Puerto Rico Act 22 Tax Incentives
Puerto Rico also referred to as a 3000+ square mile Haven, on January 17th, 2012 passed new legislation that promotes economic development in the country. The Puerto Rico Act 22 Tax Incentives seek to attract new individual investors and residents by exempting them from all income taxes on their passive income. Citizens who were not residents of Puerto Rico as from January 16th, 1997 can qualify for the income tax exemption. A 100% exemption on all dividends, short and long-term capital gains and interests will be given to those who are eligible. To a great extent, the act will be beneficial compared to the 23% and federal average state tax rate.
Applicability of the Act
The Act is valid until December 31st, 2035 and both the US citizens and foreigners who yearn to be citizens of US should submit their applications. After 2035, the beneficiaries will be referred to as Resident Individual Investor’.
Three main factors will be used to determine a bonafide Puerto Rico citizen as specified in Section 937 of Internal Revenue Code. Physical Presence is one factor that requires an individual to spend at least 183 days in Puerto Rico. The days an individual leaves or arrives at Puerto Rico will be included in counting. Tax Home is another parameter the number of days that a person runs a business while in Puerto Rico. A closer connection is the last factor. This will evaluate qualitative elements to determine whether an individual domicile, votes, has an official driving license, the family residence and bank accounts in Puerto Rico.
Exemption on Capital Gains
All the capital gains that accrue to an individual investor after relocating to Puerto Rico will be wholly exempted from tax if recognized before January 2036.However, for the benefits that accrued before one becomes PR citizen, a tax of 10% will be applied. Again, if any capital gains are realized within 10-year PR residence before January 2036, then a 5% tax will be enforced.
Exemption on Dividend Income and Interest
No interest and dividends derived by an individual investor will be subjected to federal tax under the US Code. However, for the dividends and interest that come outside PR will be subjected to a reduced tax rate of between 0-10% through investing in certain investment vehicles of Puerto Rico.
The act established an application fee for those applying for approval. The Puerto Rico Act 22 Incentives application fee will not change, but the acceptance fee for the approval of the act is $5000.