Using Puerto Rico Tax Laws to Lower Your Taxes

t1The US government has made it increasingly more difficult for citizens to avoid paying any taxes. With the enactment of FATCA and the US power to enforce it, most foreign governments have entered into agreements with the US to ensure that they share information about any offshore accounts held by US citizens. Rather than the US government work with the American people and lower their taxes they are attacking them from every angle.

However, there is a legal and easy way for US citizens to reduce their effective tax rate without renouncing their citizenship. By simply moving your domicile to Puerto Rico, a commonwealth of the US, you can take advantage of the tax laws of the place and avoid paying the high US taxes without having to give up your citizenship.t2

In order to make sure that the shift to Puerto Rico is advantages to you, you need to first consult with a tax lawyer who specializes in offshore structures. Essentially, the two laws that will affect you are called Act 20 and Act 22.

Act 20

Investment managers and their employees can benefit from moving their operations and residence to Puerto Rico under Act 20. This act says that any business that exports services will be taxed at a flat rate of 4 percent. As the investment advice service is exported to clients in the US, the income for the business will be taxed at 4 percent. Additionally, when the business owner takes his income in the form of dividends this is not taxed under Act 22.t3

If the business retains some operations in the US it will be taxed in the US under the effectively connected business tax rules.

Act 22

If a business or individual has a bona fide residence in Puerto Rico, they can under Act 22 claim 100 percent tax exemption for all short term and long term capital gains. This includes sale of property acquired after taking residence in Puerto Rico such as stocks and shares, even if the property is not within the commonwealth.

Those US citizens who reside in Puerto Rico need to report non-PR income in US form 1040 and PR income in the local form. This is because if you reside in Puerto Rico the IRS will only tax income from sale of personal property if your tax home is not in Puerto Rico. Any trader who deals with stocks and bonds can move to Puerto Rico and avoid paying US federal and state taxes. Instead, their capital gains tax will be nil.t4

Any time you can save money on taxes in this hyper tax environment (which only kills jobs and prevents businesses from expanding) imposed by Obama is a blessing.

Obtaining Advice from Tax Lawyer

In order to benefit from a move to Puerto Rico you need to consult with an experienced tax lawyer who will explain the tax obligations on your current investments as well as the criteria for establishing a bona fide residence in Puerto Rico. Essentially, to establish a residence in Puerto Rico you need to prove your presence, tax home, and close connection. For this you will have to plan on living in Puerto Rico for more than half a year, move your family, and legal matters to Puerto Rico.