Puerto Rico has a long history of using tax incentives and credits as tools for economic development and recovery after economic crises. Most recently, then Governor of Puerto Rico, Ricardo Rossello, signed Act 60-2019 (“Incentives Act”) into law on July 1, 2019, with an effective date of January 1, 2020. Chapter 2 of the Incentives Act includes measures to attract individual investors to Puerto Rico by providing many incentives to resident individuals, such as full tax exemptions on Puerto Rican-source dividends and on capital gains stemming from the appreciation in value of securities. Further, under Chapter 3 of the Incentives Act, Puerto Rico implemented changes to entice business entities to move their operations to Puerto Rico by reducing Puerto Rican corporate taxes and providing exemptions from property taxes, municipal taxes, and taxes on dividend distributions for income generated and property used in exempt operations.
Individuals
While it may make sense from a U.S. federal income tax perspective for high income U.S. taxpayers to consider expatriating from the U.S., many people do not want to give up their citizenship or green card simply to reduce their federal income tax liabilities. Additionally, expatriating U.S. citizens are subject to certain immediate tax consequences as a result of the expatriation tax regime. The expatriation rules generally apply to any U.S. citizen who has relinquished his or her citizenship.
Puerto Rico offers a compelling alternative to expatriation. U.S. citizens who become bona fide residents of Puerto Rico can maintain their U.S. citizenship, avoid U.S. federal income tax on capital gains, including U.S.-source capital gains, and avoid paying any income tax on interest and dividends from Puerto Rican sources. The expatriation rules do not apply to U.S. citizens who relocate to Puerto Rico because the relocation by itself does not require any renunciation of U.S. citizenship. Therefore, if an individual relocates to Puerto Rico, the move does not result in an expatriation tax.
Further, U.S. citizens and resident aliens living in Puerto Rico are generally subject to U.S. tax on worldwide income. However, a bona fide resident of Puerto Rico for an entire taxable year may exclude income from sources within Puerto Rico for U.S. federal income tax purposes. An individual is considered to be a bona fide resident of Puerto Rico only if he or she satisfies all of the following three conditions: (1) physical presence test, (2) tax home test, and (3) closer connection test. A special rule applies for the year of the move.
The taxpayer moving to Puerto Rico is required to file Form 8898 with the IRS and file Form 1040 for the year of move. Form 8898 requires the taxpayer to provide information concerning compliance with the above requirements.
Further, Chapter 2 of the Incentives Act offers tax incentives to individuals who relocate to Puerto Rico. For an individual to qualify under Chapter 2 of the Incentives Act, he or she must be considered a resident individual investor (“Resident Individual”). A Resident Individual is defined as a person who is domiciled in Puerto Rico by having a physical presence in Puerto Rico for at least 183 days during the taxable year and has not been a resident of Puerto Rico for the ten years prior to January 1, 2020. Further, Resident Individuals must apply for and obtain a tax exemption decree under Act 60. To obtain access to the approved and signed tax exemption decree, a one-time fee of $5,000 must be satisfied and deposited into a special fund to promote the relocation of Resident Individuals to Puerto Rico. Further, all Resident Individuals that hold a Tax Exemption Decree must comply with an annual contribution of $10,000 to a duly organized and registered nonprofit organization in Puerto Rico. Lastly, a Resident Individual must purchase residential property in Puerto Rico within the first two years after obtaining the decree.
If a Resident Individual qualifies for the tax benefits under Chapter 2 of the Incentives Act, the individual is eligible to receive a 100% tax exemption from Puerto Rican income taxes on all dividends and interest. Further, a Resident Individual would receive Puerto Rico income tax exemptions on capital gains stemming from the sale or exchange of securities that appreciated in value after the individual establishes domicile in Puerto Rico. Thus, gains realized from securities acquired after establishing domicile in Puerto Rico are exempt from Puerto Rico income tax. However, U.S. investors need to appreciate that capital gains derived from securities acquired prior to the individual becoming a Resident Individual are exempt only to the extent that the gain is attributable to the increase in value of the securities after the individual is domiciled in Puerto Rico. The portion of the gain attributable to the increase in value of the securities prior to establishing domicile in Puerto Rico is subject to the applicable Puerto Rico capital gains tax rate, but, if such gain is recognized after ten years from the date that the individual becomes domiciled in Puerto Rico, the Resident Individual benefits from a tax rate reduced to 5%.
Of special note, on January 27, 2021, the Large Business and International Division of the IRS announced that it had opened an audit campaign addressing taxpayers who have claimed Puerto Rico tax benefits without meeting the bona fide resident requirements. For example, according to the IRS, these individuals may be excluding income subject to U.S. tax on a filed U.S. income tax return or failing to file and report income subject to U.S. tax. This campaign will also address those individuals who have met the bona fide resident requirements but may be erroneously reporting U.S.-source income as Puerto Rico-source income in order to avoid U.S. taxation. Thus, taxpayers moving to Puerto Rico will need to maintain the appropriate recordkeeping and obtain appropriate tax advice, in view of anticipated heightened IRS scrutiny.
Businesses
Chapter 3 of the Incentives Act is meant to act as a facilitator to develop Puerto Rico as an international export service and commerce center. Under Chapter 3, business owners who establish qualifying businesses in Puerto Rico can enjoy significant tax benefits, such as reduced Puerto Rican corporate taxes and exemptions from property taxes, municipal taxes, and taxes on dividend distributions for income generated and property used in the exempt operations
Chapter 3 of the Incentives Act applies to businesses that maintain a bona fide office or establishment in Puerto Rico and conduct eligible services for export or promoter services. An export service provider includes businesses that are engaged in, among other business areas: (1) research and development; (2) advertising and public relations; (3) economic, environmental, technological, scientific, managerial, marketing, human resources, computer, and auditing consulting services; (4) “creative industries” including income related to the broadcasting or the sale of copyrights for a recording intended for audiences outside of Puerto Rico; (5) drafting of construction plans and engineering, architectural, and project management services; (6) professional services; (7) centralized management services including, but not limited to, strategic direction, planning, distribution, logistics, and budgetary services; (8) electronic data processing centers; (9) computer software development; (10) distribution, whether it is physical, online, through the cloud, or related to blockchain technology, and the income earned from the licensing, program subscriptions, or services fees; (11) voice, video, audio, and data telecommunications between persons located outside Puerto Rico; (12) call centers; (13) shared service centers; (14) educational and training services; (15) hospital and laboratory services including medical tourism and telemedicine sites; and (16) investment banking and other financial services.
If a service for export business qualifies for the tax benefits under Chapter 3 of the Incentives Act, the net income stemming from the business is subject to a 4% Puerto Rican corporate tax. Further, distributions from earnings and profits is not subject to Puerto Rican income tax. The real and personal property of businesses used in export of services also enjoys a 75% exemption from municipal and state property taxes. Lastly, a business engaged in export of services benefits from a 50% exemption from the municipal licenses or taxes applicable to the volume of the business.
Both for individuals and businesses, locating in Puerto Rico may provide tax and other opportunities, but in all cases appropriate professional advice is essential.
FAQs
Is it a good idea to move to Puerto Rico? ›
Puerto Rico offers a high quality of life, especially when compared to other countries in the region. The island has a relatively low cost of living, and there are plenty of amenities and services available. For example, Puerto Rico has some of the best hospitals in Latin America.
Why do people want to move to Puerto Rico? ›Moving to Puerto Rico to avoid taxes is just one of countless good reasons to be here. Besides an overall cost of living that is lower than on the mainland, you can enjoy picture-perfect beaches and nature trails, tasty Caribbean treats, convenient shopping, and so much more.
Is it easy for Americans to move to Puerto Rico? ›Puerto Rico has a quality of life many mainland American cities would die for. Plus, moving here is easier than any other Caribbean island because Puerto Rico is a legal US territory. Throw in the generous taxation system for citizens and businesses, and Puerto Rico becomes incredibly attractive.
Do Americans move to Puerto Rico to avoid taxes? ›U.S. citizens who become bona fide residents of Puerto Rico can maintain their U.S. citizenship, avoid U.S. federal income tax on capital gains, including U.S.-source capital gains, and avoid paying any income tax on interest and dividends from Puerto Rican sources.
Why are people leaving Puerto Rico? ›“The declining population of Puerto Rico in part is due to the economic crisis created by the elimination of Section 936,” Feliciano said. The economic struggles have accelerated brain drain on the islands, as the young and ambitious leave to attend school or join the U.S. military.
What are the disadvantages of living in Puerto Rico? ›- Poor Economy. Unfortunately, Puerto Rico has a somewhat poor economy. ...
- Cars are More Expensive. Cars are much more expensive in Puerto Rico than on the mainland. ...
- Private Schools are Necessary. ...
- Cultural Differences. ...
- Difficulty Shopping Online. ...
- Dangerous Hurricane Season. ...
- Poor Public Transportation.
- Condado.
- Miramar.
- Isla Verde.
- Santa Teresita.
- Ocean Park.
- Hato Rey.
- Piñones.
- Rio Piedras.
Family of four estimated monthly costs are 3,353.2$ without rent. A single person estimated monthly costs are 969.2$ without rent. Cost of living in Puerto Rico is, on average, 8.5% lower than in United States. Rent in Puerto Rico is, on average, 48.2% lower than in United States.
Where do most Americans live in Puerto Rico? ›Relocating to Puerto Rico
Most expats settle in Puerto Rico's capital, San Juan, or in the south in Ponce, its second-largest city. Carros Públicos (public cars) allow you to travel all over the island and reach even remote areas.
The top-rated city in Puerto Rico is Dorado. Bucana Barrio is the safest on the island. (It's also the smallest barrio.) Rio Mar is the 2nd-most walkable city in PR.
What is Act 60 in Puerto Rico? ›
The Tax Incentive Code, known as “Act 60”, provides tax exemptions to businesses and investors that relocate to, or are established in, Puerto Rico.
Is it cheaper to live in the US or Puerto Rico? ›The cost of living in Puerto Rico is, on the whole, significantly lower than that of the US. However, it's still by no means cheap. In Mercer's Cost of Living Survey for 2022, San Juan ranked 72nd out of 227 countries, placing it on par with large cities worldwide such as Edinburgh and Barcelona.
Does Puerto Rico want to be part of USA? ›Puerto Rico has held six referendums on the topic. These are non-binding, as the power to grant statehood lies with the US Congress. The most recent referendum was in November 2020, with a majority (52.52%) of those who voted opting for statehood.
Do homeowners pay property taxes in Puerto Rico? ›Puerto Rico real property is subject to an annual real property tax. This tax is computed based on property values that date back to the fiscal year 1957–1958 (which was the last time that a general appraisal was conducted by the government).
What are the major problems in Puerto Rico? ›Puerto Rico's residents say flooding, erosion, and loss of wetlands and other coastal habitats are among the most important threats the island's government should prioritize in coastal resource planning, according to a survey by the island's Department of Natural and Environmental Resources (DNER).
Why are the rich moving to Puerto Rico? ›Bitcoin millionaires are moving to Puerto Rico for lower taxes and island living. Bitcoin enthusiasts are flocking to Puerto Rico, thanks to tax breaks and an island lifestyle. As the community grows, it's attracting more newcomers from the states as well as curious locals. But not everybody's happy about the influx.
Is Puerto Rico in decline? ›Puerto Rico's population has been falling for nearly a decade, and the pace of decline has accelerated in recent years. Although a slowdown in the island's birthrate has contributed to this decline, a surge in the out-migration of its citizens has been a more important factor.
Can I collect Social Security if I move to Puerto Rico? ›If you are a U.S. citizen, you may receive your Social Security payments outside the U.S. as long as you are eligible for them.
What are the social problems in Puerto Rico? ›The Caribbean island, which shares a close yet fraught relationship with the rest of the United States, faces a multilayered economic and social crisis rooted in long-standing policy and compounded by natural disasters, the COVID-19 pandemic, migration, and government mismanagement.
How long can a U.S. citizen stay in Puerto Rico? ›The ESTA (Electronic System for Travel Authorization), is the online visa with which you can travel to Puerto Rico or any other state of the United States. This visa allows multiple entries within 2 years, with a maximum stay of 90 days per entry.
What is the most common crime in Puerto Rico? ›
Crime in Puerto Rico
Travelers will be most affected by petty crime, such as pickpocketing or robbery. Don't leave your valuables or belongings unattended and only take what you need out with you.
Puerta de Tierra, La Perla, Piñones, and El Parque de las Palomas are all areas in the city that you may want to avoid or visit only during daylight hours. The housing complex, Louis Lloren Torres, should be avoided entirely.
Is rent high in Puerto Rico? ›Since the cost of living in Puerto Rico is generally lower than in the United States, the rent is cheaper as well.
Does Medicare work in Puerto Rico? ›If you have Original Medicare, you have coverage anywhere in the U.S. and its territories. This includes all 50 states, the District of Columbia, Puerto Rico, the Virgin Islands, Guam, American Samoa, and the Northern Mariana Islands. Most doctors and hospitals take Original Medicare.
What is the income for middle class in Puerto Rico? ›The following data are the most current income statistics for Puerto Rico from the US Census Bureau, are in 2021 inflation adjusted dollars and are from the American Community Survey 2021 5-year estimates. Median Household Income: $21,967. Average Household Income: $34,931.
What is the nicest area in Puerto Rico? ›The most beautiful parts of Puerto Rico include Old San Juan, Ponce, and Arecibo for history lovers. Cities like Manatí, Isabela, Aguadilla, Rincón, Cabo Rojo, Vieques, and Culebra sport the most beautiful natural landscapes and beaches.
What is it like for an American to live in Puerto Rico? ›If you're a U.S. citizen, this means an easy transition for you. No need for work permits or visas if you decide to relocate. In other words, living in Puerto Rico is almost like living abroad, but without either the paperwork hassle or the immigration concerns.
Where is the safest place from hurricanes in Puerto Rico? ›For the small size of Puerto Rico, hurricanes affect the entire island, regardless of the hurricane category. If a hurricane passes far to the north or the south, the outer rainbands might affect only one part of the island, and depending on the route, the west coast might be the safest.
What's the richest town in Puerto Rico? ›| Rank | Municipality | Per capita income (2017) |
|---|---|---|
| 1 | Guaynabo | $24,264 |
| 2 | San Juan | $18,160 |
| 3 | Gurabo | $16,559 |
| 4 | Carolina | $16,188 |
Puerto Rico offers a quality of life similar to the mainland United States, but with the added benefit of a breathtaking tropical island landscape, year-round sunshine, a wealth of outdoor adventures and aquatic activities, rich cultural experiences, diverse dining and entertainment options, and an opulent resort ...
What is Rule 22 in Puerto Rico? ›
Puerto Rico Act 22 – The Individual Investors Act
As long as an individual is a bona fide resident and their source of income is in Puerto Rico, they will not have to pay the federal income tax rate which ranges from 10% to as high as 37%.
80-1976 – Puerto Rico Unjustified Dismissal Act. The statute of limitations for unjust dismissal claims has also been raised to three years. Initial severance calculation in cases of unjustified dismissal is now set to three months or six months depending on the employee's years of service.
Do I pay federal income tax in Puerto Rico? ›While the Commonwealth government has its own tax laws, Puerto Rico residents are also required to pay US federal taxes, but most residents do not have to pay the federal personal income tax.
Why do homes in Puerto Rico have bars on windows? ›The bars were popular in the tropical parts of Spain because they allowed better ventilation and were cheaper than glass. They also kept the home safe. As Spain colonized the Caribbean they took the architecture with them, including the ornate iron bars. There are mixed reasons for why this tradition continues.
Is Puerto Rico safer than the states? ›Puerto Rico is relatively safe for visitors, as it has a lower crime rate than many other regions in the United States. It's one of the safest Caribbean islands. Much of the violent gun crime in Puerto Rico relates to drug trafficking and gang activity, which doesn't usually affect travelers.
Are houses expensive in Puerto Rico? ›San Juan, PR Housing Market
The median listing home price in San Juan, PR was $420K in February 2023, trending down -24.7% year-over-year. The median listing home price per square foot was $319.
In the 2020 elections the Popular Democratic Party took a slight majority of the seats in the Puerto Rico House of Representatives.
Does Puerto Rico want to be its own country? ›For the first time in our nation's history, the U.S. recognized its role as a colonizing force. The Puerto Rico Status Act lays out a process for the Island to decide its own future. It doesn't favor statehood, independence, or free association.
What happens if Puerto Rico becomes independent? ›The United States would no longer be obligated to provide financial support, but would lose all military bases unless Puerto Rico agreed to lease them. Some or all Puerto Ricans would likely lose U.S. citizenship and the right to reside in the United States.
What is the Jones law in Puerto Rico? ›President Woodrow Wilson signed the Jones-Shafroth Act (1917) on March 2, 1917, giving Puerto Ricans U.S. statutory citizenship. This act also separated Puerto Rico's government into Executive, Judicial, and Legislative branches, and endowed Puerto Ricans with a bill of rights.
Why doesn t the US want Puerto Rico to be a state? ›
According to Christina D. Ponsa-Kraus, professor of legal history at Columbia Law School, some American legislators feared that racial mixing would occur among white Americans in the contiguous United States and non-white Puerto Ricans if Puerto Rico were admitted as a state.
What does crim mean in Puerto Rican? ›Puerto Rico's Municipal Revenue Collection Center (CRIM for its Spanish acronym) issued new instructions for reporting estimated personal property tax payments made by wire transfer or ACH credit to the CRIM to ensure the payments are credited to the taxpayer's account.
Do residents of Puerto Rico file US tax returns? ›If you're a bona fide resident of Puerto Rico during the entire tax year, you generally aren't required to file a U.S. federal income tax return if your only income is from sources within Puerto Rico.
Does Puerto Rico require car insurance? ›📋 Compulsory Liability Insurance – This insurance is obligatory in Puerto Rico and it covers the damages you cause to other cars in case of an accident.
How much money should you save to move to Puerto Rico? ›Total monthly expenses should typically be about four times your monthly rent, so you can expect to retire comfortably in Puerto Rico on about $2,000 per month. Even the more expensive parts of the island are still less expensive than most major U.S. cities.
Is it cheaper to live in the U.S. or Puerto Rico? ›The cost of living in Puerto Rico is, on the whole, significantly lower than that of the US. However, it's still by no means cheap. In Mercer's Cost of Living Survey for 2022, San Juan ranked 72nd out of 227 countries, placing it on par with large cities worldwide such as Edinburgh and Barcelona.
Do you get Social Security if you live in Puerto Rico? ›He noted that residents of Puerto Rico are typically exempt from most federal income, gift, estate and excise taxes, but that they are eligible for Social Security and Medicare.
Do you pay property tax in Puerto Rico? ›Puerto Rico real property is subject to an annual real property tax. This tax is computed based on property values that date back to the fiscal year 1957–1958 (which was the last time that a general appraisal was conducted by the government).
Where is the most affordable place to live in Puerto Rico? ›Rio Marr, Puerto Rico: Affordable, Walkable, and Chill
It's also very affordable, mostly because the area has little nightlife. There are, however, several nice restaurants and bars and a few small entertainment venues, so it's far from boring.