The best way to conceptualize the value of Acts 20/22 is to assess the reduction in your tax burden from program participation. Compare your current tax rate to the rate you would pay by establishing residency in Puerto Rico. Should you only choose to move your business to Puerto Rico under Act 20, it will be taxed at a maximum of 4%. As a US citizen, distributions from your business will be taxed under US law as long term capital gains (23.8%). If you also become a Puerto Rican resident under Act 22, these distributions are subject to 0% tax – making your net effective tax rate 4%. If you would like CASPR to help with this assessment profile, we would be happy to do so.
This step can a bit more nuanced, so we encourage you to engage our consulting team and your personal financial advisors to achieve the optimal conclusion. Typical candidates own their own business and charge fees for their services, enjoy the flexibility to work on the go, and earn a substantial income in the form of distributions from their business. While many industry types qualify, popular occupations include consultants, accountants, attorneys, etc..
Yes. There are several possible steps you can take to convert your income to qualifying Act 22 income. The consulting aspect of CASPR’s operations is intended to explore and expedite this process for aspiring Act 22 residents.
CASPR will assist in the transition process for your business despite your desire to exclude yourself from Act 22. Our partners in Puerto Rico will help with the application, ensuring your business is compliant. Once your company’s domicile is established in Puerto Rico, continue business as usual and enjoy the reduced tax rate. Should any questions or issues arise along the way, CASPR’s consultants will remain at your disposal to walk you through the process.
Timing plays an important role on the financial impacts of Act 22. Characteristics such as initial acquisition, date of residency and the date of sale all affect returns. The income characteristics are also important. Below are a few examples that illustrate Act 22 in action.
Example 1: In 2000, 100 ounces of gold were acquired at $300/oz. In 2016, Puerto Rican residency is established and gold is trading at $1,300/oz. In the year of sale, gold has appreciated to $2,000/oz. This is where the tenure as a Puerto Rican resident comes into play. If the sale is within the first ten years of residency, the US government will look to collect “Built In Gains” tax on the previously unrealized $1,000 unrealized gain ($1,300-300) at US long term capital gains rates and the other $700 will be subject to 0% under Act 22. If the sale is after the tenth year of residency, this $1,000 portion of the gain would only be subject to a 5% tax from Puerto Rico and the $700 will be taxed at 0%.
Example 2: On the day you move to Puerto Rico, you buy Apple stock for $100/share. Five years later, you sell Apple at $200 per share, you owe nothing to PR or the US government. Dividends from PR based companies are tax-exempt but dividends from US marketable securities would be US taxable income. This is a key distinction between capital gains and dividend income as dividends are taxed where they are earned. Investments in US securities by a PR fund yields a 100% tax exempt event.
In June 2016, the US enacted the Puerto Rico Oversight, Management, and Economic Stability Act (PROMEC), to help Puerto Rico manage its debt in a responsible manner. Although Puerto Rican debt might not be a good investment decision, it will have little to no effect on Act 20/22’s. Higher consumption taxes are offset by lower costs of living and tax exemptions.