As a U.S. territory, Puerto Rico is subject to tax rules that are different from those of U.S. states. At printing time, the government of Puerto Rico enacted into law: Act No. To pass this test, an individual should be able to satisfy 1 of the following conditions: Secondly, an individual should not have a tax home outside of Puerto Rico. How do I become a resident of Puerto Rico? Puerto Ricos status as a top tax haven is undisputed. Owners of existing businesses can qualify for the Act 60 business tax incentives in one of two ways: Youll have to pay a one-time fee of $750 when you file your initial application. While it is meant to test your residency in Puerto Rico, the key concern of the IRS is that you are not spending a lot of time in the US. 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. Note that you may only receive 30 free days of international travel if you fulfill the following conditions: Certain exemptions also apply. 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. With the Act 60 Export Services Tax Incentive (formerly Act 20), it may only have to pay 4% corporate income tax. 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. 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. Its a requirement. PUERTO RICO 787.759.9292 MIAMI 305-677-6626 MCVPR.COM . 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. However, individuals deriving income for services performed within Puerto . Best Places to Buy Property in Puerto Rico. Another bonus is the 30 free international travel days decree holders are eligible for if they spend more time in Puerto Rico than the US. There are always exceptions, exclusions, and limitations to be aware of. You are a bona fide resident of Puerto Rico for the year of your move plus the two proceeding years. Your tax home is considered to be where your primary or regular place of employment or post of duty is, regardless of where you reside. What if you dont have a primary place of employment? For taxable years after December 31, 2016, said capital gain shall be considered income from sources outside of Puerto Rico for purposes of the income tax provided in the Puerto Rico Internal Revenue Code. 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. */, To avoid paying regular U.S. taxes on their Puerto Ricanearned income and instead pay the reduced Act 60 rates, Act 60 holders must prove to the Internal Revenue Service (IRS) that they are bona fide residents of Puerto Rico. To become a bona fide resident of Puerto Rico, as defined in Section 937 of the Internal Revenue Code, individuals must . 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. Only one of the following conditions must be true: You were present in Puerto Rico for at least 183 days in the tax year. Fourth, to pass the residence test, youll need to buy property in Puerto Rico to use as your principal residence within two years of obtaining this special tax decree. 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 . 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. Rather, the US person has to become a. 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. All three are easy to satisfy if you truly commit to a new life in Puerto Rico. Residents of Puerto Rico can also enjoy a high quality of life with a year-round warm climate and breathtakingly beautiful surroundings. Where your personal belongings, such as cars, furniture, clothing, and jewelry, are stored, Where organizations that you affiliate with, whether professional, cultural, social, religious, or political, are located, The jurisdiction for which you hold a drivers license, The jurisdiction in which you are registered to vote, Where charitable organizations that you contribute to are located, Which country you put down as your country of residence on official forms, Which forms or documents you file, such as Form W-8BEN or Form W-9. Even if youre only in Puerto Rico for an hour on a certain day, that counts as being present in Puerto Rico. Feb. 9, 2023, 1:45 AM. Act 20 and 22 tax incentives have been replaced by Act 60 as of January 1, 2020. All of these benefits and so much more can be yours if you relocate to Puerto Rico. 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. 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. 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. 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. There are always exceptions, exclusions, and limitations to be aware of. Fortunately, the IRS provides a special exemption for that first year. To benefit from the tax advantages under Act 60-2019 (detailed below) an individual must purchase property in Puerto Rico within 2 years. Then, youll be required to file an annual report each year along with a $300 fee. Bona fide resident of Puerto Rico. Residents can also benefit from 75% exemption on property tax and construction taxes. 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. Resident Engineer (Construction) About the Position: Incumbent will serve as the Resident Engineer under the general supervision of the Area Engineer. In addition, every year you must make a donation of $10,000 split evenly between two qualifying nonprofit organizations in Puerto Rico. Puerto Rico is a US territory, and as such, all you need to visit is a Real ID-compliant driver's license or another form of photo identification. 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. 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. 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). Don't Pass Up a Lucrative Life in Puerto Rico 5%, if such gain is recognized after said 10-year period. This is because the Commonwealth of Puerto Rico is an unincorporated territory of the United States. Neither you nor your relatives can control these nonprofit entities. Before they will exempt you from regular U.S. tax obligations, the IRS must determine that you have truly made Puerto Rico your home. Before they will exempt you from regular U.S. tax obligations, the IRS must determine that you have truly made Puerto Rico your home. The owner must also take out a reasonable salary for him- or herself, which is subject to normal Puerto Rico income tax rates. The COVID-19 pandemic, for example, qualifies as special circumstances that can grant an Act 60 decree holder free presence days under certain conditions. Puerto Rico now requires the individual to purchase residential property within the first two years of becoming a resident. Its a great bargain. 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. Under certain conditions, you can also satisfy the presence test if you were located in Puerto Rico for at least 549 days during the current year and the preceding two years. Currently, such an eligible business with a tax exemption decree in Puerto Rico under Act 60 will enjoy a: 4% income tax rate (2% for 5 years for small businesses, or 1% for pioneer activity) 100% income tax exemption on dividends or profits generated 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. These benefits are available to any Act 60 Individual Resident Investor decree holder who fulfills the requirements for bona fide residency in Puerto Rico, pay the applicable filing fees, meets the minimum annual charitable donations (currently $10 annual to approved PR registered non-profit), and lives on the island at least 3 years. The closer connection test can be tricky for some Act 60 decree holders to satisfy because its subjective and offers no hard guidelines on fulfillment. 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. Ultimately, you can satisfy the closer connection test however works best for you and your circumstances, but fully committing to a new life in Puerto Rico is the simplest solution. Act 60 offers a corporate tax rate of 4% to Puerto Rican companies that export services performed in the territory to people or companies . To avoid paying regular U.S. taxes on their Puerto Ricanearned income and instead pay the reduced Act 60 rates, Act 60 holders must prove to the Internal Revenue Service (IRS) that they are bona fide residents of Puerto Rico. To explore your options in more detail, please contact 7th Heaven Properties, the Luxury Caribbean Property Specialist. 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. 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. Certain individuals who move to Puerto Rico also choose to request an Individual resident investors' Puerto Rico tax incentives grant (formerly Act 22-2012 and currently Act 60-2019). Long-Term Permanent Residents (LTR) tend to not have this issue, since LTRs already have citizenship in another country. This implies residing on the island for more than 183 days per year, filling out IRS forms, such as form 8898 and applying for a tax exemption decree from the Secretary of Economic Development and Commerce of Puerto Rico. Note, however, that if youre going for the 549 days in a three-year period condition, you must still physically spend at least 60 days in Puerto Rico each year. 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. This tax haven can easily save taxpayers hundreds of thousands of dollars per year (or more) in federal taxes! (a) Appreciation Before Becoming a Resident Individual of Puerto Rico. Be present in Puerto Rico for a minimum of 183 days in the tax year. During each year of the 3-year period, you must be present in the relevant territory for at least 60 days. 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). 60 of July 1, 2019, known as the Puerto Rico Incentives A person must meet extensive rules and requirements to qualify for the favorable tax treatment available to residents of Puerto Rico. The purpose of Puerto Rico Incentives Code 60 is to promote investment in Puerto Rico by providing investment residents with tax breaks. The portion of the net long-term capital gain generated by a Resident Individual Investor attributable to any appreciation of the Securities or other Assets owned by such Resident Individual Investor. For example, the salaries of owners and employees are tax deductible. Each year, the island welcomes new, ambitious Americans and others who wish to keep more of their money while enjoying the island lifestyle Puerto Rico offers. 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. For all of the Puerto Rico tax incentives, it is necessary to ensure you understand and monitor compliance with residency requirements. As you might suspect, its easier to satisfy this requirement if you move to Puerto Rico during the first part of the year. 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. they want to find a way to legally avoid the overbearing US tax rules, while not necessarily expatriating and renouncing their US citizenship. 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. Third, to pass the closer connection test, you must convince the IRS that you have stronger ties to Puerto Rico than to the rest of the United States. However, you cant qualify unless you establish residency on the island. Consulting with a tax advisor would be a good idea as well. Citizenship: The most straightforward qualification is the requirement to be a citizen of the United States, living in Puerto Rico. And, if it the income is sourced in Puerto Rico, it would escape tax in the U.S. as well. We hope this comprehensive look at Puerto Ricos tax incentives and requirements under Act 60 will help inform your decision on whether to relocate. 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. 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. Golding & Goldingspecializes exclusivelyin international tax, and specificallyIRS offshore disclosure. 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