Puerto Rico voter registration is required. If your C Corporation conducts its business in Puerto Rico, then dividends paid to shareholders will be taxed at 0%. 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. 2. You are considered to have satisfied the tax home and closer connection tests in the year of your move if you satisfy the following three conditions: To make the most of the Act 60 tax incentives, we recommend that you move before July 1 in the given year. 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. This property must be the individuals primary residence and not rented out. Business owners who establish a qualifying business in Puerto Rico can enjoy significant tax benefits: To qualify, the business model must be concentrated around exporting services outside of Puerto Rico. This tax haven can easily save taxpayers hundreds of thousands of dollars per year (or more) in federal taxes! Puerto Rico operates with some independent from the US government. Your chances of passing improve considerably as you strengthen banking, social, cultural, or religious ties to the island, identify Puerto Rico as your place of residence, and establish your permanent home there. What It Means to Be a Resident 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. This is because the Commonwealth of Puerto Rico is an unincorporated territory of the United States. 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. 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. 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. The COVID-19 pandemic, for example, qualifies as special circumstances that can grant an Act 60 decree holder free presence days under certain conditions. 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. You dont need to satisfy them allsatisfying just a single one is sufficient. 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. Financial accounts include bank accounts, crypto asset accounts, certain insurance policies or investment accounts. You had no significant connection to the US during the tax year. To qualify as a resident of Puerto Rico, an individual must essentially pass 3 key tests as follows. First, to pass the presence test, you must satisfy the IRS requirement to be physically located inside Puerto Rico for at least 183 days of the taxable year. However, if your C Corporation derives its revenue from the United States, dividends will be subject to regular federal taxes. 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. The IRS offers five different conditions a decree holder can use to fulfill the presence requirement for bona fide residency. 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 Application costs You'll have to pay a one-time fee of $750 when you file your initial application. To qualify for the exemptions, you must become a bonafide resident of Puerto Rico. Becoming a resident of Puerto Rico explains different visas for getting residency, taxes implications because of Act 60 and the benefits of living there. Before they will exempt you from regular U.S. tax obligations, the IRS must determine that you have truly made Puerto Rico your home. We elaborate on that at the end of the post. An individual is treated as a bona fide resident of Puerto Rico under Section 933 if the person (1) meets a physical presence test; (2) does not have a tax home outside of Puerto Rico during the taxable year; and (3) does not have a closer connection to the United States or a foreign country than to Puerto Rico. Long-Term Permanent Residents (LTR) tend to not have this issue, since LTRs already have citizenship in another country. You were present in the relevant territory for at least 183 days during the tax year. You had earned income in the United States of no more than a total of $3,000 and were present for more days in the relevant territory than in the United States during the tax year. 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. If the unrecognized gain is US-sourced, it will still generally be taxable in the US despite Puerto Rico Incentives Code 60. During each year of the 3-year period, you must be present in the relevant territory for at least 60 days. . If you do not have a primary or regular place of employment, your tax home is considered to be your primary place of residence. The IRS' report to Congress calculated that more than 1,924 applicantscorporations, LLCs, partnerships, and other typeshad been granted tax benefits under the Exports Services Act (formerly known as Act 20) as of March 2020 based on partial information provided by Puerto Rico. We look forward to helping you find your perfect property in Puerto Rico. If you think this test sounds impossible to satisfy for the year of your move, thats why the IRS offers a special exemption for the year of your move only. One of these is the low 4% corporate tax rate we touched on earlier. Then, youll be required to file an annual report each year along with a $300 fee. If the unrecognized gain is US-sourced, it will still generally be taxable in the US despite Puerto Rico Incentives Code 60. and representation are limited. That way, you can satisfy all the tests and achieve bona fide residency even in the year of your move. This is important, because under the previous version of the rule, there was no need to actually purchase property. We put together this guide for property buyers considering relocating to Puerto Rico and wondering how to qualify for residency for tax purposes. Therefore, there are multiple ways to satisfy the requirements of the presence test. The U.S. will not tax any prior unrealized gains if recognized after 10 years of residence in Puerto Rico. For all of the Puerto Rico tax incentives, it is necessary to ensure you understand and monitor compliance with residency requirements. 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. 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. This is an important point because if your company does business with other entities that are based on the island, youll risk losing your tax exemption. Promotion of Puerto Rico as a residency jurisdiction Prevalence of non-resident options via IFEs (discussed below) 1. Under the latter approach, youd set up a new entity on the island that charges a management fee to the rest of your mainland-based business. Even if you are in the US or another country for part of the day, if you were physically present in Puerto Rico even briefly, you are counted as being present that day. 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). Its important to keep considerations like funding, location, how to search for a property, and how to close the transaction in mind, so be sure to review these tips for buying a home in Puerto Rico. This is ensured by Act 60-2019 (formerly known as Act 22). As provided by Puerto Rico Incentives Code 60: What does this mean? 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? Disclaimer: Neither PRelocate, LLC, nor any of its affiliates (together PRelocate) are law firms, and this is not legal advice. Be present in Puerto Rico for a minimum of 183 days in the tax year. 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. First and foremost, there are some significant tax benefits. Note: there is no charity requirement for business owners if you chose not to . Before using any Materials, you should consult with legal counsel licensed to practice in the relevant jurisdiction. Act 20 and 22 tax incentives have been replaced by Act 60 as of January 1, 2020. they want to find a way to legally avoid the overbearing US tax rules, while not necessarily expatriating and renouncing their US citizenship. Generally, you are a bona fide resident of one of these territories (the relevant territory) if, during the tax year, you: Do not have a tax home outside the relevant territory, and, Do not have a closer connection to the United States or to a foreign country than to the relevant territory. 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. 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. 5. Foreign Earned Income Exclusion: 0% tax on first $100,000 and 35% tax on $400,000 = $140,000. 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