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. The closer connection test is perhaps the most reliable in determining your loyalty to 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; } For example, the salaries of owners and employees are tax deductible. Thanks to this code, your income sourced from Puerto Rico can be exempt from both federal and state taxes. 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. Still, Puerto Rico hopes to lure American mainlanders with an income tax of only 4%. If you leave your family in the US, it will be quite difficult to pass the closer connection test, unless you satisfy all the other requirements listed. Luckily, you can take your pick from a huge selection of quality housing on the island. 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 . Disclaimer: Neither PRelocate, LLC, nor any of its affiliates (together PRelocate) are law firms, and this is not legal advice. 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. Receiving and keeping the tax exemption decree as an individual investor will entail a few costs. Puerto Rico now requires the individual to purchase residential property within the first two years of becoming a resident. At the same time, youll retain your U.S. citizenship and wont forfeit Medicare or Social Security. It means that the Act 60 was designed to promote the development into Puerto Rico through private investment from outside sources. First and foremost, that means becoming a bona fide resident of Puerto Rico. 257 of December 10, 2018, which introduced significant amendments to the Puerto Rico Internal Revenue Code ("Puerto Rico Code"); and Act No. 3. Puerto Rico is a great investment opportunity, because it does not require a passport for US citizens and it does not require the US citizen to expatriate in order to gain the tax benefits under Acts 20 and 22 (combined into Act 60) but, is it really that easy? Residency in Puerto Rico The Guide from 7th Heaven Properties, Can a citizen or permanent resident of the USA live in Puerto Rico? */. 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. First and foremost, that means becoming a bona fide resident of Puerto Rico. Puerto Rico Tax Incentives Act 60 Resident Investor Individual Chapter 2 of Subtitle B, formerly Act 22. 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. As provided by Puerto Rico Incentives Code 60: What does this mean? The Department of Economic Development and Commerce (DDEC), as . Act 60 Updates from Act 22 (Individuals) 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. At printing time, the government of Puerto Rico enacted into law: Act No. 957(c)(1) a bona fide resident of Puerto Rico is not treated as a U.S. person (as defined in Sec. Can a citizen or permanent resident of the USA live in Puerto Rico? 4. 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. Youll 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. Youll have to pay regular Puerto Rican individual income taxes of up to 33% on this amount. That way, you can satisfy all the tests and achieve bona fide residency even in the year of your move. Various factors such as the presence of an individuals permanent home, family, belongings, principal bank and business in Puerto Rico, as well as the existence of professional, cultural, religious, social and political affiliations and links in Puerto Rico, may help to demonstrate a closer connection to Puerto Rico than to anywhere else. 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. Noting, the Puerto Rico BFR rules are not the same as the Substantial Presence Test BFR rules but the concept is the same. If your export-service company is conducting its activities inside Puerto Rico, it may be eligible for substantial benefits that apply to income received from customers outside of Puerto Rico. Not be present in the USA for more than 90 days during the tax year. Puerto Rico Act 60 Tax Exemptions: IRS Examination and Audits, Key Issues for Individual and Business Taxpayers Treatment of Puerto Rico-Sourced Income, Puerto Rico Act 60 (formerly Act 20 and Act 22) Benefits, Residency Requirements Recording of a 90-minute premium CLE/CPE video webinar with Q&A After such individual investor becomes a bona fide resident of Puerto Rico Act 60 provides 100% tax exemption from Puerto Rico income taxes on all interest and dividend income, and on certain capital gains realized and accrued during the period of the exemption. 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. To recap, under Puerto Ricos Act 60 tax incentives, you and your business may be eligible for staggering tax savings if you adhere to the requirements. We recommend moving this block and the preceding CSS link to the HEAD of your HTML file. How do I become a resident of Puerto Rico? How do I become a resident of Puerto Rico? But to those considering taking advantage of Puerto Ricos generous tax exemptions without committing to a life on the island, be warned: Integrating into Puerto Rican life isnt just a bonus. 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. Schedule Consultation . If youd like to know more about the qualifying tests, consult IRS Publication 570. 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. 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. The tax home test is far more straightforward than the presence test and only encompasses a single condition: maintain your tax home in Puerto Rico throughout the entire tax year. 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; } Lets take the example of a C Corporation, which the IRS recognizes as an independent legal entity. Puerto Rico operates with some independent from the US government. A C Corporation is separate from its owners. 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. Finally, exceptions are available for special circumstances, such as medical treatment or disasters. Act 20 and 22 tax incentives have been replaced by Act 60 as of January 1, 2020. Youd be hard-pressed to find a better value home than a U.S. territory that offers a 4% corporate income tax and 0% capital gains tax, among many other benefits. The non-profit charitable contribution requirement which was previously at $5,000 has been increased to $10,000. 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; } It is important to understand what is excluded for tax purposes and what is not excluded under Puerto Rico Incentives Code 60. Keep in mind that as the owner of an export-service company, you must pay yourself a reasonable salary based on the services you provide. 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. Consulting companies, auditing firms, marketing businesses, and, How to qualify for the Act 60 Export Services Tax Incentive, Moving the entire company, including employees, to Puerto Rico and ceasing all operations in the United States, Establishing a Puerto Rico subsidiary and recording the percentage of business income and expenses related to the Puerto Rico entity so that it can be taxed under the Act 60 incentives, Individual Resident Investor Tax Incentive, 100% tax exemption from Puerto Rico income taxes on all dividends, 100% tax exemption from Puerto Rico income taxes on all interest, 100% tax exemption from Puerto Rico income taxes on all short-term and long-term capital gains, 100% tax exemption from Puerto Rico income taxes on all cryptocurrencies and other crypto assets, Just keep in mind that to qualify for these generous incentives, you must become a, Be physically present in Puerto Rico for at least 183 days of each tax year, Make Puerto Rico your tax home by establishing your office or primary place of work there, Buy property in Puerto Rico, move your family and possessions there, get a Puerto Rican drivers license, register to vote in Puerto Rico, and do other things that demonstrate your commitment to a life on the island, Capital gains before moving to Puerto Rico, If the gains are recognized within 10 years of your move, they are taxed at the U.S. rate, If the gains are recognized after 10 years of your move, they are taxed at Puerto Ricos preferential 5% flat tax rate, and you do not owe U.S. taxes on them, Applying for the Individual Resident Investor Act, Why EB-5 Investors Should Consider Moving to Puerto Rico, How to Obtain or Renew Your Annual Vehicle Registration (Marbete) in Puerto Rico, A Guide to Puerto Rico Export Services Tax Incentive For Businesses, A Guide to Puerto Rico Investor Resident Individual Tax Incentive, How to Pass the Puerto Rico Bona Fide Residency Tests, Things to Consider Before Living in Puerto Rico, Are Puerto Ricans US Citizens? Puerto Rico's Acts 20 & 22, tax incentive laws make living and working in Puerto Rico more enticing than ever before for U.S. Citizens. Have no significant connection to the USA during the tax year. To explore your options in more detail, please contact 7th Heaven Properties, the Luxury Caribbean Property Specialist. Giving up your connection to organizations in the US is also not mandatory, but it is recommended to make connections with Puerto Rico organizations to establish ties in the local community. 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). Feb. 9, 2023, 1:45 AM. Act 20 and 22 tax incentives have been replaced by Act 60 as of January 1, 2020. Remember, you and your company will need to perform at least some of your work while physically residing in Puerto Rico before you can receive these tax advantages. If your C Corporation conducts its business in Puerto Rico, then dividends paid to shareholders will be taxed at 0%. 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. As a U.S. territory, Puerto Rico is subject to tax rules that are different from those of U.S. states. The three tests are the presence test, the tax home test, and the closer connection test. It is important to understand what is excluded for tax purposes and what is not excluded under, It is crucial to understand that in order to exclude the income from capital gains and dividends, it should be accrued. /* Add your own Mailchimp form style overrides in your site stylesheet or in this style block. Puerto Rico taxes are very favorable to crypto investors when using Act 60. Planning Tip: Puerto Rico income is not taxable in the US but the US still taxes the individual on their worldwide income (other than Puerto Rico Income under IRC 933). This assumes you're using an offshore company and thus not subject to Self Employment Tax in the United States. To enjoy this lifestyle and benefit from the tax incentives under Act 60-2019 (the Puerto Rico Incentives Code), individuals should be aware of the complex rules and the various residency requirements which now include buying property in Puerto Rico within a defined time period. We recommend moving this block and the preceding CSS link to the HEAD of your HTML file. 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. Therefore, there are multiple ways to satisfy the requirements of the presence test. Firstly, an individual must be present in Puerto Rico for defined period. Rather, the US person has to become a Bona-Fide Resident of Puerto Rico. These services must not have a connection with Puerto Rico. 2. Tax Exemption Period Act 60. The presence test also grants you 30 automatic presence days of international travel (i.e., travel not to the US) per tax year, which means you actually only need to be present in Puerto Rico for 153 days per year as long as you are traveling outside of the US. For detailed information directly from the IRS about the residency tests, consult Publication 570. You were present in the relevant territory for at least 549 days during the 3-year period that includes the current tax year and the 2 immediately preceding tax years. How about moving just yourself? If the unrecognized gain is US-sourced, it will still generally be taxable in the US despite Puerto Rico Incentives Code 60. You were present in Puerto Rico for at least 549 days in the three-year period of the current tax year and the two previous tax years and were in Puerto Rico for at least 60 days in each tax year during that period. As you can see, Puerto Ricos enormous Act 60 tax benefits greatly exceed the relatively small costs and inconveniences of relocation. Form 8898 is used to officially declare the beginning or cessation of bona fide residency in a U.S. possession, determined by the three above-mentioned tests. 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. When filling out the form, you will need to refer to the detailed instructions, which are based on the bona fide residency rules outlined in Publication 570. The purpose of these measures is to provide incentives to individuals who have not been residents of Puerto Rico to become residents. Puerto Rico's Act 60: 30% tax on first $100,000 = $30,000 and 4% of $400,000 = $16,000, for a total tax of $46,000. The term 'resident individual' means an individual who is domiciled in Puerto Rico. Not least among them are the high thresholds to qualify as a bona fide resident; however, these requirements are beyond the scope of this item. 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). Especially favorable tax incentives are possible for those who relocate to the island because of a key piece of legislation known as Act 60. 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. 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. You were present in Puerto Rico for at least 183 days in the tax year. This is ensured by Act 60-2019 (formerly known as Act 22). Its no surprise that thousands of Americans who have moved to the island have been thrilled with the tax breaks that have saved them millions of dollars. It has only one requirement: do not have a tax home outside of Puerto Rico during any part of the tax year. You were not present in the US for more than 90 days during the tax year. Would you like to find out more about how to get residency in Puerto Rico? Sometimes, effective tax planning can help avoid these taxes. 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