside of Puerto Rico. So, don’t make the mistake of assuming that you get the favorable Act 60 rates on all types of income. You don’t.
2. PR taxes its residents on their worldwide income, not just income earned within or sourced to PR.
Even income sourced to the mainland (such as for services you provide while visiting the mainland) or to another country (such as for services provided while in another country) must generally be reported on your PR tax return and any resulting taxes calculated there. However, that same income will also generally get reported on your US (or foreign) tax return with any resulting taxes calculated there too. Does that mean you’re effectively double-taxed? No. PR gives you a foreign tax credit against your PR taxes for any taxes you pay to the mainland (or a foreign country), so you don’t end up double-paying taxes on this income. But, if PR rates are higher than the mainland or foreign rates, and they often are if the income in question doesn’t qualify under your Act 60 decree, you’ll still effectively end up paying the higher of the two tax rates on that income. Again, this only applies to income earned (sourced) outside of PR. Income earned within (sourced to) PR is only reportable on your PR returns (if you are a U.S. citizen, at least) and only subject to the PR tax rates, which are very low if it is a type of income that qualifies under Act 60.
3. Act 60 Export Services tax incentive benefits are presently only available to PR business entities (corporations, LLCs, etc.) and not to sole proprietorships.
You’ll need to form a new PR entity that will apply for the Act 60 decree. If you presently operate as a sole proprietorship, you’ll need to figure out how to redirect qualifying future income to your new PR entity. This may mean rewriting contracts with your customers/suppliers. In some industries (e.g., the securities industry), redirecting the income to a PR entity may be difficult or impossible due to licensing and regulatory issues. Be sure to think that through in advance.
4. PR requires companies with more than $1 million in gross revenue to report their income using the accrual basis of accounting.
Why? Just because.
5. PR requires essentially all companies with more than $3 million in gross revenue to have audited financials each year.
Why? Just because.
6. You must register your Act 60 business in the municipality(ies) from which it operates, even if you are working from home.
Those municipalities will assess a small tax on the entity’s gross revenue generated from within the municipality. Though the rate will be reduced considerably for Act 60decree holders, it’s not usually zero.
7. Items 4, 5, and 6 above operate together to incentivize maximizing your Act 60 entity’s net income while minimizing its gross revenue.
Think about ways to do that in advance.
8. Assuming your Act 60 entity is owned only by bona fide residents of PR, it should be exempt from U.S. tax withholding for any payments made to it from U.S. people or companies.
You may need to provide each U.S. payer with a properly completed IRS Form W-8BEN-E so that they know not to withhold. Once done, these U.S. payers should not have to issue your PR entity an IRS Form 1099 each year.
9. Your Act 60 company must pay you a “reasonable” salary each year, and that salary will be taxed to you personally at ordinary PR tax rates.
In other words, the portion of your company’s profits paid to you as salary each year will not receive the favorable Act 60 tax treatment each year.
10. PR does not recognize US–based retirement plans such as 401(k)s, IRAs, defined benefit plans, Roth IRAs, etc. as “tax-qualified” under PR tax law.
Combined with number 2 on this list, this means that PR residents will pay PR taxes on gains within these plans/accounts (even within Roth IRAs!) that accrue after their move to PR. Account balances that existed prior to the move to PR aren’t subject to PR tax, as I understand it. Furthermore, PR residents will pay tax on post-move gains within these U.S. retirement plans at PR tax rates. Individual Resident Investor tax treatment appears to be unavailable for assets owned within these plans, unless the plans can somehow be characterized as grantor trusts under PR law. It’s unclear to me whether those gains are taxed as they accrue within the plan after one’s move or only upon withdrawal from the plan after one’s move. Regardless, you’ll need to plan around this unfortunate fact. For instance, depending upon your circumstances, it may be preferable to cash out your US-based retirement plans, even Roth arrangements, upon your move to PR, pay out any tax owed to the IRS on the cash, and then invest the proceeds in after-tax arrangements that qualify under the Individual Resident Investor act. That way, future gains will continue to grow tax-free under the Individual Resident Investor act, even though you will have suffered a one-time payment of U.S. tax on the cash-out. There may be other ways of resolving this issue, but my point is that you should think it through in advance.
11. Notaries in Puerto Rico are legally required to be lawyers.
In other words, only lawyers can be notaries. Seriously. Why? Because Puerto Rico.
12. You have to have a notary’s/lawyer’s signature to do pretty much anything in PR.
To buy real estate, to get a license for medical cannabis, or even to just file your rinky-dink San Juan Municipal “Volume of Business” tax return—you need a notary’s or lawyer’s signature for it all. So, make friends with a good notary. Since, presumably, most people in the PR legislature are lawyers, they apparently want to make sure that lawyers get paid a small piece of every deal by requiring a notary signature on most everything.
13. In Puerto Rico real estate transactions, a notary basically provides the services that a title company would in the mainland but at a much higher cost.
The fee charged by notaries for real estate mortgage transactions is apparently fixed by statute and is a percentage of the original mortgage balance. This fee gets charged whether you’re doing a bank mortgage or a private mortgage. For a large mortgage, the notary fees can be tens of thousands of dollars. And, unfortunately, a notary must be involved both when you originate the mortgage and when you retire or cancel that same mortgage. So, notaries get paid the statutorily mandated percentage twice for every mortgage! How convenient! Alas, without understanding this, I bought a residence down here with a large mortgage that I retired about six months later, costing me tens of thousands in unnecessary notary fees. I should have just paid cash up front, but there were reasons that I didn’t. I’m not complaining—I’m just trying to make sure that you understand the system better than we did.
Just like the government is looking out for the notaries, they are apparently also looking out for the banks.
14. The government won’t take a personal or corporate check for hardly anything (neither for tax payments, nor for filing fees, nor for tickets), no matter how small.
Instead, they demand a certified check or manager’s check, for which you’ll pay the bank a pretty penny and probably waste an hour of your time, regardless of how large a customer you are for them.
15. The banking services here… well… suck.
Everything is ridiculously slow, and you get charged a pretty penny for everything—for a certified check, to send a wire, to receive a wire (in what other states do banks charges to RECEIVE wires?)—no matter how big or important you are. Plus, the banks here are very nosey. They take AML/KYC and fraud prevention to an extreme no matter who you are. Expect lots of annoying and invasive questioning about large or small checks, wires, etc. The banking experience here is manageable, but don’t expect a mainland type of experience.
Everything is ridiculously slow, and you get charged a pretty penny for everything—for a certified check, to send a wire, to receive a wire (in what other states do banks charge to RECEIVE wires?)—no matter how big or important you are. Plus, the banks here are very nosey. They take AML/KYC and fraud prevention to an extreme, no matter who you are. Expect lots of annoying and invasive questioning for large or small checks, wires, etc. The banking experience here is manageable, but don’t expect a mainland type of experience.
Puerto Rico is 90% heaven and 10% hell. So long as you’re prepared for the hell, you’ll love it here. We certainly do. I’m just sharing this information so that you can be prepared for all of this wonderful place, the good and the bad.
Disclaimer: PRelocate, LLC is not a law firm, and this is not legal advice. You should use common sense and rely on your own legal counsel for a formal legal opinion on Puerto Rico tax incentives, maintaining bona fide residence in Puerto Rico, and any other Puerto Rico tax or residency related issues.
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