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. If your company provides services connected to commercial activities on the island or gives advice regarding the laws and regulations of Puerto Rico, it is not providing export services, because there is a connection. Your benefits should not be affected even if there are amendments to the legislation during the term of this agreement. 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. If thats the case, the IRS will treat your primary residence as your tax home. Rather, the US person has to become a Bona-Fide Resident of Puerto Rico. 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. TIP. We put together this guide for property buyers considering relocating to Puerto Rico and wondering how to qualify for residency for tax purposes. Such materials are for informational The goal of tax planning is to legally limit, minimize, and if possible, avoid US tax while also avoiding a tax fraud audit (eggshell or reverse eggshell) or special agent investigation. Local government has legislated a series of incentives to attract investment, of which EB-5 Visa program participants can also take advantage. Just be sure to comply with the presence test, the tax home test, the closer connection test, and the residence test if this is the right move for you. 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. The restrictions may have been modified to require only that the investor have spent more time in Puerto Rico than any other single place in the world. Lets explore each of these in greater detail. Plus, you are obliged to donate at least $10,000 USD to charity. 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. You had no significant connection to the United States during the tax year. This comes out to $5,110 in application fees and an ongoing $15,005 in annual report filing fees and charitable contributions. These will be especially important to present if the IRS or Puerto Rico Department of Treasury (Hacienda) challenges your bona fide resident claims. So, even though Puerto Rico will only charge you 4% corporate tax, the US will take at least another 6.5% from your CFC if you . You must spend more time in Puerto Rico than the US during the 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; } 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. This Code is approved with the conviction that it shall improve Puerto Ricos economic competitiveness. Due to the territorys legal status, moving to Puerto Rico is considered internal migration as opposed to immigration. 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; } One of these is the low 4% corporate tax rate we touched on earlier. Discover: Best Places to Buy Property in Puerto Rico. 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. 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. Act 52-2022 requires Puerto Rico resident individuals to report financial accounts that are held outside of Puerto Rico or outside of the United States and had a balance over $10,000 during the tax year. Of important consequence is the fact that the person cannot have a closer connection to the United States or a second tax home. We recommend moving this block and the preceding CSS link to the HEAD of your HTML file. 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. If you wish, you can follow in their footsteps and escape some of the worst ravages of 2022s surging inflation and anemic economic growth by moving to this low-tax haven. 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. Legally avoiding the 37% federal rate and the 13.3% California (or other state) rate is a jaw-dropping benefit . 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. No Article, Blog Post or Page may be reproduced or used without express written consent of Golding & Golding. A C Corporation is separate from its owners. 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. 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. Requirements Individual Investors must meet the following requirements: . Youll want to keep meticulous records to ensure you dont jeopardize your eligibility for these generous Act 60 tax benefits. There are many advantages to becoming a resident of Puerto Rico. The term 'resident individual' means an individual who is domiciled in Puerto Rico. Theyve been delighted to experience the rich culture, delicious food, and wonderful tropical sightseeing opportunities found in Puerto Rico. How about moving just yourself? 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. 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 most important consideration for the IRS is that you spend more time in Puerto Rico than in the rest of the United States. 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. This is ensured by Act 60-2019 (formerly known as Act 22). Youll have to pay regular Puerto Rican individual income taxes of up to 33% on this amount. 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. And, if it the income is sourced in Puerto Rico, it would escape tax in the U.S. as well. 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. 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 guide explores the rules and requirements in detail and outlines how to go about applying for residency in Puerto Rico. 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. A Puerto Rico resident is an individual who is domiciled in Puerto Rico. First and foremost, there are some significant tax benefits. The purpose of Puerto Rico Incentives Code 60 is to promote investment in Puerto Rico by providing investment residents with tax breaks. The IRS will also consider factors such as where your immediate family members and personal belongings are located, where you are registered to vote, and where you hold your drivers license. Puerto Rico Service Exporters Must Document Well to Avoid IRS Ire. Tax Exemption Period Act 60. What are Puerto Rico Tax Incentives Under New Act 60 (20/22). 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. We recommend moving this block and the preceding CSS link to the HEAD of your HTML file. Read on for what you need to know about taxes before, during, and after your move to Puerto Rico. Of course not. For US citizens who are not dual-citizens and have been US citizens from birth, the idea of giving up their citizenship can be overwhelming. Many companies opt to become C Corporations because of the special tax advantages associated with this status. However, this is a rule of thumb, and others have retained their status with fewer than 183 days on the islands soil in the wake of major natural disaster declarations. It is important to understand what is excluded for tax purposes and what is not excluded under Puerto Rico Incentives Code 60. With beautiful, sunny weather, a vibrant Hispanic culture, and generally lower prices than in the mainland, Puerto Rico offers more than just tax savings. Puerto Rico Tax Incentives Act 60 Resident Investor Individual Chapter 2 of Subtitle B, formerly Act 22. Physical Presence: the investor has to be physically present in Puerto Rico 168-183 days per year, and in the United States for less than 90 days in the 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. Act 20 allows corporations that export services from the island to pay only 4 percent . 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. 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. Golding & Goldingspecializes exclusivelyin international tax, and specificallyIRS offshore disclosure. To avoid penalties, this would require a transfer pricing analysis and intercompany agreements to determine the share of profits realized in Puerto Rico vs. on the mainland, as laid out in this guide. Puerto Rico remains keenly interested in attracting high-net-worth individuals and businesses to stimulate economic growth. Fortunately, the IRS provides a special exemption for that first 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. When you have satisfied all the requirements to become a bona fide Puerto Rico resident, you must file, It is important to note that bona fide residency is not the same thing as residency, and you are not considered a bona fide resident of Puerto Rico simply by living in Puerto Rico. The purpose of Puerto Rico Incentives Code 60 is to promote investment in Puerto Rico by providing investment residents with tax breaks. 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 . From a technical standpoint, the new version of the act provides a detailed definition of the term securities and what will be covered under the long-term capital gain exemption rules. In more ways than one, starting a new life in Puerto Rico can be the best investment you ever make. 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. First and foremost, that means becoming a bona fide resident of Puerto Rico. Puerto Ricos status as a top tax haven is undisputed. 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