Every year, hundreds of businesses and individuals make the move south to the sunny Caribbean island of Puerto Rico to enjoy a luxurious beach lifestyle in a vibrant Hispanic culture—with a lower cost of living than in the United States and significant tax benefits thanks to the Act 60 tax incentives. Puerto Rico is a fantastic choice for U.S. expats—since it’s a U.S. territory, U.S. citizens and residents can travel easily and indefinitely to the island and still enjoy the conveniences and protections of U.S. laws and programs like Medicare. We held a webinar to discuss the tax incentives and how you can benefit from them—read on for details.
Act 60 Export Services
If you operate or intend to launch a business, consider setting it up in Puerto Rico to take advantage of the Act 60 Export Services (formerly Act 20) tax benefit. As long as your business qualifies, you can enjoy a 4% corporate tax rate and a 0% tax rate on dividends. Compared to the 30%+ corporate tax rate in the United States, the astoundingly low 4% corporate tax rate under the Export Services incentive can help your business grow and flourish.
Our webinar highlights that the business owner must still grant themselves a reasonable salary based on the work they perform, and this salary is taxed at regular Puerto Rican tax rates, which can be as high as 33%. Thus, you can’t have all your business’s income taxed at 4%, but the savings compared to U.S. tax rates are monumental.
Act 60 Investor Resident Individual
If you’d like to move yourself to Puerto Rico, look into the Act 60 Investor Resident Individual (formerly Act 22) tax benefit. As explained in our webinar, this tax incentive fully exempts decree holders from capital gains tax liabilities as long as the gains were amassed while the decree holder was a bona fide resident of Puerto Rico. You’ll still owe U.S. taxes on any unrealized gains earned before your move to Puerto Rico, but the remainder is taxed at 0%.
Satisfying the bona fide residency requirements aren’t difficult if you truly commit to relocating to Puerto Rico. You must pass three tests: the presence test, which requires you to spend at least 183 days in Puerto Rico or fewer than 90 days in the United States each year; the tax home test, which requires your office or regular place of business to be in Puerto Rico; and the closer connection test, which requires you to demonstrate more significant ties to Puerto Rico than the United States.
Meeting the presence test could be impossible in your first year, which is why we recommend moving in the first part of the year. Thanks to the “year of the move” perk, the tax home test and closer connection test only need to be satisfied for the last 183 days of the year in the year of your move.
PRelocate Can Help
Many decree holders apply for both the Export Services and Investor Resident Individual incentives to maximize their profits. Here at PRelocate, we’ve already aided hundreds in making the move, helping them understand Act 20/22/60, determining their eligibility, completing and submitting their application, and negotiating their tax exemption. Even after you’ve moved to Puerto Rico and settled into your new life, you can take advantage of offers like our virtual mailbox service, which equips you with a physical Puerto Rico business address and allows you to easily manage your mail when you’re abroad. We also produce informational blog posts and webinars that may help you even as an Act 20/22/60 veteran.
If you have any questions that aren’t covered in the webinar, reach out to us at info@relocatepuertorico.com or call us at 787-503-8184.
Webinar Text Transcription
Mike Schoenfeld:
Hey, everyone. Thanks for joining us today. This is Mike Schoenfeld, one of the founders of PRelocate, and I’m joined here with Pilar Rivera and Chris Irizarry as well. What we’re going to do today is just try and cover some of the overall basics of the Act 60 program, both related to the business side and the individual investor side, some of the key residency considerations, most common questions that we get on moving to Puerto Rico and give you a little bit more of an overview about our company overall. Now before we get started, we’re actually going to do a quick poll. We’re going to ask four quick questions just to see where everybody’s coming from in terms of how they’re thinking about Act 60, if they’re already on the island, things like that. So we’ll launch the poll now.
Thanks everybody for answering this poll because it’s really going to help guide some of the conversation today and to make sure that we’re covering all the types of questions that you’d want to hear. As you are finishing up the poll, I’m going to give you a little bit of an overview of what we’re going to cover. First of all, we’re going to talk about the tax incentives in general in Puerto Rico and why Puerto Rico can actually offer these tax incentives and what makes Puerto Rico so unique. Then a little bit about our company and how we operate within the space. Next, we’re going to really dive into the Act 60 tax incentives. We’re going to focus on the two key ones that most of you are probably interested in which includes the Export Services and the Investor Resident Individual. Then we are going to dive into the compliance section of when you come down here and how do you actually make sure that you’re meeting all of the requirements? How should you think about those requirements and all those types of things. And with that, we’ll close the poll and dive right in.
So quick background on Puerto Rico. I’m sure at this point you all know a little bit about Puerto Rico, but one of the unique things that makes it able to offer these tax incentives is that it is a U.S. territory and not a state. So because of that, everybody in Puerto Rico is born a U.S. citizen. It is part of the United States, but similar to let’s say the U.S. Virgin islands and Guam. It is not technically a state. So because of that, Puerto Rico gets to have its own tax regime and decide its own tax laws, and it’s one of the few places in the world where there’s no double taxation. Typically if you are a U.S. person and you go to another country, the United States does have its arms out and all of the income that you make in anything that you do is subject to U.S. taxation. But because there are some territories around the world including Puerto Rico that get to make their own tax laws, it’s in a very advantaged situation. Additionally, one of the key things of Puerto Rico is that it is part of the United States. There’s great colleges here. There’s a really strong workforce; both Puerto Ricans still on the island and many Puerto Ricans who left the island and have been educated and stayed on the mainland. But we’re seeing more and more Puerto Ricans coming back to Puerto Rico with some great STEM programs on the island and with the schools, there’s a really rich talent pool available on the island and a vast majority are bilingual which can be extremely helpful in business.
On the screen, we have a number of different tax incentives that have all been combined under Act 60. So historically we would’ve called this Act 20 for the Export Services and Act 22 for the Investor Resident Individual. Those have been bundled under Act 60. There’s many other really interesting tax incentives that we’re not going to cover today, but lots of really cool things on the island, like the young entrepreneur program which used to be Act 135, tons of manufacturing tax credits, film tax credits, and lots of other things that make Puerto Rico a really attractive destination, not just for the Act 20 and 22 type businesses, but for many other businesses overall. So these are the two key things that everybody on this webinar probably cares about.
First is the Act 60 Export Services. So at the high level, if you have a business where you are able to run the business from Puerto Rico, have your team in Puerto Rico and export your services either to the United States or internationally, you then are able to apply for a decree which allows you to have a 4% corporate tax rate. Typically in the United States, many small businesses are set up as LLC pass-through entities, so you avoid double taxation. But in Puerto Rico under the Act 60 program, what’s really unique is that you are able to have your company taxed as a corporation at 4% and then as an owner of the company, dividends to yourself are tax exempt. So where in the United States, typically you would have the corporate tax that’s applicable, and then any distributions you take would be at the capital gains rate. So you have two levels of taxation. Instead, in Puerto Rico, it’s the 4% tax rate and then a 0% dividend. There’s a few other things like you must pay yourself a reasonable salary for the job that you’re doing and a majority of the business does have to be owned by Puerto Rico residents. So if you have non-Puerto Rican partners, that is an important consideration. But generally, it’s really attractive for any business that can export its services. We’ll go through a few examples of that later on.
The other program that we’re seeing a very large growth in is the Act 60 Investor Resident Individual program. If you have not been in Puerto Rico and you relocate to Puerto Rico, any Puerto Rico-sourced capital gains are taxed at 0%. So any future gains are taxed at that 0% rate. Prior gains, there are different taxes that go to things that you accumulated before moving down to the island and that is also something that we’ll dig into a little bit more later. For both of these programs, one of the most important things is you truly need to move to Puerto Rico, be a bona fide resident, and do things the right way. I’ve talked to a lot of people and some questions we get all the time are: Do I actually have to move to Puerto Rico? Can I just set up a company there and not move or just move myself and not my team? And generally the answer is always going to be no. This is an amazing program with great tax benefits, but it is meant and only really works if you do truly move to Puerto Rico, become a bona fide resident and reestablish yourself on the island.
Many different types of companies and businesses use both decrees. For example, there’s lots of private equity firms, hedge funds, law firms that can export their service, many doctors who practice telemedicine and teleradiology, traders, commodities and stocks. Pretty much anything where you can export your service or you can do from your computer or have your team do remotely makes a lot of sense to utilize the tax incentives in Puerto Rico. One big one that I hadn’t mentioned is blockchain. There’s a lot of crypto activity going on in the island, both because of the tax incentives, but now because there’s such a nucleus of crypto activity, there’s a lot of really cool projects that are going on in the island.
So what do we do at PRelocate? To give you a little context to why I launched this company, we moved down in 2017 right after Hurricane Maria. As we were going through the process of learning about the Act 20 and 22 programs, there really was not a lot of good information available online. I had a personal friend that was already in Puerto Rico and some clients that had already moved down to use the programs and after learning more about it, I reached out and tried to get information and spoke to a few different attorneys and was really surprised in the lack of information and transparency on the programs. At its core, these programs are relatively straightforward if you meet the requirements and sometimes you don’t need to pay a very expensive law firm a lot of money for specific advice if you have a straightforward case.
What we’ve tried to do, first and foremost, is provide really high-quality information online so you can do a lot of the research yourself all in one place. Secondly, on the Act 60 Export Services side, we are an Official Qualified Promoter. What this means is that we assist you in all aspects of setting up your business and making sure it complies with the Act 60 Export Services requirements as well as structuring the application. Of course, if it’s a complicated case, we strongly recommend using a law firm and an accounting firm and we have a lot of great law firms and accounting firms that we work with. For some people it’s an extremely straightforward case and you can simply follow the rules by yourself and we can help you with that. Lastly, and the best part of all, is that because we’re an Official Qualified Promoter, we don’t charge for any of these services. We’re incentivized by the government to help do this so we don’t charge you for any of these services. You are only paying the actual costs associated with it.
Next is the Investor Resident Individual application. This is the application that you use when you’re applying for the capital gains exemption. It’s gathering a lot of information on yourself. What we do is we make it as seamless of a process as possible to help guide you through it. Due to working with over 600 clients through the years, we’ve learned a lot of the pin points of many of our clients, and we’re starting to expand into other types of businesses. Recently, we launched a real estate brokerage firm. One of the more unique things on the island in the real estate industry is it’s not like the United States. The MLS doesn’t really work. Buyer’s agents weren’t really a concept. A lot of times there’s some conflicts and seller’s agents just want to sell their own property to their own client and get both sides of the commission and just a complete lack of transparency. So after referring clients out for the past couple of years, we’ve brought a couple of the best brokers that were really helpful to our clients in-house and we’ve launched that as a service and we’re going to continue to expand other services to help all of our clients that are relocating to the island.
So a bit more information about us. As I mentioned, we started PRelocate in 2018 primarily because after moving down ourselves, we thought that there was a lot more information that could be available online. We’ve helped over 600 individuals and businesses combined relocate to the island and go through the decree application process. Overall our goal is to try and provide good information and make the move as painless and turnkey as possible and continue to deliver a lot of value to our clients. We operate the way that many of our clients are used to U.S. service providers operating. We are always responsive. We try and answer any questions you have. We actually respond to emails. If you’ve already gone through the process of moving down here or you’ve worked with some other service providers, you may realize that things don’t always work as well as they should in Puerto Rico. So what we pride ourselves on is being able to be responsive, provide high-quality information, and provide great service to our clients.
A little bit of information on me is on the right side of the screen. My co-founder, Sam Silverman, is on the left side of the screen. Both of us used to work at the Boston Consulting Group. We have several other companies together which was the primary reason why we moved down to Puerto Rico and now we also operate PRelocate. Then these are my two team members that I’m joined with today who I will be handing the microphone over to very soon, Pilar Rivera and Chris Irizarry. They are both phenomenal and are actually both attorneys and help take care of our clients and do an amazing job. I’ve only heard great things about them from all of our clients. We’re really excited to have them as part of the team. Then we have several other members of our support staff that we’re highlighting on the screen here.
Pilar Rivera:
My name is Pilar Rivera. I’m the Operations Manager at PRelocate. I did see many of you are already our clients, so you probably know my voice. Now we’re going to take a deep dive. Even though that’s what we called this section, it’s still going to be a pretty high-level overview to give you a basic understanding of what these incentives are. Hopefully they’ll answer some of your broader questions and help you come up with more specific questions so that when you do reach out to us, your questions are more targeted and we can take better advantage of the time that we have together. The first incentive that we help with is called the Exports Services Incentive. Many people still refer to it as Act 20 because that’s what it used to be called. Now it’s under Chapter Three of Act 60. These are for businesses that are relocating to Puerto Rico and providing services to clients located outside of Puerto Rico. Generally, there could be two types of business. Number one is the services business. You could also set up an export trade business when it’s involved in the sale of products. Usually the second type, the trade business, is a little bit more complicated because depending on the activities that are happening, there can still continue to be U.S.-sourced income. So many companies are able to either move all of their activity to Puerto Rico or some of their activity to Puerto Rico and we’ll talk about that a little bit more on the next slide. But once you form your company in Puerto Rico, the company is going to be taxed at a 4% corporate tax rate and then you can take the distributions tax free.
Something you do have to keep in mind is that business owners that are going to be working for the business and dedicating at least 80% of their time to the business do have to give themselves a reasonable salary and that is going to be taxed at regular Puerto Rican income tax rates, which is a bracket system, but it maxes out at 33%. So how do we help you? Number one, we help you understand the incentives and help you determine whether this is something that you should either move forward with or maybe continue looking into. We do have several CPAs and tax attorneys that we recommend if your case isn’t as straightforward. We help connect you with the right people and then you can always come back to us and we’re happy to help you with the application and any other questions that you mention. Hopefully the people that are our clients already and are listening would agree that we try to be very responsive and helpful to you. If you have anything along the way you need, we will step in and try to provide the best service. We help you complete the application. On the business side, that includes forming a Puerto Rican entity. Then we draft and submit the application online and we’re involved throughout the whole process up until you get your signed decree. These are the two options that I mentioned. Many people choose and are able to move their entire business, and when I say move their entire business, you don’t necessarily have to already have a business that you’re closing and bringing or moving. You can start a new business in Puerto Rico, but 100% of the business will be eligible under Act 60.
In this case it’s the most beneficial, because let’s say for example, you have a software development company and this software development company has services that you can provide entirely from within Puerto Rico. You don’t have any employees in the United States. That’s eligible under Act 60. So 100% of your profits will come into the new Puerto Rican entity. Option two is for certain businesses that can’t relocate their businesses for whatever reason or they want to continue to have their businesses in the United States, but they can move a certain aspect of their business to Puerto Rico. For example, if you have a real estate construction business in the United States and your real estate office is in the United States, but maybe you want to move your marketing activities or your back office support to Puerto Rico. Also the export trade-type companies that are doing warehousing and fulfillment in the United States, but they want to do their marketing and their customer service in Puerto Rico. Those are companies that will start a new Puerto Rican company and invoice their U.S. company for the services that they’re providing. In this situation, it’s still advantageous, but it’s a little bit less only because you won’t be able to bring in 100% of your profits to the Puerto Rican company. We also recommend that you do what’s called a price transfer study, which essentially is an evaluation that is done whenever affiliated entities are doing business with each other that will let you know what is the fair price that you can charge your company so that you’re not charging more or less than you would charge a non-affiliated company.
The next incentive we help people with is the Investor Resident Individual Incentive. This is the one that will give you the 0% capital gain tax rate on certain capital gains, interest, and dividends. In order to benefit from this incentive, you do have to establish bona fide Puerto Rico residency which we’ll discuss a little bit later in this webinar. As long as you know the capital gains are eligible, for example, investments in the stock market or cryptocurrency in Puerto Rican-sourced interest or dividends, those will be taxed at 4% for any gains that are realized after your relocation date. A similar type of service we offer is we help you understand your situation. We’ll help you understand the compliance requirements, and we will be involved throughout the whole application process up until you get your signed decree. Just to help you understand the Investor Resident Individual Incentive a little bit more, this slide focuses on what is known as a marketable security. The marketable security is going to be an asset that has a value when you move to Puerto Rico. In this example, let’s say in 2011 you bought Apple stock for $100. Then you moved to Puerto Rico in 2016 and the value on that date was $200. You have an unrealized gain of $100. Then let’s say in 2021, you decide to sell. Now the value of the stock is $400. So the $100 that it appreciated before you relocated to Puerto Rico is going to continue to be taxed by the United States and then the $200 that it appreciated after your relocation date will be taxed by Puerto Rico at 0%. There’s also a benefit in holding onto your investments for over 10 years. The reason being in our example, if you sell in 2027, then the built-in gain that you brought with you, that’s going to be reduced to a 5% tax rate and the gain in Puerto Rico, of course, will be zero.
Mike:
And this is a question that we get from clients all the time. It’s just trying to understand exactly how that works. It’s very straightforward for anything that trades on an exchange or something where you can actually mark it when you move down. I’d say the day that you move down, you mark everything as of the current value and then going forward, all those future gains are capital gains which are tax exempt in Puerto Rico.
Pilar:
Right and so that’s in the case of a marketable security. I also often get asked about non-marketable securities, for example, when there’s a sale of a business. In that situation, gains will be allocated between the United States and Puerto Rico based on a holding period. It’s also known as the IRS bifurcation rule, but this rule only looks at the total amount of time the investment was held and then allocates gains between the United States and Puerto Rico on such holding period. Okay. So general application timeline. I want to preface this by saying that processing times vary and many times they are random, but this is how it’s currently looking. So in this timeline, let’s say we filed this application in January of this year. It’s going to be pending probably around 10 months where at that time, the examiner will send us a copy of the decree draft, where we’re going to be able to review it. We will share it with you, and we can make comments and request any changes at that time. Once we approve the draft, there’s a couple more months before the final processing is done. I would say right now business applications are taking at least 12 months, maybe a little bit less, but probably at least 12 months. Once the decree is issued, there are 60 days where you have to submit the sworn statement of acceptance. This is really important for both the Export Services and the Investor Resident Individual Incentives. Even though you get the decree, sometimes people can forget to submit the acceptance and then what happens when you do submit the acceptance is that you went through this whole trouble; maybe you moved down to Puerto Rico; you started the business; but then all of a sudden because you failed this last step, your decree is null and void. So throughout the whole process, we’re really reminding you of everything that’s becoming due so that you don’t mess up anything that’s important and risk losing the decree and the tax savings that you believed you had.
Mike:
And just thinking about the timeline, I wish we could control it. But this is up to the Department of Economic Development and Commerce of Puerto Rico (DDEC) for how quickly they’re going to adjudicate and just get through these applications and approve the decrees. We also know and we’ve seen that there’s a lot of people moving to Puerto Rico right now so there’s a lot more applications in process now than the DDEC is used to. Over the past year and a half, we’ve seen a large increase in the amount of people moving to Puerto Rico on both incentives. So results may vary. Sometimes they adjudicate quickly. Sometimes they don’t. You really don’t know exactly how long it’s going to take, but I can promise you, our team consistently follows up on all of the applications. We know where everything is in the process. You can always feel free to reach out to us and you have to wait patiently.
One thing we did not mention is on both sides, but especially the business, because this is important to a lot of people. The tax benefits start the day that you file your application. So it’s retroactive to the day that you file the application. Let’s say you move down next month in December of 2021. You start your new Act 60 business and you start exporting your service December of 2021. At that point, the tax benefits would start coming back to you even though it may not be approved until, on this timeline, let’s say that would be late in 2022 is when you would probably get that approval. That’s one question that we always get and I think it’s really important to know that these tax benefits are retroactive to the date of application.
Pilar:
Yes. That’s true on the business side. On the investor side of things, generally, it’s going to be retroactive to the day that you establish your residency. So let’s, in this example, say you moved to Puerto Rico. It’s not on the screen, but let’s say you moved in January of 2021, but you didn’t file your application until March 2021 and it’s likely going to be pending through the rest of the year. Once it’s approved, it’s going to be retroactive to the day you establish your residency, in my example, January of 2021. The important thing about that is that it will only be as retroactive as the year that you move. So let’s say you move in 2021 but you don’t file until 2022. It will only be retroactive until January 1, 2022. So you do have to file in the year that you move if you want it to be retroactive through when you establish your residency.
Mike:
And we’ve seen quite often that people move down, let’s say just on the business side. So you have a small digital marketing company; you move down and the Act 60 business makes sense. But now with all of the requirements of Act 22, the Act 22 portion of Act 60; there’s a $10,000 per year annual donation requirement and another $5,000 annual filing fee. By the time you add it all up, your run rate could be close to $20,000. And if you are primarily only operating your business and you’re not really an investor, maybe it did not make sense to file on the individual side right when you moved down. But a year or two later, things go well, you start doing more investing, then it could make sense to actually file the application. So it’s good to know you can mix and match. You don’t have to file both the individual and the business side together. Many people just do the business, many just do the individual, and a lot of people do both together as well.
Pilar:
Yes. On the investor side of things processing-wise, I would say again this varies, but we’ve seen applications be approved in as little as four months recently, but then others are taking as much as 10 to 12 months. It really is random. I’ve filed applications for a husband and wife on the same day, same set of circumstances. One was approved in four months, the other one in almost 12 months. And it really has nothing to do with the merits of the application. It just literally means that there’s not enough people working through the applications. I know it’s difficult to compare others that have received their decrees sooner than others. But trust us, if you’re concerned, you can always reach out, and we’ll follow up. 100% of the time I will say I followed up and it’s just that they haven’t reviewed it yet. There’s not an issue or anything like that. So hopefully what we also do is a little bit of counseling and trying to keep you from not freaking out about the length of it all.
Mike:
This is an extremely important slide and probably what a lot of people on the webinar have questions about: bona fide residency. How do you know if you’re actually a Puerto Rico resident? What do you have to do to meet all of the tests? The one test that most people always talk about is the presence test. So that’s the 183 day test. Being in Puerto Rico for over 183 days is primarily the way that you would do it. There’s a few other ways that you can meet the presence test such as spend less than 90 days in the United States and more time in Puerto Rico than anywhere else. Things like that. But generally everybody’s going to be looking at it as you have to be in Puerto Rico for at least 183 days. This is the only black and white test out of the three.
So let’s say you’re in Puerto Rico for 185 days. You check one box. Now the other two tests are a little bit more subjective: the tax home test and the closer connection test. The one that I really want to focus on here is the closer connection test. Let’s say you’re a couple in New York with kids going to school in New York and the husband is the primary income earner. If he decides, hey, I’m going to become a Puerto Rican bona fide resident. Flies down to Puerto Rico and spends exactly 183 days in Puerto Rico and the rest of the time up in New York. I think it’s pretty hard to say that your closer connection is to Puerto Rico if your family is still in New York. There’s a lot of things like that where if you’re trying to cut it close to the line in the gray areas of days of closer connection in your tax home, I’d say just really reconsider whether this is the right move for you.
In Puerto Rico, the way the tax incentive program works is you truly need to be in Puerto Rico. It’s meant to bring investors down to Puerto Rico to make investments on the island and stay on the island. I just would not cut things close, especially since there is increased IRS scrutiny on the Act 20 and 22 programs. There have been publications on that. The program is 100% compliant and legal. It’s just that you actually have to follow these tests. So as I was saying, 183 days on the ground. You should probably do a lot more than that. Don’t even make it close. This is all self-tracking. Nobody’s looking over your shoulder, but you want to keep good records on all of that and then make sure that you are actually moving your life and everything around it to Puerto Rico. Of course, there’s always some circumstances where maybe it’s not completely possible. Maybe somebody has a health issue and they have to stay in the United States for certain healthcare. There can be a lot of things that could make it that it’s not a complete clean move. You just have to weigh the different factors there and think about whether it’s going to pass the presence test and the tax home test and the closer connection test. I’ll let Pilar go through a little bit more information here because I know she gets these questions all the time from people and just get some of her thoughts on this.
Pilar:
I think you explained it really well. But definitely, a lot of the time people will call and they’ll say, oh, I can spend six months in Puerto Rico? Yes, that’s no problem. Or I hear, well, my friend moved to Puerto Rico, but his family is in the United States. Yes, it’s true. I’m sure a lot of people are doing that. I’m sure you’ve heard of people moving to Puerto Rico but really keeping a lot of connections in the United States. That’s not the way that we would recommend it. Also, sometimes people want to ask us a checklist. If I do this, do I pass? If I do this, do I pass? It’s not really something that is so black and white. Everything’s going to be considered in the aggregate and so it depends on your specific situation.
Many times I would say if you’re unable to make the move the way Mike described it, and actually making Puerto Rico your home, then you would need to talk to a CPA or tax attorney that has audit experience so that they can better prepare you. But really I tell everybody, you have to make Puerto Rico your home. Of course you can travel, but you should cut as many, if not all, connections to the United States so that you minimize your risk of being audited. Ultimately if you are audited either by Puerto Rico or by the IRS, if you’re doing everything right, there’s nothing to be worried about. You know it’s when you’re not doing things right, that you should be concerned.
Then there are the year of the move residency benefits. Basically what this means is if you move once the year has already started, you have to commit to being in Puerto Rico for an additional three years in order to avoid having the IRS come back and want taxes owed for the first year. It also means that you are going to have to meet 183 days in Puerto Rico. But in the year of the move it’s a little bit more lenient in that only for the last 183 days of the year you must meet the tax home and the closer connection test. It is a little bit more lenient in that sense, but we always recommend to people that it’s ideal if you can move to Puerto Rico by the first of January. If you don’t or if you can’t, it’s not a deal breaker, but just know that you are going to have that additional requirement of spending at least three more years in Puerto Rico.
I also like to remind people that for the tax home and closer connection tests, you can’t live outside of Puerto Rico for the last 183 days. There are several ways that you can meet the presence test. I know sometimes people ask me. One of the ways you can meet the presence test is if you spend 60 days in Puerto Rico one year, and then in total of the three years, 549. Yes. That’s one way that you can meet the physical presence test. But if you had a tax home or closer connections past the 183 days, then you won’t be meeting the residency requirement. On the residency test, you have to meet all three in order to meet the residency requirements.
This is a scenario so that you can understand how your tax savings will be with Act 60 and without Act 60. Those that are in Puerto Rico but without Act 60 don’t pay federal taxes, but there is a 37% tax and then there’s also a 5% tax. Then with Act 60, the corporate tax rate is going to be 4% in Puerto Rico. The municipal taxes here are on a bracket system, but generally it maxes out at 1%. The average is 0.5% and then the distributions are going be tax free. So right now on a sample take home of $500,000, your tax liability or what you’re taking home after taxes is going be $290,000 whereas with Act 60, your take home would be $445,000.
Mike:
And this is just an illustration and we actually have a pretty cool Excel Capital Gains Tracking Tool that we built so you can do some of this yourself to figure out how much you might be saving. But it’s pretty drastic when you take the impact of having that effective 4.5% tax plus a little bit more on your salary compared to the typical tax rates within the United States. Here are some examples of the type of people who are benefiting from Act 60. There’s a lot of traders down here. Commodities traders. Equity traders. People who come down can trade. There’s no short- or long-term capital gains so it’s really beneficial on the individual side. And then also if there are other businesses where you are managing money, let’s say, you can charge management fees from Puerto Rico and be exporting your service. That’s for traders, either trading themselves or trading other’s capital and managing it. That’s an example of the type of people that are coming down. Lots of digital entrepreneurs come down. People that are exporting their service such as digital affiliate marketing and other digital consultancies are down here. We’re also seeing more and more retired people that have a good amount of capital to play with that like investing. They are able to take advantage of the capital gains exemption even if they’re retired and just trading their own personal assets.
Pilar:
This is the overview of the application process. The first step is going to be working with us to gather all the information and confirming that you qualify for the incentives. Then we take over. We create the new entities and we draft and submit the application. The review process on the government side takes six months for those that are moving quickly on the investor side of things, but more like 12 months right now depending on the complexity of the business. When to relocate? You can actually file the application before you relocate or you can file the application once you relocate. Because the applications are taking so long to be adjudicated, I would say if you know this is something you’re going to be taking advantage of, I would go ahead and put in the application now just so that you can get everything in the queue. Of course you won’t be able to take advantage of the incentives until you do relocate, but at that point we’ll help you file the notices that you must submit to the government letting them know of your residency date and if you have a business, on the commencement of operation date as well. Finally, once you’re approved, we’ll help you make sure that you formally accept the decree and then make the connections that you need in terms of ongoing compliance.
Chris Irizarry:
This is Chris Irizarry here. We have basically grown our business to take care of you from beginning to end. Moving to Puerto Rico is a big step and what you’ll find is that a lot of things on the island are a little different from what you’re used to. So what we have done over the years is brought a whole bunch of services in-house to help ease the transition. Moving to a new place, you’re going to have questions about healthcare providers. You’re going to have questions about shipping your belongings and your vehicles to Puerto Rico and all the processes and fees and excise taxes that that entails. We can help you with that too. You’re probably going to need to switch over to a Puerto Rico driver’s license. And what you’ll find is that dealing with our government agencies oftentimes is quite challenging and a little frustrating. We can hold you by the hand and point you in the right direction and either provide these services ourselves or we have set up a network of partners that we can refer you to. People that we’ve been vetting for over three years now in the time that this business has been gone going. They provide great service for our customers. If you’re thinking about bringing your family down, I’m sure you’re going to have a lot of questions about schools and safety, and you’re going to need introductions for social networks. Basically we can do all of that for you. We also provide a virtual mailbox service where for a fee, you can find the pricing on our website or you can call us, you can use our office as your physical address. What this does is that apart from just having a reliable place to receive your correspondence, we can also help you circumvent a lot of the business permitting requirements so it can get you started as quickly as possible. Apart from that as Mike said earlier, we started a full-service real estate company, and we’re helping people move down. Right now the real estate market in Puerto Rico is probably more challenging than the real estate market is in the mainland. We’re experiencing very limited inventory in terms of rental units and properties for sale. Construction in Puerto Rico, if you’ve been here before, is a little different. We can’t construct in cement. We’re going through some supply chain issues and all that stuff has caused a very limited inventory. But we know this market very well. We know what you’re looking for. So these are basically all the services that we can provide for you.
Mike:
We want to be mindful of everybody’s time so we are going to answer some questions after this, but before diving into the questions, we just want to make sure that you have our contact information on the screen. We do have it so you are able to set up a meeting with us. If you go to our website, you can book a time and one of our team members, likely Pilar, maybe me, maybe Chris or someone else will give you a call. We found this is a great way to connect with our potential clients. Pilar’s email is also on the screen. You can reach out to us and our goal is to be as responsive as possible and try and make the transition easy. One of the things that Chris had mentioned on the real estate side is it is an extremely challenging market right now in Puerto Rico. There are a lot of people moving down. There are not a lot of properties available that might be what you’re looking for in terms of the high quality. Puerto Rico has been in a pretty deep recession for a long period of time and it’s coming out of it at an amazing pace. But new home builds and high-quality luxury real estate inventory has not kept up with the demand so there is a squeeze right now in terms of that. So please reach out to us and we’ll be happy to help with that.
Chris:
Please, if you have any questions, drop them in the question section, and we’re going to mute this really quick so we can go over some of these questions and we’ll be right back with some answers.
Mike:
All right. Perfect. We had a lot of questions come in but we’ve been able to review them. One of the more common ones that we’re getting is about potential changes to the program. I wish we had any insight on this, more than anybody else, but what we do know is that the government is very pro-business right now. There’s a lot of emphasis on bringing talented people and businesses to Puerto Rico. We’ve had a lot of conversations and there’s a very strong push to continue the incentives. Of course, political situations are always a little delicate, but any of the changes they’ve made so far to the Act 20 and 22 programs since the start have been primarily minor modifications on both the business and the individual investor side, such as increasing the annual donation requirements, putting in a requirement that resident investors buy property, things like that.
So they have made some tweaks to the program, but I think that the government is starting to see some of the great impacts of the program in terms of new businesses that are hiring people in Puerto Rico, and the programs are now working exactly how they were designed to be. So it’s a really exciting time. It does not sound like there’s anything on the immediate horizon for them changing the program. But what I would suggest is once you make the decision that Puerto Rico’s the right fit, and you want to take advantage of the decrees, definitely get your applications in. These decrees are contracts with the government. So any changes should be for prospective new residents and new applications, not for those already approved seeing that you have a contract with the government. I definitely think getting the applications in now is helpful. So far the program has only gotten more burdensome, not less in terms of the things they’ve put in such as the increased donation requirements and the real estate requirements. So it’s still a great time to file your applications.
Another question that we get a lot of is on the crypto side. This is something that’s probably a little too complex to unpack, but I would say that just generally in terms of the price appreciation on crypto, it is a capital gain. So once you’re down in Puerto Rico on the day of the move, any gains after that would fall in that 0% capital gains category. On the crypto side, and there is some different opinions on farming, staking, and some things like that. So I would say that is something that you need to have a more detailed conversation on, and we have worked with some of the best CPAs and lawyers on the island for those types of questions.
One other question that we had is do I need to hire a separate lawyer or do I need to hire a separate CPA? What I’ll say is that while we do have attorneys working at our company and very good accounting professionals, we do not provide either of those services directly. We are an Official Qualified Promoter and we’re here to help you. If you have a complicated case, absolutely what we do is the blocking and tackling. We will quarterback and we will get the initial drafting done. I highly recommend engaging one of the several attorneys that we’ve worked with many times that we can recommend that will be very helpful to review the application and get into the nuanced questions. But a lot of the blocking and tackling is pretty straightforward and we’re able to help with all that.
One other question that we got is about renting versus buying. In terms of the new decrees for the investors, you do have to purchase property within the next two years. The way that it’s worded is it is supposed to be your primary residence. Historically in the program, it just said you had to buy real estate. So some people were like, can I buy a really cheap studio and then rent somewhere else because I don’t know how long I’ll be in Puerto Rico? The way that it’s worded now is you are supposed to buy what will be your primary residence within two years of the approval of the decree.
Pilar:
One other question that people also ask is if you apply now, do you have to pay the fees for 2021 and 2022? So as far as the application fees, those are going to be paid once you’ve put your application in. The donation requirement, the annual donation and the annual report, will both be due starting on your second year annually. So if you apply in 2021, then it won’t be due until 2022, both the donation and the annual report filing fee. Those are going to be due starting on your second year.
Mike:
And with that, we’ll end it now just to be mindful of everyone’s time. But please reach out to us to schedule some time, and we’d be happy to answer your questions. We know there’s a ton of interest right now in both the business and the individual investor side of the program. It’s growing extremely quickly and there is a lot of excitement around it. So we’d be happy to answer any questions you have. Thanks again.
Chris:
Thank you.
Pilar:
Thanks.
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.
