How to Move Your Trading Business to Puerto Rico and Why You Should
- Posted: July 8, 2022
- Posted by: Travis Lynk
- Last Reviewed: December 17, 2022
In the 21st century, the world of trade has seen an explosion of extraordinary magnitude in terms of accessibility. With the emergence of online trading platforms such as Robinhood, U.S. citizens now find it easy to establish large-scale trading businesses or to become full-time day traders. Moreover, they not only have the option to go the traditional way by trading in stocks, bonds, or precious metals, but also to conduct trades related to cryptocurrency like Bitcoin or Ethereum.
However, as always, there is a catch. If you own a trading business or are a qualified trader, then there is no need to tell you about the complicated mess that is also known as taxes. Trading, whether in the traditional form or in the new-age crypto form, is filled with an inordinate amount of tax liabilities. The list of federal tax laws concerning trading businesses that are involved in stock exchanges or deal with cryptocurrency goes on for pages. Nevertheless, there is a way to reduce your tax worries and simplify your business’s tax troubles. This remedy presents itself in the form of Puerto Rico.
Puerto Rico: A Tax Haven
Puerto Rico occupies a special place in the scheme of things. This Caribbean island is an unincorporated territory of the United States, so while it is considered a part of the United States, it is not a state in itself. As a result, Puerto Rico has the advantage of operating with a certain degree of independence from the U.S. government. Consequently, the Puerto Rican government is given more elbow room to stipulate their own tax laws that are separate from the federal and state laws of the mainland.
The Puerto Rican government passed Acts 20 and 22 on January 17, 2012, which were later combined and replaced by Act 60. The Act 60 program was put in place with the aim to facilitate the recovery of Puerto Rico’s economy. By providing a multitude of tax incentives, it is meant to attract high-net-worth individuals and investors while setting the stage for new businesses and employment opportunities in Puerto Rico.
Act 60: Tax Benefits for Trading Businesses
American trading companies have become aware of the trading giants and crypto millionaires that have made it big in Puerto Rico. The benefits for trading businesses operating inside Puerto Rico and exporting their services to customers located outside are in abundance. Whether you are part of a traditional or crypto trading company or you are a daily trader, your business can qualify for the following perks as per the Export Services Tax Incentive (formerly Act 20):
- 4% corporate tax rate
- 100% tax exemption on distributions from earnings and profits
- 50% tax exemption on municipal taxes
- 75% tax exemption on municipal and state property taxes (with a possible 100% tax exemption for the first five years of operation in the case of small and medium trading businesses)
How to Benefit from Act 60
For a trading business to derive the tax advantages of Act 60, it has to satisfy a few criteria:
- The trading service must not have a nexus with Puerto Rico, which means that there should be no business-related activity within the island itself. In other words, the trading business needs to have their clients located outside Puerto Rico.
- The trading business needs to move their income producing activities to Puerto Rico and establish an office there. To achieve this requirement, the business can choose from two possible arrangements
- The trading business can move 100% of its income producing activities to Puerto Rico. This entails the business setting up a new establishment on the island and then either relocating all value-creating employees to Puerto Rico or replacing them with people who are already residents. The trading business would then cease to operate on the mainland, and all of the income would be taxed as per Act 60 regulations.
- The other option is to move a part of the trading business’s income producing activities to Puerto Rico while continuing operations on the mainland as well. Matters get a bit complex here as the entire trading business would then be straddling two independent tax jurisdictions. Consequently, a transfer pricing analysis and intercompany agreements would be required to determine how much of the revenue would be divided between the Puerto Rican resources and the existing U.S. resources.
- The most crucial step in this process is to get the Act 60 tax exemption decree. This decree contains all necessary information regarding the associated tax rates and conditions that the trading business needs to meet; it is a contract between the business and the Puerto Rican government. The trading business simply needs to submit an application to the Office of Industrial Tax Exemption (OITE) of Puerto Rico, and once it is acquired, all the benefits are secured for 15 years, after which they can be extended.
To put it simply, Puerto Rico presents a wonderful opportunity to cut down on taxes for traditional and crypto traders with established businesses. To find out more about the Act 60 program and how to get your business to flourish in this tax haven, get in touch with our PRelocate team. If you wish to get the process started, let us know and we will handle it for you.
Disclaimer: Neither PRelocate, LLC, nor any of its affiliates (together “PRelocate”) are law firms, 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’s tax incentives, maintaining bona fide residence in Puerto Rico, and any other issues related to taxes or residency in Puerto Rico. 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”). Before using any Materials, you should consult with legal counsel licensed to practice in the relevant jurisdiction.