Puerto Rico is welcoming residents from the mainland in record numbers. For years running, financial tech startups have set up headquarters in Puerto Rico, so the growing list of newcomers from the mainland reads like part of the tech sector who’s-who list. The big draw? A law that lets new residents pay nothing on capital gains from the assets they acquire after establishing residency.
Now, following Bitcoin’s big run in 2021, the Puerto Rico tax savings are impressive — for those in the position to benefit.
Who Are Puerto Rico’s Newcomers, and Where Do They Congregate?
In addition to some very wealthy crypto holders, Puerto Rico newcomers include people financial and blockchain professionals as well as consultants for the real estate, pharmaceutical and energy industries.
The more they come, the more real estate prices rise. The proud tax haven Dorado Beach is peppered with multimillion-dollar homes. The secluded St. Regis Bahia Beach Resort offers seaside condos and a golf course by the rainforest. Condado Beach and Old San Juan are also major draws for mainlanders.
What Tax Breaks Are Attracting Them?
Section 933 of the Internal Revenue Code lets Puerto Rico residents exclude Puerto Rico source money from taxable gross income. Thus, Puerto Rico has established two key tax breaks, lasting through 2035. Under Act 60, also known as the Tax Incentive Code, the key provisions are:
- The Individual Investors Act. This exempts taxpayers who move to Puerto Rico from capital gains taxation. This, obviously, is a big deal. Wealthy people on the mainland generally pay taxes of 20% and higher on their capital gains. The provision exempts dividends and interest, too. Gains from blockchain-based digital assets qualify for the exemption. The taxpayer must donate $10,000+ to nonprofits in Puerto Rico and buy a home within two years of claiming the tax exemption.
- The Exports Services Act. This pertains to income from export services, including computing and blockchain services. The provision gives businesses a 4% corporate tax rate, leaving dividends untaxed. (In contrast, mainland-based companies pay 21% in federal corporate taxes and also pay state tax.) This provision is credited for tens of thousands of new jobs in recent years, mainly focused on consulting, marketing, and accounting services.
Interested people need expert tax advice. It’s vital to correctly report income from Puerto Rico sources versus mainland sources, to understanding qualifying business structures, and to be aware of potential tax consequences of migration.
Pitfalls in Paradise
With throngs of buyers arriving on the small island, there’s the matter of sprawl on a fragile island. Housing opportunities for islanders are turning into a concern, too, because the real estate prices have skyrocketed. It means Puerto Rico is sharing market tensions with the mainland, with working and low-income households struggling to keep their footholds in places where most of the opportunities exist.
Worker and material shortages exist in Puerto Rico, too — just as they do on the mainland. The U.S. State Department is helping workers get visas from Central and South America to keep up with the island’s demand for housing and infrastructure.
Puerto Rico in 2022: A Crypto Haven on the Rise
Puerto Rico’s allure will continue to attract cryptocurrency firms through 2022, because of its already-robust financial tech and blockchain sectors. But those with new crypto wealth should take note of the comments made by the Association of International Certified Professional Accountants, through its publication The Tax Adviser:
To implement a Puerto Rican structure, all facts and circumstances must be evaluated on a case-by-case basis. The ability to benefit in Puerto Rico and the United States rests heavily on the sourcing of income, meeting Puerto Rican eligibility requirements for the tax exemption decree, and U.S. eligibility requirements under Sec. 933, among other factors…
As for those taxpayers who have landed in the sweet spot of facts and circumstances, a 4% business tax, blended with an exemption from normal U.S. income tax, could make Puerto Rico very appealing indeed.
Supporting References
Bloomberg.com: Zero Taxes, Golf and Beach Houses Create a Crypto Island Paradise (Dec. 11, 2021).
Natallia Shapel, CPA, MST, MBA, et al., for The Tax Adviser: Puerto Rico – A Permanent Tax Deferral in a GILTI World? (May 1, 2020).
Photo credit: Wei Zeng, via Unsplash.