Puerto Rico’s Tax Solution to Investment Immigration

High net worth aliens have unique access to U.S. citizenship through the EB-5 visa program. For many, investing $1 million in a US company can mean a green card and, two years later, citizenship. But, as an important treatise on immigration observes, “the American tax structure is the main deterrent to future [immigrants].” Immigrants who accept EB-5 visas must also accept US taxation of their worldwide passive income.

However, for foreigners willing to spend half their time in Puerto Rico, the deterrent may largely disappear. Puerto Rico offers a range of tax incentives, and the The IRS has recognized the importance of “Puerto Rican efforts to retain and attract workers and businesses”.

By moving to Puerto Rico through the EB-5 visa program, foreigners can obtain U.S. citizenship at a reduced cost and pay taxes at a reduced rate.

EB-5 Basics

As described by USCIS, the EB-5 visa program was created in 1990 to “benefit the U.S. economy by providing an incentive for foreign capital investment that creates or maintains jobs in the United States.” Each year, up to 10,000 foreigners receive green cards and, in almost all circumstances, they obtain American citizenship two years later.

Eligibility generally requires an equity investment of $1.05 million in a new or existing U.S. business and that investment creates 10 or more U.S. jobs. The investment threshold drops to $800,000 in rural and other areas with high unemployment, including Puerto Rico. Investments can be made directly in a US company or pooled with other investments through regional hubs.

In 2019, foreigners invested over $5 billion through the program. Nearly 80% of visas were granted to Asian investors and 96% were based on investments in regional hubs.

Incentives in Puerto Rico

Moving to Puerto Rico offers significant US tax advantages for immigrant investors, as it does for mainland Americans. More importantly, residents of Puerto Rico pay significantly less tax on gains from global investment sales and business income earned in Puerto Rico. The benefits available also provide opportunities to reduce income tax earned by mainland businesses operated in Puerto Rico.

Reduction of taxes on gains

High net worth US residents pay capital gains taxes at federal rates of 15% and 20%, plus state rates that sometimes add an additional 10%. This tax can crush the rate of return for even the best performing portfolio. And for anyone considering selling a valuable business, this tax may persuade them not to sell at all.

Moving to Puerto Rico can change the analysis. The capital gain accumulated after the move is taxed at 0%, as indicated in section 13 LPRA 45142(b). The gain accumulated before the move is taxed at 15%, and only 5% if it results from a sale more than 10 years after the move, as indicated in 13 LPRA Section 30082 and 45142(a). Thus, foreigners who expect to sell substantial stocks after moving to the United States can save substantial taxes by moving to Puerto Rico.

In particular, interest and dividends received from continental sources do not receive preferential tax treatment. This is consistent with the tax treatment of individuals in other countries. For US tax purposes, the source of such income is the location of the payer. The same goes for the gain on the sale of real estate.

Professionals advising immigrants should take note of the maze-like rules that allow the above treatment via exception-to-exception-to-exception. Generally, the gain from the sale of stocks by U.S. residents comes from the IRC Section 865(a)(1).

However, for the purposes of the supply rules, Puerto Rican residents are treated as non-residents. Thus, the gain from the sale of shares by a Puerto Rican resident does not have a US source. This rule only applies if the recognized gain is subject to a tax of at least 10% by a foreign country. Fortunately, the tax does not apply this rule to Puerto Rican residents. Bona fide residents of Puerto Rico enjoy significantly reduced taxes on their capital gain.

Reggaeton singer and rapper Bad Bunny waves a Puerto Rican flag during protests against Ricardo Rossello, Puerto Rico’s governor, July 17, 2019, outside the Capitol building in Old San Juan, Puerto Rico.

Photographer by Joe Raedle/Getty Images

Reduction of business taxes

Business income in the United States is often taxed at a combined federal tax rate of 37%, resulting from corporation tax and dividend tax. State and local taxes can increase the total rate to over 50%. Operating the business in Puerto Rico, or even managing it from Puerto Rico, can reduce corporate tax to 4% and dividend tax to 0%.

For U.S. tax purposes, a Puerto Rican corporation is treaty as a foreign company. Unless it is a controlled foreign corporation, its income is not subject to U.S. corporation tax except to the extent of its US source income. LLCs in Puerto Rico are treated the same.

In general, Puerto Rican companies are subject to Puerto Rico corporate tax of 18.5% plus graduated surtax. And dividends issued by Puerto Rican corporations to Puerto Rican residents are subject to a 15% tax. However, for several types of income and corporations, the corporate rate is reduced to 4% and the dividend rate reduced to 0%.

This is the case for export service companies, as stated in section 45241 of the 13 LPRA. An Export Services Company is a company that provides non-Puerto Rico related services to customers outside of Puerto Rico – see 13 LPRA Section 45221. She must also obtain a decree approving her eligibility. of the Department of Economic Development and Commerce of Puerto Rico.

The range of eligible services is incredibly wide. The law explicitly lists generic services such as business consulting, research and development, as well as specific services such as training, data processing and call center services.

Business management in mainland France is a particularly attractive service to offer. If a mainland business owner resides and owns a management business in Puerto Rico, he can convert high tax income to low tax income. The Mainland company will deduct the Puerto Rican company’s compensation for management services, which will reduce the Mainland company’s net income, which is taxed at normal US rates. The Puerto Rican management company will pay tax on this remuneration and distribute it, paying a total tax of only 4%.

“Actual residence” and opportunities

These benefits are very much dependent on the taxpayer becoming a bona fide resident of Puerto Rico; see Sections IRC 933 and 937. In general, a taxpayer must reside in Puerto Rico for at least 183 days of the tax year, have no other tax household, and have no closer ties to the United States than Puerto Rico. The second of these rules applies the analysis for the deduction of travel expenses; see Sections 937(b)(2) of the IRC, 911(d)(3)and 162(a)(2).

The IRS, finding that a number of people relied on Puerto Rico’s tax benefits without meeting these requirements, recently announced an official campaign to remedy the non-compliance. Anyone considering using these strategies should take special care to become a bona fide resident of Puerto Rico. Michael Hummel, CEO of Establishable, which recently moved its headquarters to Puerto Rico, said, “We got it right and our tax savings allowed us to reinvest heavily in our growth.

Provided one is truly relocating to Puerto Rico, they can take advantage of its substantial incentives. They will obtain citizenship for 20% less through the EB-5 visa program and, under the right circumstances, reduce their tax rate from over 50% to 4%.

This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Jeremy Baber is the founder of Structured Consulting and previously worked at the US Treasury’s Office of Fiscal Policy. He advises companies on strategy, partnerships and marketing.

Roberto Santosis the Chairman of Trusts & Taxes and advises clients on corporate finance, taxation and immigration. He regularly assists clients in identifying and evaluating investment opportunities.

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