How to benefit from Puerto Rico’s bankruptcy

The US territory of Puerto Rico is going through some tough times and will enter bankruptcy in the next few months. Puerto Rico is set to become the largest bankruptcy case in the history of the American public bond market. Here’s how you and your business can benefit from Puerto Rico’s bankruptcy.

Puerto Rico plans to file bankruptcy on $123 billion of debt owed by the government and its public corporations. Most is owed to bondholders and public employee pension systems. The bankruptcy is an attempt to deal with creditors while keeping public services going and will likely mean a 60% haircut for bondholders.

By comparison, Detroit’s bankruptcy was for $18 billion — one-ninth the size of Puerto Rico’s. Puerto Rico has a long way to go to reach the largest bankruptcy in history. Greece owed $220 billion in bailout cash when it defaulted.

Bottom line: Puerto Rico is in financial crisis… there’s blood in the streets… now is the time to make money!

Now is the time to setup a business in Puerto Rico.

Because of these financial woes, Puerto Rico is offering a number of tax holidays to new businesses. If you move a service business to Puerto Rico, and hire 5 employees on the island, you’ll cut your business tax rate to 4% on Puerto Rican sourced income.  

EDITORS NOTE: On July 11, 2017, the government of Puerto Rico did away with the requirement to hire 5 employees to qualify for Act 20. You can now set up an Act 20 company with only 1 employee (you, the business owner). For more information, see: Puerto Rico Eliminates 5 Employee Requirement

Just about any business that can provide a service from Puerto Rico to companies and persons outside of Puerto Rico will qualify for this tax deal. This includes banks, brokerages, investment advisors, internet marketers, call centers, technical support, and most online business.

If your business is portable, and requires at least 5 full time employees, you should consider relocating to Puerto Rico. For more see: Puerto Rico is the Top Offshore Business Jurisdiction for Americans.

EDITORS NOTE: On July 11, 2017, the government of Puerto Rico did away with the requirement to hire 5 employees to qualify for Act 20. You can now set up an Act 20 company with only 1 employee (you, the business owner). For more information, see: Puerto Rico Eliminates 5 Employee Requirement

In addition to online and portable service businesses, the following licenses qualify a 4% tax holiday guaranteed for 20 years:

• International banks licensed in Puerto Rico under Act 273,
• Investment advisors, funds, and family offices operating as International Financial Entities,
• Payday lenders with a hybrid license,
• Fund managers with an offshore master/feeder, and
• Offshore FinTech banks operating from Puerto Rico.

And here’s the killer: Individuals who spend 183 days a year or more in Puerto Rico, and qualify as residents under Act 22, have a zero percent rate on passive income. Dividends from your Act 20 company are tax free, as are capital gains on assets acquired after moving to Puerto Rico. For more, see: Who is a Resident of Puerto Rico for US Tax Purposes.

Move your business to Puerto Rico and get tax deferral at 4%. Move you and your business to Puerto Rico and get tax free!

Puerto Rico is offering some amazing tax deals to businesses and high net worth individuals. The purpose of these tax deals is to bring employment to the island. The reason these tax deals exist is that Puerto Rico desperately needs jobs.

That is to say, Puerto Rico is making you an offer you can’t refuse because they’re broke… because Puerto Rico is in bankruptcy… because there’s blood in the streets.

And these offers from Puerto Rico come with a number of guarantees and protections. Yes, you’re investing in a distressed territory, but you have the protection of the US government and the guarantee of the Puerto Rican government.

As a territory, Puerto Rico is a hybrid. The island is exempted from US Federal tax law and free to create it’s own tax code. At the same time, most other Federal laws apply, such as employment, FDIC, etc.

Only Puerto Rico can offer these tax deals to US citizens because only Puerto Rico is exempted from the US tax code. Of the territories, only Puerto Rico has built a business friendly tax code.

Banking in Puerto Rico

Federal tax law applies to all US owned business abroad and all American citizens and green card holders living in foreign countries. Only American’s living in Puerto Rico are exempted from US Federal tax. For a comparison of Federal income tax of American’s abroad and Puerto Rico’s tax deal, see: Panama vs. Puerto Rico.

Yes, Puerto Rico is in bankruptcy, but their banks are protected by US law. Puerto Rico won’t go the way of Cyprus because all of their local banks are FDIC insured. There’s no risk of the government seizing the assets of depositors.

• Local banks that accept deposits from Puerto Rican residents are required to have FDIC. Offshore banks licensed under Act 273 generally don’t apply for FDIC coverage.

And the state of banks in Puerto Rico is irrelevant to you. There’s no requirement to hold your income or retained earnings in Puerto Rico. The only requirement for retained earnings is that they remain inside a Puerto Rican corporation.  

So, form a Puerto Rican company and open a bank account in the United States. You can hold your cash at your favorite US bank with zero risk from Puerto Rico.

That is to say, a Puerto Rican company can open an account anywhere in the US. You can take your company documents into any Wells Fargo, Bank of America, or Citibank and get an account opened in a matter of minutes. While it’s impossible to open a US account for an offshore corporation, a Puerto Rican company is treated just like a structure from Delaware or Nevada by US banks.

20 Year Tax Holiday Guarantee

More importantly for a business seeking stability in Puerto Rico, your 4% tax holiday is guaranteed for 20 years. No matter how the political winds blow, your tax deal can’t be reviewed or revoked by the government of Puerto Rico. Even if the law is amended or repealed, you’re golden.

And only the government is locked in. So long as you have 5 employees in Puerto Rico and comply with the rules, you’re guaranteed a 4% tax rate on your Puerto Rico source income. If you want to walk away, you can shut down at any time without penalty.

As to a change in the law, once your company is set up and your tax deal approved, a change could be a great thing. I often tell clients that they should hope the law is repealed. When that door closes, the acquisition value of their Puerto Rican business will increase significantly.

Conclusion

Puerto Rico is offering you a tax deal you can’t refuse… and a deal that can’t be matched by any foreign country. For more information, please contact me at info@premieroffshore.com or call us at (619) 483-1708  for a confidential consultation on moving you and/or your business to Puerto Rico.