In January of 2012, Puerto Rico passed legislation making it a tax haven for U.S. citizens that become residents of Puerto Rico. The tax laws, known as Act 20, the Export Services Act, and Act 22, the Individual Investors Act, shields new residents residing in Puerto Rico for at least half of the year from paying most federal income taxes. The U.S. Tax Code generously exempts Puerto Rico sourced income from federal tax and, under the law, residents pay minimal or possibly no taxes on interests and dividends, as well as capital gains. Additionally, property taxes are significantly lower than property taxes in the mainland U.S. Thus, making Puerto Rico a mecca for exportation of international services worldwide.
These tax laws were the response to Puerto Rico’s ballooning national debt that started accumulating when the US government cut federal subsidies to the island in 1996. Beginning in 2012, Puerto Rico used its special status within the United States to create unique tax incentives that would lure successful employers down to the island to bring capital and create jobs.
Once granted, the benefits under Act 22 will be secured during the entire term of the act, regardless of changes in the Puerto Rico tax laws applicable. The act shall have a term of 15 years, until December 31, 2030, and renewable for 15 years.
In June 2019, Puerto Rico made substantial changes to its tax incentives that came into effect on January 1, 2020. Under this new law, known as the Incentives Code, Acts 20 and 22 have been consolidated into Act 60 and were subsequently renamed. More importantly, the requirements for each program have been adjusted. We will continue to use the old names of Act 20 and 22, but the information below will reflect the new changes.
US investors could be required to pay as much as 20% in federal taxes on dividends and capital gains, plus state and local taxes. Act 22 provides those who qualify with passive income and capital gains exemptions to reduce taxes paid significantly. If you’re expecting big capital gains in the future, you need to seriously consider Act 22. Gains on stocks, bonds, crypto will be tax-free after your move to the territory. And if you are sitting on significant gains already, Puerto Rico may still help you. If you spend more than ten years as a resident there, your tax obligation on the portion of capital gain you accrued while still living in the US will also go down… to 5%.
Passive Income Exemptions
100% tax exemption from Puerto Rico income taxes on all dividend and interest income. Interest and dividends that qualify as Puerto Rico source income will not be subject to federal income taxation under Section 933 of the IRS Tax Code.
Capital Gain Exemptions
All capital gains accrued after becoming a New Resident will be 100% exempt from Puerto Rico taxes. These gains will not be subject to federal taxes. All capital gains accrued and unrealized prior to becoming a New Resident will be subject to a tax:
- At the prevailing tax rate (currently 10%), if such gain is recognized within 10 years of new residence in Puerto Rico, and,
- 5%, if such gain is recognized after said 10-year period. The U.S. will not tax any prior unrealized gains if recognized after 10 years of residence in Puerto Rico.
- Article 7 of Act 22 protects those trusts created by Act 22 grantees from the forced inheritance provisions of the Puerto Rico Civil Code.
For information on Act 22, check out our Qualifying for Puerto Rico’s Act 22 blog being posted to our blog page soon.
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