Is Puerto Rico a haven for crypto-currency? Is Act 20 right for my business? Do I have to move? What are the tax benefits? What does it take to qualify for tax benefits? What is the process?
Identifying the steps to becoming a bona fide resident of Puerto Rico as an individual and/or a company is a multi-step but well-documented process. Identifying the particular laws that will most benefit you and/or your company is a more nuanced question.
What is a Bona Fide Resident of Puerto Rico?
Just to be completely clear, Puerto Ricans are United States citizens. There is a long and nuanced discussion that starts with the preamble to their constitution but, for the purposes of this discussion, American citizens can also be considered bona fide residents of Puerto Rico if they meet the criteria specified in the IRS’s Pub 70.
- Meet the presence test,
- Do not have a tax home outside the relevant possession, and
- Do not have a closer connection to the United States or to a foreign country than to the relevant possession.
The Presence Test, also detailed in Pub 70, requires that you comply with at least one of the following criteria:
- You were present in the relevant possession for at least 183 days during the tax year.
- You were present in the relevant possession for at least 549 days during the 3-year period that includes the current tax year and the 2 immediately preceding tax years. During each year of the 3-year period, you must be present in the relevant possession for at least 60 days.
- You were present in the United States for no more than 90 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 possession than in the United States during the tax year. Earned income is pay for personal services performed, such as wages, salaries, or professional fees.
- You had no significant connection to the United States during the tax year.
Your Tax Home is can be either the place where you regularly live (family home) or your regular or main place of business, employment, or post of duty regardless (place of business). If you have neither of these, you are considered itinerant and your place of home is where you most frequently do business.
You will be considered to have a closer connection to Puerto Rico than to the United States if you have maintained more significant contacts with the possession(s) than with the United States. The location of your permanent home, family, personal belongings may be considered as well as documents like a drivers license, tax forms, voters registration, etc.
I have seen seminars that claim there are ways around the one or more of these test, typically by playing games with the definition of a Tax Home or Closer Connection definitions. There aren’t. If you can’t abide by the plain text reading of an official IRS publication, this is probably not a good tax strategy. However, there are some tax implications that may be worth making these big changes.
U.S. citizens who are also bona fide P.R. residents can exclude all of their income from P.R Sourced Income. The rules for determining P.R Sourced income are based on the type of income as well as the locations of the payor and payee. There are different rules for personal property sales and service. For personal property, both the U.S. and P.R. code only consider the residence-of-the-seller rule. If you are a U.S. citizen who is a P.R. resident, you can exclude gains from the sale of personal property from federal tax obligations. For cryptocurrencies that are considered personal property, this is can be a significant tax advantage. Sourcing of services depends on where the services were provided. If you have a business in Puerto Rico providing services in Puerto Rico, you can exclude that income from federal taxes.
Act 22, the Act to Promote the Transfer of Investors to Puerto Rico, is designed for individuals who:
- have not been residents of Puerto Rico between 2006 and 2012
- obtain a grant from the DDEC (Department of Economic Development and Commerce)
- establish their residence within one year of the DDEC’s grant approval
- may an annual $5,000 contribution to one of these non-profits.
Act 22 provides a number of tax benefits to grant holders during the life of the grant including 100% tax exemptions on all P.R. sourced interest and dividend income and 100% tax exemption on capital gains realized on new investments made after your relocation to Puerto Rico.
Combining 933 Exemption with Act 22 can create a powerful tax incentive for relocation, but Act 20 makes an even more compelling case.
Act 20, the Act to Promote the Export of Services, was designed to augment the 933 Exclusion to promote Puerto Rico as an international export service center by allowing tax advantages to companies that are providing services outside of Puerto Rico. An Act 20 company owned by a P.R. resident will not be subject to federal income tax on income derived from services physically performed in Puerto Rico to entities that are not residents of Puerto Rico clients or on matters that are not related to Puerto Rico. Being able to enjoy federal tax exemption for P.R. residents doing work with Non-P.R. clients or working on Non-P.R. matters is transformative for Puerto Rico and for companies considering relocation.
Puerto Rico is making a concerted effort to bring more U.S. businesses and investors to live and work on their island. Being able to live and work in a country following U.S. tax and banking laws while enjoying the tax benefit of a foreign domicile is unique to Puerto Rico. There are more considerations than tax consequences to a business model, but it might make sense to just take it into consideration.