It’s an upside-down situation. Being liable for tax on their worldwide income, Americans are effectively barred from accepting any low-tax offer made by an independent foreign country… but they’re free to accept any low-tax offer made by Puerto Rico.
Although it is not a state and is excepted out of many US laws, Puerto Rico is part of the US.
• Puerto Ricans are US citizens.
• The US dollar is legal tender and the only currency in common use.
• No passport or visa is required to travel to Puerto Rico from the US. It’s as simple as any domestic flight. It is a domestic flight—just a boarding pass and driver’s license (or other accepted ID) will get you there.
• No special permit or waiver is required for an American to work in Puerto Rico. You are as eligible as anyone born there to buy real estate, register to vote, or get a driver’s license.
• Moving to Puerto Rico is little different from moving to another state, except that the primary language is Spanish.
Puerto Ricans participate in (US) Social Security and Medicare, and thus are subject to payroll taxes. However, no resident of Puerto Rico is subject to US income tax on what he earns from Puerto Rican sources. Instead, a resident of Puerto Rico is subject to Puerto Rican income tax, which generally is levied at rates similar to US federal income tax rates—but with certain critical exceptions that are the focus of this report. Specifically, for Puerto Rican residents and businesses that qualify—mostly expatriates from the US mainland or their enterprises—the recent Act 22 and Act 20 provide for a zero tax rate on capital gains and certain interest and dividends earned by individuals, and for single-digit tax rates on qualifying service income earned by corporations operating in Puerto Rico.
When we learned of the new tax laws, we were excited but skeptical. It sounded just too good to be true… or one of those things (like US Virgin Islands partnerships) whose complexity requires paying an army of lawyers. However, our investigation found that the apparent tax advantages are real and that for many Americans, including individuals
operating on a modest scale, they are a huge opportunity.
Obtaining the benefits offered by Puerto Rico and allowed by the US Internal Revenue Code is a moderately complex matter, and it’s not a solution that will work for everyone.
Also, it’s not just a tax matter, since it would require you to become a resident of the island. But if you would be comfortable living there and you or your business is able to qualify, the rewards could be life-changing.
Bottom line: if you’re an American with significant investment income or have a service business that can be relocated, the Puerto Rico option might be for you. The starting point is to get acquainted with the place.