Did you know that a U.S. citizen living in Puerto Rico (a U.S. possession) is not subject to federal income taxes on Puerto Rico source income due to an exclusion allowed by the U.S. Internal Revenue Code? That means that you don't have to tinker with your U.S. citizenship to reduce your federal tax bill. But how does it work? Easy!

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Puerto Rico's Act 60 (formerly known as Acts 20 and 22) were approved on 2012 in an effort to promote the economic development of the island through tax incentives. The benefits of these laws have been extensively published by the largest financial magazines available like Bloomberg and Forbes, among others.

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Unlike other tax incentives provided by other jurisdictions, which provide benefits to certain types of businesses and activities, Act 22 offers its tax benefits to individuals who are non-residents of Puerto Rico in order to encourage them to move to the island, to acquire real estate, and to perform other types of local investments to stimulate the economy.

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What makes Puerto Rico's offer more attractive is that every American or foreign citizen non-resident of Puerto Rico, who establishes his or her domicile in Puerto Rico, qualifies for the exemptions under Act 22, provided that he or she was not domiciled in Puerto Rico at any time during the last six years prior to January 17, 2012 (date on which this law was approved).

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The exemptions provided by Act 22 are applicable to interest, dividends, and certain capital gains from the sale or exchange of securities recognized during the period beginning from the date on which the individual is domiciled in Puerto Rico, until December 31, 2035.

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A large number of individuals have already benefited from exemptions provided by both laws, as a result of their interplay with the dispositions of Section 933 and 937 of the U.S. Internal Revenue Code. As an example, in the case of individuals that generate significant amounts of capital gains as a result of the sale of securities, they can benefit from tax savings of up to 15% on gains attributable to the increase in value of such securities after establishing his or her domicile in Puerto Rico.

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Similarly, for money managers and other service providers, the decision to move to Puerto Rico has been motivated by the reduction on the federal income tax rate of 39.6% (without considering the rates of state income tax) to a 4% income tax rate in Puerto Rico.

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Consulting services related to any industry or business; investments or any other financial business; advertising, public relations, environmental, technology, management, marketing, human resources, audit, legal, tax or accounting services; development of computer programs and many others, are among the services that qualify under the benefits provided by Act 20.

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The combination between the 4% rate on income tax and the 60% of municipal license tax exemption for a period of twenty years that provides Act 20 with the total exemption on dividends provided by Act 22 is very attractive. The new Puerto Rico residents could create a Puerto Rico company to provide its services from here to their clients outside of Puerto Rico, structuring a compensation package consisting of wages (taxable only in Puerto Rico) and totally exempt dividends.

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Act 22 has also been very attractive for aliens that reside in foreign countries where their capital was subjected to sovereign risk. When these individuals become U.S. citizens through their residence and naturalization in Puerto Rico, they benefit from incentives provided by Act 22, while they continue being treated as non-resident aliens for U.S. estate tax purposes. Therefore, as long as they do not own property located in the U.S., their estate shall not be subject to federal estate taxes and may be exempt from Puerto Rico estate taxes.

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Come to Puerto Rico and enjoy, not only the beautiful beaches, scenery, and comforts this island offers, but experiment for yourself the tax benefits available to you. And with its international airport, you can be almost anywhere in the world by the next day!

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For additional information regarding the benefits provided by Acts 20 and 22 contact CPA Miguel J. Carbonell.