Chapter 2 of Act 60 (Act 22): Resident Individual Investors
ELIGIBILITY
In order to qualify for the tax benefits under Chapter 2 of the Incentives Code, the applicant must be a bona fide resident of Puerto Rico for the entire tax year. Chapter 2 applies to any individual investor who becomes a Puerto Rico resident (“Individual Investor”) on or before the taxable year ending on December 31, 2035,
provided that the individual was not a resident of Puerto Rico at any time from January 17, 2006, to January 17, 2012. Internal Revenue Code (Sections 933 and 937), a bonafide resident of Puerto Rico is a person who meets the following tests:
1) Presence Test. The individual must meet one of the following: (1) be present in Puerto Rico for at least 183 days during the calendar year; (2) be present in the United States for no more than 90 days during the calendar year; (3) have no earned income from sources within the United States (that is, compensation for labor or personal services rendered by the manager in the United States exceeding $3,000) and be present in Puerto Rico for more days than in the United States; (4) be present in Puerto Rico for a minimum of 549 days during the three-year period that includes the current tax year and the two preceding calendar years, as long as he is also present in Puerto Rico for a minimum of 60 days during each of those three years; or (5) have no ‘‘significant connection’’ to the United States.
2) Tax Home Test. The individual’s regular (or principal, if more than one) place of business that he or she claims for purposes of determining income tax deductions for traveling expenses while away from home in the pursuit of a trade or business must be in Puerto Rico. Thus, to meet the tax home test, the individual must spend substantially more time working from his office in Puerto Rico than from an office in the United States or a foreign country.
3) Closer Connection Test. The individual must have a closer connection to Puerto Rico than the U.S. or any other foreign country. The closer connection is determined by a variety of factors including but not limited to the following: (1) the location of the individual’s permanent home; (2) the location of the individual’s family; (3) the location of the individual’s personal belongings, such as automobiles, furniture, clothing, and jewelry; (4) the location of social, political, cultural, or religious organizations with which the individual has relationships; (5) the location where the individual conducts routine personal banking activities; (6) the location where the individual conducts business activities (other than those that constitute the individual’s tax home); (7) the location where the individual holds a driver’s license; (8) the location where the individual votes; and (9) the country of residence designated by the individual on all official government forms, documents, and tax returns. The significant connections analysis can also take into account similar factors that attempt to show that the individual is no longer living in the United States. BENEFITS
100% Tax Exemption from Puerto Rico income taxes on dividends from all sources. The US-IRC generally provides US income tax exemption on Puerto Rico source dividends and interest earned by a “bonafide Puerto Rico resident”. However, dividend and interest income from non-Puerto Rico sources (i.e., US or foreign sources) will be subject to US income taxation;
100% Tax Exemption from Puerto Rico income taxes on interests from all sources; and
100% Tax Exemption from Puerto Rico income taxes on all short-term and long-term capital gains accrued after the individual becomes a bonafide resident of Puerto Rico. The long and short-term capital gains derived from the appreciation of securities after the individual becomes a resident of Puerto Rico are exempt from Puerto Rico income tax and will not be subject to US income tax if the securities were not owned prior to becoming a Puerto Rico resident. If the securities were owned prior to becoming a Puerto Rico resident, the gains will be considered Puerto Rico source income (as per the US Internal Revenue Code) when sold after 10 years of Puerto Rico residency. Long-term capital gains prior to becoming a resident of Puerto Rico are subject to a 10% tax rate if realized within 10 years of residency or 5% if realized after 10 years of residency. tax law, long-term capital gains prior to becoming a bonafide resident of Puerto Rico that are realized within 10 years are subject to a 20% tax rate. If the long-term capital gains are realized after 10 years, the U.S. tax rate is 0%. REQUIREMENTS
Individuals must request and obtain a grant of tax exemption. There is a filing fee of $750, and an acceptance fee of $5K. Act 60 provides that the grant will be considered a contract between the individual and the Government of Puerto Rico so that it cannot be modified unilaterally and should not be impacted by amendments to Act 60 enacted after the grant is issued. The individual must comply with becoming a bonafide resident of Puerto Rico as per IRS Sec. 933 and 937. A minimum annual charitable donation of $10K to a local nonprofit certified under PR-IRC. Half paid to a charity for the eradication of childhood poverty, and the other half to a Puerto Rican charity of the grantees' choice. Grantee (the 'Individual Investor') must purchase real estate property in Puerto Rico within two years of obtaining the decree. The property must be the individual investor's primary residence throughout the validity of the decree and cannot be rented out. The grantee must file an annual report with the Puerto Rico government.
