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. Generally, you are a bona fide resident of one of these territories (the relevant territory) if, during the tax year, you: What is important to note is that US Persons do not use the standard , While Puerto Rico is considered part of the United States, it is not a state, The individual cannot have been a resident of Puerto Rico for, The non-profit charitable contribution requirement which was previously at $5,000 has been, Puerto Rico now requires the individual to, 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. The term 'resident individual' means an individual who is domiciled in Puerto Rico. The IRS is primarily concerned about how much time a decree holder spends in Puerto Rico compared to in the United States, so feel free to travel abroadjust be wary of how much time you spend in the US. Carlos Fontn, director of the DDEC's office of business incentives in Puerto Rico, said in April, the agency began the first . However, in the case of Puerto Rico, all the above tax and other benefits are legally available to residents of Puerto Rico without having to renounce US citizenship. What It Means to Be a Resident of Puerto Rico. With fewer close connections to the U.S. mainland, youll minimize your risk of an IRS audit. Rather, the US person has to become a Bona-Fide Resident of Puerto Rico. Therefore, there are multiple ways to satisfy the requirements of the presence test. In order to encourage the transfer of such individuals to . 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. Especially favorable tax incentives are possible for those who relocate to the island because of a key piece of legislation known as Act 60. 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. This comes out to $5,110 in application fees and an ongoing $15,005 in annual report filing fees and charitable contributions. What It Means to Be a Resident 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. The Resident Tax Incentive Code, known as "Act 60" provides tax exemptions to businesses and investors that relocate to, or are established in, Puerto Rico. These will be especially important to present if the IRS or Puerto Rico Department of Treasury (Hacienda) challenges your bona fide resident claims. As of 2022, that could result in a tax rate of up to 37%. It is crucial to understand that in order to exclude the income from capital gains and dividends, it should be accrued after arriving in Puerto Rico and acquiring dividends and capital gains as a Resident of Puerto Rico. For example, if you leave Puerto Rico to receive or accompany a parent, spouse, child, or stepchild to receive a qualifying medical treatment, you are still counted as present in Puerto Rico. The core motivation of the IRS in administering the, The first of the three tests is perhaps the most complicated. Contrary to popular belief, just getting a Golden Visa without further action does not reduce an Americans tax liability. Demand for Non-CRS Banking as CRS Goes Global Opening bank accounts in countries that do not participate in the Common Reporting Standards (CRS) is sometimes seen as a way to increase privacy. attorney to discuss your specific facts and circumstances and to obtain advice on specific legal problems. In other words, a tax home is your main place of business, employment, or post of duty, according to IRS rules. 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. 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. The territory boasts hundreds of miles of golden sand beaches, world-class golf courses and excellent conditions for all kinds of water sports such as scuba diving and snorkeling, surfing, kayaking and paddle boarding. Consequently, the IRS has identified vulnerabilities with certain individuals who may be excluding income subject to U.S. tax on a filed U.S. income tax return or failing to file and report income . 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 must acquire a grant of tax exemption by applying through Puerto Ricos Industrial Tax Exemption Office. In September 2021, the IRS announced a campaign targeting taxpayers who claimed Puerto Rican tax benefits without meeting the requirements of the bona fide residency rules. These free travel days encompass travel outside of the United States but effectively mean that a degree holder need only spend 153 days in Puerto Rico, as long as the extra 30 days are spent outside of the US. 2 This income also would be excluded from Puerto Rican income tax. Youll also use Form 8898 to inform the IRS of your new residency status. The amount of said net capital gain means the portion of the gain related to the appreciation of the Securities or other Assets owned by the Resident Individual Investor at the time of becoming a Resident Individual of Puerto Rico and those acquired by him after becoming a Resident Individual of Puerto Rico. Miramar Plaza, 954 Avenida Ponce de LeonSuite 205San Juan, Puerto Rico 00907, #mc_embed_signup{background:#fff; clear:left; font:14px Helvetica,Arial,sans-serif; } Moving to Puerto Rico can be a dream come true for individual U.S. investors and businesses seeking to lower their taxes, as long as they follow certain requirements. Act 60 provides tremendous tax benefits to qualified businesses and individual investors. 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. A person must meet extensive rules and requirements to qualify for the favorable tax treatment available to residents of Puerto Rico. 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. The IRS's new campaign addresses taxpayers who have claimed benefits through Puerto Rico Act 60, without meeting the requirements of section 937, Residence and Source Rules Involving Possessions. 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. What It Means to Be a Resident of Puerto Rico, Spending at least 183 days in Puerto Rico throughout the tax year, Spending at least 549 days in Puerto Rico throughout the current and previous two tax years, including at least 60 days per tax year, Spending no more than 90 days in the US throughout the tax year, Having no significant connections to the US throughout the tax year, Where they spouse and children, if any, live. It has only one requirement: do not have a tax home outside of Puerto Rico during any part of the tax year. Citizens and permanent residents of the USA enjoy the right to live in Puerto Rico in the same way that citizens of Puerto Rico may live in the mainland US. 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. Under Chapter 2 of Act 60 . Even if youre only in Puerto Rico for an hour on a certain day, that counts as being present in Puerto Rico. . All of these benefits and so much more can be yours if you relocate to Puerto Rico. 957(c)(1) a bona fide resident of Puerto Rico is not treated as a U.S. person (as defined in Sec. You can follow one of two paths to make this happen: a total relocation of your business or partial relocation of it to Puerto Rico. 4. Puerto Rico offers a myriad of tax incentives, but they all entail the same goal for the government: boosting Puerto Ricos economy by attracting to the island high-net-worth individuals who will invest in the infrastructure. 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). In addition, every year you must make a donation of $10,000 split evenly between two qualifying nonprofit organizations in Puerto Rico. Local government has legislated a series of incentives to attract investment, of which EB-5 Visa program participants can also take advantage. Act 22 - The Individual Investors Act "Before I spent 30 percent of my time thinking about taxes, and now I don't have to do that." - John Helmers, Act 22 Resident, Money Manager, CEO Long Focus Capital. Earned income is pay for personal services performed, such as wages, salaries, or professional fees. 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. Note that you may only receive 30 free days of international travel if you fulfill the following conditions: Certain exemptions also apply. For detailed information directly from the IRS about the residency tests, consult Publication 570. 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. Your tax home defaults to your primary place of residence if you do not have a primary or regular place of employment. Before using any Materials, you should consult with legal counsel licensed to practice in the relevant jurisdiction. 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. As a U.S. territory, Puerto Rico is subject to tax rules that are different from those of U.S. states. The most important consideration for the IRS is that you spend more time in Puerto Rico than in the rest of the United States. 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. It should be presumed that an individual is a resident of Puerto Rico if they have been present in Puerto Rico for a period of 183 days during the calendar year. *Paragraph C refers to the Presence Test. 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. 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. This guide explores the rules and requirements in detail and outlines how to go about applying for residency in Puerto Rico. We recommend moving this block and the preceding CSS link to the HEAD of your HTML file. Those of Act 22 on average pay 12 times more than most taxpayers in PR. According to Act 60-2019 (known as the Puerto Rico Incentives Code) which replaces various historical incentives including Acts 20 and 22, residents of Puerto Rico can enjoy a 4% flat income tax rate and freedom from taxes on capital gains, dividends, interest and royalties. Individual Investor must not have been a resident of Puerto Rico during any of the 10 years prior to the effective date of Act 60 (July 1st, 2019). Act 60 ensures that this grant will remain a binding contract between you and the Puerto Rican government for at least 15 years. Achieving bona fide residency in the year of the move and the two years following it This means that as long as you move to Puerto Rico before July 1, you can become a bona fide Puerto Rican resident in your first year on the island and reap the benefits of your Act 60 decree immediately. With proper tax planning and sourcing allocations, a person can feasibly reduce their tax liability to nearly zero on income and assets generated and acquired once becoming a Puerto Rican resident but its not quite that simple. The non-profit charitable contribution requirement which was previously at $5,000 has been increased to $10,000. Then, youll be required to file an annual report each year along with a $300 fee. If thats the case, the IRS will treat your primary residence as your tax home. Think about how your business can flourish with such a low tax burden. Disclaimer: Neither PRelocate, LLC, nor any of its affiliates (together PRelocate) are law firms, and this is not legal advice. Your tax home is the jurisdiction in which your primary place of employment is located. In 2012, Puerto Rico had passed two laws intended to make the island a "global investment destination.". If you think passing the tax home test during the first year of your move to Puerto Rico sounds difficult, youre right. One of these is the low 4% corporate tax rate we touched on earlier. What are Puerto Rico Tax Incentives Under New Act 60 (20/22). We look forward to helping you find your perfect property in Puerto Rico. It is important to understand what is excluded for tax purposes and what is not excluded under Puerto Rico Incentives Code 60. Passing the Presence Test 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. If your C Corporation conducts its business in Puerto Rico, then dividends paid to shareholders will be taxed at 0%. 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. Luckily, you can take your pick from a huge selection of quality housing on the island. Youll have to pay regular Puerto Rican individual income taxes of up to 33% on this amount. To discover homes for sale in Puerto Rico and condos for sale in Puerto Rico from the exclusive beachfront resort communities of Bahia Beach and Dorado Beach to more affordable options in Palmas del Mar, explore real estate in Puerto Rico on our website. Upon approval, you will be required to pay a one-time $5,000 acceptance fee. 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. 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. Rather, the US person has to become a. The territory offers some of the most luxurious real estate in the Caribbean, ranging from lavish homes overlooking the ocean to stunning contemporary beachfront condominium residences. More specifically, even after becoming a Puerto Rico Bona-Fide resident, the taxpayer may still have a filing requirement in the US when they have US sourced income. You did not maintain a tax home outside of Puerto Rico for the last 183 days of the year. Lets get some clarity on how the tax situation plays out: To begin with, becoming a resident of Puerto Rico is not as simple as purchasing a property and visiting the PR Coast a few times a year. If you are a U.S. citizen or resident alien, you will satisfy the presence test for the tax year if you meet one of the following conditions. You were present in the United States for no more than 90 days during the tax year. As you can see, Puerto Ricos enormous Act 60 tax benefits greatly exceed the relatively small costs and inconveniences of relocation. If you do not have a primary or regular place of employment, your tax home is considered to be your primary place of residence. Physical . 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. At printing time, the government of Puerto Rico enacted into law: Act No. Act 20 and 22 tax incentives have been replaced by Act 60 as of January 1, 2020. Likewise, the incentives offered shall be continuously reviewed in order to identify those that are not cost-effective and to strengthen those that have proven to have an impact and which generate a return on investment for the Treasury. Foreign Earned Income Exclusion: 0% tax on first $100,000 and 35% tax on $400,000 = $140,000. PUERTO RICO 787.759.9292 MIAMI 305-677-6626 MCVPR.COM . What is the GILTI Tax, and How Does It Affect Non-Resident Export Services Tax Incentive Decree Holders? 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. 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. TAX EXEMPTION DECREE If saving big on income taxes while soaking up the sun on a U.S.-owned Caribbean island sounds like a dream life to you, relocating to Puerto Rico under the Act 60 tax exemptions may be right for you. Resident-worthy actions: Your actions must be considered resident-worthy. How do I become a resident of 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. Therefore, there are multiple ways to satisfy the requirements of the presence test. Act 60 investors must also submit their donation before December 31 and present proof in their annual report in May. If such appreciation is recognized at any other time, 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. Nov. 8, 2019, 10:00 AM. Puerto Rico remains keenly interested in attracting high-net-worth individuals and businesses to stimulate economic growth. As a side note, this will help solidify US residents in making Puerto Rico their main home because owning property or real estate in a location and claiming it as primary residence goes a long way in showing Puerto Rico is actually the tax home. , such as wages, salaries, or professional fees 400,000 = $ 140,000 during tax! And 22 tax incentives Under new Act 60 ensures that this grant remain. 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