There is no doubt about the allure of Puerto Rico to high-net-worth individuals (HNWIs) and ultra-high-net-worth individuals (UHNWIs). Being U.S. territory, though with its addition of providing tax advantages that most low tax jurisdictions don’t, it has turned into a low tax jurisdiction in which people don’t have to renounce their United States citizenship in order to get asset protection.
For those willing to move and set up residency bona fide, Puerto Rico offers an unparalleled opportunity to preserve wealth through its tax incentives under Act 60. Is Puerto Rico the right choice for you?
The Promise of Act 60
Puerto Rico’s Incentives Code, Act 60, combines the merits of Acts 20 and 22 into a single, coherent set of benefits aimed both at businesses and individuals. For UHNWIs and HNWIs, the key advantages include:
- Zero Capital Gains Tax: Capital gains of all types accrued while you live in Puerto Rico, short-term and long-term are subject to this.
- Zero Tax on Dividends and Interest: There’s complete exempt for qualified residents.
- 4% Corporate Tax Rate: For businesses that export services out of Puerto Rico, this rate is much lower than U.S. mainland corporate taxes.
- Exemptions on Federal Income Tax: For instance, residents only pay local taxes on Puerto Rico sourced income, with no federal income tax.
But these benefits don’t just come automatically. These not only come with strict requirements, they also require total dedication.
Residency Requirements: The Fine Print
Want to be eligible for Act 60 benefits? Then you need to meet Puerto Rico’s residency criteria. Here’s what you need to do:
- Staying in Puerto Rico for a minimum of 183 days each year.
- Spending no more than 90 days in the U.S. each year.
Making the stronger connections (buying property, opening local bank accounts, moving important parts of your personal and financial life to Puerto Rico, etc.) helps prove that Puerto Rico is your main home.
If your investment doesn’t perform well enough to meet these standards, you may lose the tax benefits and then flow back into the U.S. tax system. For some people, this sort of commitment is a deal breaker.
Tax Haven or Low-Tax Jurisdiction?
But Puerto Rico isn’t a typical tax haven, nor is it a place that will allow you remote work and anonymous banking like some other places.
The model utilized brings in investment and stimulates employment opportunities for Puerto Rico, but it limits those participating.
Once you’re not willing to expatriate, the pluses of Puerto Rico begin to fade. Of course, if you want complete freedom from taxes, there are perhaps more appropriate places, though often you would also lose your U.S. citizenship, and that is a decision not to be taken lightly. If you’re a HNWI or UHNWI, you’ll want to take into account the following:
Exempt from Capital Gains
This is arguably the greatest lure for UHNWIs, according to zero capital gains tax. But even if you’re just handling huge amounts of portfolios or huge assets, this alone can save you millions of dollars.
Corporate Tax Benefits
Act 60 allows entrepreneurs running service based businesses to relocate operations to Puerto Rico and qualify for 4% corporate tax rates. But establishing this legitimate business presence requires setting up a business presence on the island, hiring at least one local employee, and maintaining an office.
Residency Requirements
That 183-day rule is not negotiable. It certainly feels limiting for those of us who have become accustomed to global mobility. The incentives may not outweigh the inconvenience, however, if you can’t imagine yourself living there long term.
Lifestyle Adjustments
A slower pace of life, stunning beaches, a favorable climate, Puerto Rico is really the location that seems to have it all, but it’s not without its challenges, either. It might lack the infrastructure you’re after, and you might not have access to certain services or business ecosystems of major financial hubs.
Puerto Rico vs. Traditional Offshore Jurisdictions
We compare Puerto Rico to traditional offshore tax havens to understand what makes it unique. While the Cayman Islands or Vanuatu offer no taxes to pay, affording you the ability to maintain your U.S. citizenship and enjoy sizable tax advantages, Puerto Rico accomplishes this. But this comes with some trade-offs:
Commitment to Residency
While they normally have minimal or no residency requirements, they are very attractive to globetrotters because of the flexibility.
Physical Presence
For those accustomed to traveling, Puerto Rico’s physical presence requirement can be a little restrictive.
Global Tax Planning
But for those who are looking for multi-jurisdictional strategies, Puerto Rico may be one of the pieces within their overall asset protection framework and not a standalone device.
Why Puerto Rico Appeals to the 0.1%
It’s more than tax savings that dictate why UHNWIs relocate. While tax efficiency is not a factor that usually contributes to your overall asset protection plan, in Puerto Rico you can now combine them together. By combining local tax incentives with a suitable international strategy, clients can protect their wealth from external dangers and take advantage of a legal and compliant structure.
This particular challenge is uniquely catered to by Dominion’s approach. Through our evidence-based asset protection strategies for the 0.1%, no nuance of any jurisdiction is left to chance. Then we examine Puerto Rico’s various legal frameworks and create strategies fitting your exacting trust structure, maximizing gains while minimizing risk.
The Risks of Getting It Wrong
Puerto Rico is not a place you want to pick without first doing the necessary homework. For example:
Residency Compliance
Disqualification from Act 60 benefits can occur if the physical presence test is misinterpreted.
Jurisdictional Conflicts
Puerto Rico’s tax advantage applies only to income generated in Puerto Rico (Income Sourced (Sourced In) Puerto Rico). Allocating income in the wrong streams will result in audits and penalties.
Reversibility
If you opt to leave Puerto Rico and go through with it, every tax advantage disappears immediately, and all of a sudden, you need to create an entirely new financial strategy.
We expect these challenges to arise at Dominion and develop proactive responses. We use an international network of attorneys and advisors to make sure you are in compliance and to protect your wealth overseas.
What the Future of Puerto Rico’s Tax Incentives Could Look Like
Like any tax policy, Puerto Rico’s tax incentives are subject to change; they’re meant to attract long-term investment. Changes such as economic, political or changes in U.S. tax laws could make Act 60 untenable. To remain ahead of such changes, vigilance and flexibility is needed.
In the meantime, Dominion continues to lead the development of these technologies. Thanks to our global reach and our jurisdictional neutrality, we have the ability to change strategies to protect your wealth nearly instantaneously based on the ever-changing circumstances.
Is Puerto Rico Right for You?
Whether you want to relocate to Puerto Rico depends on a comprehensive analysis of your financial goals, preferences for a good quality of life and your long-term strategy. The tax benefits are huge but the obligations may not be for everyone.
Through a carefully composed wealth governance strategy, Puerto Rico can be a powerful tool for UHNWIs committed to creating a bulletproof asset protection plan. Dominion’s experience means that we carefully plan and implement each step of your transition to deliver the most benefit possible and least amount of risk in the process.
A Multi-Jurisdictional Strategy Using Puerto Rico
Puerto Rico doesn’t have to be the only part of a tax and asset protection strategy for UHNWIs. Rather, it might act as a building block to a multi-jurisdictional plan.
You can achieve flexibility and security above and beyond what any single jurisdiction can provide by integrating the tax benefits of Puerto Rico with structures in other favorable jurisdictions.
For example, owning a Puerto Rican residency combined with offshore trusts or foundations in anonymous, creditorproof jurisdictions creates levels of anonymity. For those with wealth in many countries and who therefore need a network of structures to provide comprehensive protection, this is a particularly effective solution.
Dominion specializes in putting together strategically interrelated strategies that make full use of what is distinctive about Puerto Rico while assuring it from global risks. Our solutions are bespoke and future-proof, whether it’s structuring income to be compliant with Puerto Rican tax laws or folding in offshore accounts to have liquidity and flexibility.
Wealth Governance for the Long Haul
The tax incentives go beyond just saving a little money now; they play a crucial role in the island’s broader plan aimed at preserving wealth over the long haul and ensuring responsible management. UHNWIs will be able to move to Puerto Rico, where they will get the benefit of a jurisdiction committed to economic growth and stability with financial safeguards under U.S. legal protection.
Puerto Rico is uniquely positioned as a jurisdiction balancing opportunity with reliability in its reality. Importantly, Puerto Rico’s tax framework can represent a stable base for dynastic wealth planning also.
The island has an exemption on capital gains and dividends, allowing families investing and looking to create generational wealth in an environment in which the wealth does not get eroded away by taxes.
Dominion Makes Asset Protection Make Sense
Despite their depth, Puerto Rico’s tax incentives open up a rare opportunity for big savings. So don’t neglect yourself and leave your assets vulnerable. You can contact Dominon today, and build a plan tailored to you and your personal needs.
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