In this article we will learn about the Act 20 and Act 22 Puerto Rico tax haven. Also, we will discuss how the U.S. Territory of Puerto Rico has become a tax shelter for some Americans. In addition, we’ll talk about the pros and cons of moving and retiring to Puerto Rico.
Puerto Rico Income Tax
In general, Puerto Rican citizens are taxed similarly to the US. In fact, many citizens pay a social security tax. However, in Puerto Rico, citizens are exempt from paying taxes to the IRS in the United States, which is part of the reason it is known as the Act 22 Puerto Rico tax haven. Instead, Puerto Rico has its own taxing agency like the IRS that collects taxes from citizens.
About the Act 22 Puerto Rico Tax Haven
The Act 22 Puerto Rico tax haven is not part of the 50 American states. Instead, Puerto Rico is a U.S. Territory. Its government is very similar to the United States. Like the US, it has 3 branches of government. Puerto Rico has executive, judicial and legislative branches. First, Puerto Rico has a government made up of a House of Representatives and a Senate. It has an elected Governor who governs the island as the executive power. Leaders in the House, Senate and Governor’s Office are elected every 4 years.
Spanish is the official language in Puerto Rico. And although Puerto Ricans share some commonalities with Americans, they have established their own culture and ethnicity.
Taxes in Puerto Rico?
As previously stated, since Puerto Rico is not one of the 50 states of the United States, its citizens are exempt from paying income tax to the U.S. IRS. In addition, corporations based in Puerto Rico are not generally subject to corporate taxes levied in the United States. Finally, if you are a US Citizen who becomes a permanent resident of Puerto Rico, you are exempt from paying US income taxes.
What created the Act 22 Puerto Rico tax haven? Well, in 2008 Puerto Rico passed legislation to encourage individuals and businesses to conduct business in Puerto Rico. As a result, two new laws were enacted into legislation:
- Act 20: The Export Services Act and;
- Act 22: The Individual Investor Act
As of 2020, these acts have now been consolidated into Act 60. Thus, the Act 22 Puerto Rico tax haven was created and people began migrating to Puerto Rico to save money on their taxes.
Act 20: The Export Services Act
Pay Taxes of 0-4% for Service Industry Businesses
This act can be utilized by any citizen of any country. It allows businesses and individuals to reduce their corporate taxes to only 4%. In addition, the act allows dividends to be paid at 0%. Yes, you read that correctly – 0% tax rate!
Essentially how this works is quite simple. Let’s say you are an American business owner and you want to pay lower taxes. You simply incorporate a business in Puerto Rico which provides a service. The service can be provided to anyone, either inside or outside of Puerto Rico. Your tax rate then falls to 4%. Poof! You are now in the Act 22 Puerto Rico tax haven!
Examples of types of businesses that are considered “service” businesses may include consulting, internet services, software engineer, legal services, etc. In addition, by following the Puerto Rico tax rules, you do not pay any US taxes.
Act 22: The Individual Investor Act
Pay Taxes as Low as 0% for Investment Income
This act allows for US Investors who normally pay capital gains taxes on investments to take advantage of lower tax rates of 0%. For example, if you buy and sell equities such as stocks you can re-locate to Puerto Rico and be considered exempt from the capital gains taxes. In addition, cryptocurrency trading is also exempt from tax assessment.
One of the small requirements of Act 22 is that you donate $5,000 – $10,000 to official charities of Puerto Rico. In addition, you are required to purchase a residence in Puerto Rico. This is one example of how you have to spend some money to take advantage of the Act 22 Puerto Rico tax haven status.
In addition, both Act 20 and 22 require an annual filing fee that has recently increased from $300 to $5,000. However, it’s still considered a great deal for anyone with a significant income from the services industry or investments. The tax savings alone more than cover the expense in most cases.
Retiring in Puerto Rico
If you expect to have significant gains on investments during retirement, Puerto Rico may be a good fit for you. Resident retirees in Puerto Rico can enjoy potentially tax-free benefits from investment income.
To become a resident, you must simply move to Puerto Rico and set up a permanent residence. You are required to live in Puerto Rico a minimum of 183 days per year (slightly more than half a year). Americans could potentially share time between Puerto Rico and still visit family and friends at home in the United States with no issues. Retiring to the island territory can help you take advantage of the Act 22 Puerto Rico tax haven opportunity.
Traveling and Moving Puerto Rico
How Puerto Rico is Different from the United States: Cultural and Geographical Differences
In many ways, Puerto Rico is much like visiting another country if you are a native of the United States. You can expect to eat different foods, speak a different language and experience what it’s like to live on an island. Life is different from the United States in Puerto Rico. As a result, we recommend visiting the island several times first before making the permanent move.
Additionally, Puerto Rico has special concerns that should be considered. For example, as an island in the middle of the ocean, Puerto Rico experiences hurricanes and tropical storms regularly. For example, in September 2017, Hurricane Maria, a Category 5 storm struck Puerto Rico with deadly force, killing almost 3,000 people and shutting off power for weeks. Hurricane Maria was one of the worst storms to ever strike the islands, costing the island an estimated $91 Billion in damage.
Power outages and utility outages are a common problem in Puerto Rico. The island has an aging infrastructure that frequently has problems and needs upgrading. In addition, political corruption has been a problem for Puerto Rico for decades. As a result, much needed infrastructure repair and other improvements have not occurred. Clearly, the Act 22 Puerto Rico tax haven is not always a paradise.
Puerto Rico’s Financial Crisis
For years, Puerto Rico has struggled with mounting debt problems. In 2012, the territory suffered a credit downgrade, which makes it more difficult to borrow money to finance infrastructure improvements or even function as a government. Second, Puerto Rico has an aging population that requires government services such as medical care and retirement pensions. Finally, in 2016 the United States approved Puerto Rico’s request to move toward bankruptcy with the new “Promesa” law. The bankruptcy proceedings are an ongoing issue for Puerto Rico.
A Note About Tax Savings in Puerto Rico
Given the changing and volatile political climate in the United States, it is unclear for how long the tax savings of Act 20 and 22 will last. There is clearly a growing populist movement in the United States that wants to increase taxes on investors and business owners. This is not a big surprise to any student of history. Populism movements have played out many times in the past. Venezuelan politics under the Hugo Chavez was one example of this.
Even if you are not prepared to move to Puerto Rico, you may seriously consider beginning the application process for Act 20 and/or Act 22. Getting your “foot in the door” with an application may be a smart move if US legislators move to block US Citizens from these juicy tax incentives. As a result, the Act 22 Puerto Rico tax haven may only exist for a limited time.
Find More Help on the Act 22 Puerto Rico Tax Haven
One fantastic resource for getting more answers regarding the Act 22 Puerto Rico tax haven relating to Act 20 and 22 can be found at Sovereign Man. Simon Black, founder of Sovereign Man is an investor and entrepreneur who helps people make more money, keep more money and increase their freedom. He has a great weekly newsletter that provides smart, actionable intelligence on how to get ahead financially.
In summary, the Act 22 Puerto Rico tax haven may not be for everyone. There are clear examples of how certain businesses and individuals can benefit from the low tax laws. Puerto Rico’s Act 20 and 22 have created a great opportunity for people to pay limited taxes while enjoying the island life.
It is important to note that Piggy Bank Coins does not provide financial advice. We do not endorse or recommend any financial investments. Instead, we provide information for educational purposes to those seeking knowledge regarding personal finance. However, in the spirit of transparency, note that the author is an investor in cryptocurrencies, precious metals and some equities.
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