Tag Archive for: puerto rico tax incentives

Tax Planning for an International Bank License
Christian Reeves

Tax Planning for an International Bank License

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Tax planning for an international bank license is the most overlooked issue in startup banks. Sure, most offshore jurisdictions don’t tax your profits, but other countries will be looking for their cut if you set up an office or hire employees outside of your licensing jurisdiction. Here’s what you need to know about tax planning for an international bank license.

This article is focused on international bank licensed entities, sometimes referred to as Class B banks. An international bank is usually setup in a low or no tax offshore jurisdiction. As a condition of the license, these banks are prohibited from doing business with locals but can offer all manner of international banking services.

Countries either charge a large annual fee to allow an international bank to operate in the country, or a small tax on your earnings and profits. For example, the Cayman Islands Monetary Authority charges about $87,000 a year, plus other fees, to maintain an international license. Cayman won’t tax your business and makes their money on the annual fees.

  • I don’t consider Panama here because this country doesn’t issue international banking licenses to startup banks. You must have an existing license from a major jurisdiction to get an international license in Panama.

Smaller countries like Belize charge an annual fee of $15,000 and Dominica $10,000. Puerto Rico charges 4% tax on the net profits of the bank and a $5,000 annual fee.

So, the tax rate on income earned by an international bank will be 0% to 4% depending on the jurisdiction you select. That’s all fine and good… so, why does and international bank need “tax planning?” Taxes are very low no matter where you set up.

Here’s the catch: These 0% to 4% tax rates apply to income earned by the bank in its country of licensure.

If you license an international bank in Dominica, all your employees are in Dominica, and all work to generate the earnings of the bank are performed in Dominica, then 100% of the profits of the bank are Dominican sourced income and zero tax will be paid in Dominica.

But, what if you have an international banking license in Dominica, a small office with 2 employees on the island and 30 employees in the UK? The vast majority of the income of the bank will be allocated to the UK and taxed at 19%.

Do you also have a trading desk in Hong Kong? Then some of the profits will need to be allocated to that country and taxable at 16.5%. How about a sales office in the United States? Then income allocatable to that office will be taxed at 35%.

The bottom line is that income is sourced to the country where the work is performed to generate those profits. An international banking license gets you 0% to 4% on income earned in the country where you are licensed. All income earned abroad will be taxed where your employees are located.

Thus, tax planning for an international banking license includes two main components:

  1. Maximizing the value attributable to workers in the country that granted your international banking license, and
  2. Allocating income between your country of license and your foreign offices. This is a form a transfer pricing.

How much tax planning your international bank will need will depend on your business model. If you require 5 employees for a high dollar low volume business, then Dominica and Cayman will be fine. If you need 20 employees to start and plan to grow to over 100, then you should focus on Puerto Rico are a more advanced global tax strategy.

The simplest form of tax planning for an international bank is where all work is performed in your country of licensure. This is difficult in Belize with its population of 350,000 and nearly impossible in n Dominica with only 72,000 residents. While there is an abundance of professionals in Cayman, the costs of living and doing business on this island are very high.

The exception is the US territory of Puerto Rico. With a population of 3.5 million, and lower costs of doing business than any State in the Union, Puerto Rico is the most efficient jurisdiction for an international bank that will require a large number of employees. In fact, Puerto Rico is probably the only choice for a high volume transactional international bank if you want to keep your corporate tax rate below 15%.

There are international banks with over 400 employees in Puerto Rico and startups projecting 180 coming online. Puerto Rico is the only offshore jurisdiction that can support these numbers.

Yes, Puerto Rico is relatively large compared to other offshore banking jurisdictions, but that’s just part of the puzzle. Any US citizen can move to Puerto Rico and begin working… no visa, residency permit, work permit, or other red tape.

This means that an international bank licensed in Puerto Rico can move anyone it likes from the United States to the island. This gives you a virtually unlimited employment pool if you have the cash to entice them to move.

For these reasons, the fastest growing international banking center is Puerto Rico. The Island has 63 international banks operating now and 12 are in process. These banks will launch in 2 to 6 months.

This compares to 6 international banks in Belize, 15 in Dominica and 147 in Cayman (who has a 20 year head start on Puerto Rico). I expect Puerto Rico to surpass Cayman in the next 2 or years.

I hope you’ve found this article on tax planning for an international bank license to be helpful. For more on negotiating a bank license from Dominica, see: How to get an Offshore Bank License in Dominica.

For more on international bank licenses, see:

For more on Puerto Rico see:

For assistance in setting up a new international bank, or to negotiate a new correspondent account, please contact me at info@premieroffshore.com or call us at (619) 483-1708.

tax free income the legal way
Christian Reeves

Pay Zero Income Tax the Legal Way

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The internet is filled with Idiots selling scam programs that will teach you how to pay zero income tax. They’re all full of BS and infuriate those of us who try to write about legal ways to protect your assets and minimize your income taxes. In this article I’ll talk about the only legal ways to pay zero income tax on your business and capital gains offshore.

This post is meant for US citizens or green card holders willing to do what it takes to reduce or eliminate their US taxes.

I’ll tell you upfront that paying zero income tax the legal way is VERY difficult. It takes a lot of work and commitment on your part. There are no tricks or easy solutions. To pay zero income tax requires moving you and your business out of your comfort zone… not necessarily out of the United States… but, I’ll get to that in a bit.

And I’m not talking about retirement accounts or other US methods for reducing or deferring US tax. I’ll assume you’re making too much money to benefit from those accounts or that you already have your IRA and 401-k plans setup.

As I said, the web is filled with scam artists pitching all kinds of ways avoid US taxes. Tax lawyers call these guys tax protestors (and morons) and they refer to themselves as sovereign citizens. They’re using straw man companies and sham trusts to claim they earn no “income.”

I won’t get into these bogus arguments because they’ve been debunked time and time again. At this point, tax protestors are just a sad commentary on how gullible some people are. These cases are so cut and dry that lawyers can be sanctioned for wasting the court’s time.

Another issue to watch out for when searching the web are claims that you can operate tax free in a foreign country. These are true statements by providers in the country where you will incorporate… but meaningless to US citizens.

For example, you call a lawyer in Panama to set up a corporation there. You ask them if your structure will pay any tax… and they say no, it does not. It’s totally tax free! They’re talking about the tax laws of Panama. That’s great but, as a US citizen, you’re focused on US tax laws because that’s your real risk.

The provider in Panama is not trying to mislead you. He’s simply telling you the law of his country. He’s an expert in Panamanian law, thus his comments are limited to that country. This is why you always need a quarterback in the US who can show you how US tax laws interact with those of the foreign jurisdictions you’re setting up in.

There are basically four legal ways to eliminate US tax by going offshore. They are:

  1. Offshore captive insurance,
  2. Offshore life insurance,
  3. Set up a division of your business offshore, and
  4. Move to Puerto Rico to eliminate capital gains tax.

Offshore Captive Insurance Company

An offshore captive insurance company allows you to provide insurance to your active business. You form an offshore captive insurance company in Bermuda, Cayman or Belize, and insure against risks not covered by your traditional policies.

As of 2017, the US IRS will allow you to deduct up to $2.2 million of insurance premiums paid to an offshore captive insurance company owned by you. For previous years, the amount was $1.2 million.

By insuring against risks with a low probability of occurring, you effectively move $2.2 million of pre-tax income off of your corporate books in the US and onto an offshore captive insurance company. These transfers then accumulate offshore tax deferred until you close down the structure.

For more, see: The Mini Offshore Captive Insurance Company. This article was written before the deductible amount was increased from $1.2 to $2.2 million.

Offshore Life Insurance

Offshore life insurance, typically offshore private placement life insurance basically allows you to create an “offshore ROTH” without any of the contribution limits or distribution requirements.

You can put as much after tax money into an offshore life policy as you like and it will remain in the plan tax deferred. That is to say, you will pay zero tax on capital gains inside the life policy so long as the plan is active.

If you decide to shut it down and take a distribution, you will pay US tax on the increase in value. If you leave the policy in place until your death, the value will pass to your heirs tax free. Neither you nor they will ever pay US tax on the gains because of the step-up in basis they receive.

You also have the choice of borrowing against the policy. If you need access to the cash, you can take out a loan.

The minimum investment for these offshore life policies is usually between $1.2 to $2.5 million depending on the provider and other factors. For more, see: Benefits of Private Placement Life Insurance.

Offshore Business

If you move you and your business offshore, you can earn up to $200,000 a year tax free. If you move a division of your business offshore, you can get tax deferral on any foreign sourced profits that business generates.

If you move abroad and qualify for the Foreign Earned Income Exclusion, you can earn $102,100 per year free of Federal income tax from your offshore business. If a husband and wife are both working in the business, and both qualify for the Exclusion, you can take out over $200,000 combined.

To qualify for the Exclusion, you need to 1) be a resident of a foreign country and out of the US for about 5 months a year, or 2) out of the US for 330 out of 365 days. It’s much easier to qualify for the FEIE as a resident, so I strongly recommend you consider one of the easy and low cost second residency programs.

For example, you can become a resident of Panama with an investment of $20,000 and Nicaragua for $35,000. Panama is the easiest because this one doesn’t have a physical presence requirement. For more, see: Best Panama Residency by Investment Program.

If you’re not ready to move you and your family offshore, but can setup a division of your business offshore, then you can defer US tax on income attributable to that division.

Assuming your offshore team can operate independently, income they generate should be eligible to be held in the offshore corporation tax deferred. When you take it out as a dividend, either personally or as a transfer to the parent company in the US, you will pay US tax. For more, see: Step by Step Guide to Taking Your Business Offshore

Move to Puerto Rico

Even if you go offshore, you’re still going to pay US tax on your capital gains. So long as you hold a US passport, the IRS wants it’s cut of your investment profits. The only exceptions are investments inside a US compliant life insurance policy (described above) and capital gains for residents of Puerto Rico.

When an American moves to a foreign country, they’re subject to US Federal Income Tax laws. All US citizens and green card holders must pay unto the IRS.

The only individuals exempted from this rule are residents of the US territory of Puerto Rico. US Tax Code Section 933 excludes residents of Puerto Rico from US Federal tax laws.  This means that Puerto Rico is free to create it’s own tax system, which it has done.

If you set up a service business in Puerto Rico, one with at least 5 employees on the island, you can qualify for a 4% tax rate on your Puerto Rico sourced income. To see how this compares to the FEIE, see: Panama vs Puerto Rico.

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

Even better, if you move to Puerto Rico, spend a minimum of 183 days a year on the island, and otherwise qualify for their Act 22, you’ll pay zero tax on your capital gains. That’s right, without any of the costs or limitations associated with a private placement life insurance policy, those willing to live in an island paradise can pay zero income tax on their capital gains.

For more on how to pay zero tax in Puerto Rico, see: How to stop paying capital gains tax.

Conclusion

I hope you’ve found this article on how to pay zero income tax legally to be helpful. For more information, and a consultation, please contact us at info@premieroffshore.com or call (619) 483-1708. We’ll be happy to assist you to structure your affairs offshore in a tax compliant manner.

international financial entities in puerto rico
Christian Reeves

International Financial Entities Licenses in Puerto Rico

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An International Financial Entities licensed in Puerto Rico under Act 273 is one of the most powerful international banking and financial services structures available. As the rules continue to tighten around offshore transactions, offshore tax benefits are reduced under President Trump, and the US increases FATCA and other regulations, expect more financial services companies to move to an International Financial Entities license in Puerto Rico.

This International Financial Entities in Puerto Rico can offer all manner of international banking, brokerage, investment management, and financial services from Puerto Rico to clients outside of Puerto Rico. Below I will detail all of the services which may be provided by this structure.

In order to qualify as an IFE in Puerto Rico under Act 273, you must hire 4 employees on the island (I usually advise clients hire 5). Then you set up an office, submit a very detailed business plan to the banking regulator, and negotiate the terms of your license.

Once approved, you will be eligible for a 20 year tax holiday on all income earned by your International Financial Entity in Puerto Rico. You will pay a 4% tax rate on all corporate profits earned by the business.

That is to say, the corporate tax rate on Puerto Rico sourced income in your IFE will be 4%.

You will also get full property and municipal licenses tax exemptions and a 6% income tax rate on distributions to PR residents. Dividends to non-PR residents will be tax free. Likewise, dividends paid to residents of Puerto Rico who qualify under Act 22 are tax free to the IFE and to the receiving party.

An IFE in Puerto Rico must be capitalized with a minimum of $550,000. Of this, $300,000 is placed on deposit with a local bank as a surety. The balance of $250,000 is your minimum corporate capital. Total authorized shares of your International Financial Entities in Puerto Rico must be $5 million (but only $250,000 of this is paid-in).

The largest firms structured under Act 273 as a International Financial Entities in Puerto Rico are international banks. For an article on this topic, see: Lowest Cost Offshore Bank License is Puerto Rico

The IFE license not limited to international banks. Family offices, insurance companies, investment advisors, hedge fund operators, currency traders, and others all operate under Act 273 as an International Financial Entities in Puerto Rico. For this reason, Act 273 is the most powerful financial services license available today.

Here’s a list of the services an Act 273 International Financial Entity licensed in Puerto Rico can offer:

  1. Accept deposits, including demand deposits and interbank deposits (or otherwise borrow from banks outside of PR and other IFEs)
  1. Place deposits with banks outside of PR and other IFEs.
  1. Make, procure, place, guarantee, syndicate, or service loans.
  1. Issue, confirm, give notice, negotiate or refinance letters of credit provided both the client and the beneficiary requesting the letter of credit are not residents of Puerto Rico.
  1. Discount, rediscount, deal or otherwise trade in money orders, bills of exchange, and similar instruments, provided that neither side of the transaction is a resident of Puerto Rico.
  1. Engage in any banking transaction permitted by Act 273 in the currency of any country, or in gold or silver, and participate in foreign currency trades.
  1. Underwrite, distribute, and otherwise trade in securities, notes, debt instruments, drafts and bills of exchange issued by a firm outside of Puerto Rico and purchased by a client of the IFE who is not a PR resident.
  1. Engage in any activity of a financial nature outside of Puerto Rico which would be permissible for a bank licensed in the United States.
  1. If the International Financial Entity licensed in Puerto Rico gets an additional license, it may act as a fiduciary, executor, administrator, registrar of stocks and bonds, property custodian, assignee, trustee, attorney-in-fact, agent, or in any other fiduciary capacity.
  1. Acquire and lease personal property.
  1. Buy and sell securities outside of Puerto Rico.
  1. Provide investment advice to persons outside of Puerto Rico.
  1. Act as a clearinghouse in relation to financial contracts or instruments of persons who are not residents of Puerto Rico.
  1. Organize, manage, and provide management services to international financial entities such as investment companies and mutual funds. This is the section of the law used by hedge funds to manage master / feeder structures set up in Cayman with feeders in the US and Cayman.
  1. Dedicate itself to provide the following Services:
  • Asset management,
  • Management of activities related to the investment of private capital,
  • Management of hedge funds and high-risk funds,
  • Management of pools of capital,
  • Administration of trusts utilized for converting different types of assets into securities (such as REITs),
  • Management of Escrowed  fund for persons who are not residents of Puerto Rico.
  1. Engage in any other activities approved by the Commissioner.
  1. With the Commissioner’s prior approval, establish branches outside of Puerto Rico. This includes the United States and foreign countries.

Section 15 above is commonly used by family offices. The clause “dedicated to” means you may only engage in these activities and will thereby be subject to reduced compliance.

For more on operating an investment fund from Puerto Rico, see: How to operate an investment fund tax free from Puerto Rico

Note that an International Financial Entities in Puerto Rico is prohibited from doing business with persons or businesses in Puerto Rico. Therefore, all of the above are limited to persons outside of Puerto Rico. An Act 273 IFE can do business with Puerto Rico’s Development Bank and its Economic Development Bank.

I hope you’ve found this article on the International Financial Entities of Puerto Rico licensed under Act 273 to be helpful. For more information on setting up an IFE in Puerto Rico, please contact me at info@premieroffshore.com or call us at (619) 483-1708.

You might also find my articles Puerto Rico’s Act 20 to be helpful, as well as a comparison between offshore tax planning and Act 20.

For more on Puerto Rico’s Act 273 vs a traditional offshore banking license, see: Top 5 Offshore Bank License Jurisdictions for 2017. For my post on the offshore FinTech, see: Offshore FinTech Bank License.

For more of my articles on the offshore bank licensing and operations, see:

tax planning for payday lenders
Christian Reeves

International Tax Planning for Payday Lenders

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The US tax costs for Payday lenders in the United States is harsh. The interest component of your income is taxed where the borrower is located. This means you get to file returns is every state and deal with a web of complex tax laws.

Then, the portion of your income which is not considered interest, is taxable where you and your business is located. This must be in the United States, so you’re paying 35% corporate tax plus up to 12% in state tax on net profits.

What if I tell you that you can operate in the United States and pay only 4% on the majority of your net profits? That you can get a banking license and operate the business through this entity while still maintaining your 4% corporate tax rate?

That’s exactly what I’m saying. You can setup a fully licensed credit union in US territory Puerto Rico and make loans throughout the United States. Then you structure an Act 20 company in Puerto Rico to service the loans, which is taxed at 4%. The credit union breaks-even or makes a small profit for its members, but the bulk of the income moves to the Act 20 company.

This structure will allow a large payday lender to exchange their 40% US tax rate on corporate profits for a 4% tax rate in Puerto Rico.

Puerto Rico is the ONLY jurisdiction such a tax deal can be had. If you set up offshore, US Federal tax laws apply to your US owned business. Plus, it’s nearly impossible to make loans into the United States from abroad.

Puerto Rico is unique. It’s a US territory, so US Federal laws apply. This means that forming a payday loan company in Puerto Rico is equivalent to forming the company in any US state… with one major exception… taxes.

Section 933 of the US tax code exempts any income earned in Puerto Rico from US taxes. A business operating from Puerto Rico pays only Puerto Rican taxes, not US Federal income taxes.

For this reason, Puerto Rico can offer payday lenders a deal. Setup your company here, negotiate an Act 20 business license, hire at least 5 employees on the island, and your Puerto Rico sourced income will be taxed at 4%.

To clarify: You will still pay US income tax on the interest component. It’s the business component of your corporate profits that are taxable in Puerto Rico at 4%. To qualify for this 4% rate, the work to generate those corporate profits must be done from Puerto Rico.  

Here’s how you might allocate income between interest income / US source income and corporate income / Puerto Rico sourced income taxable at 4%:

Some tax experts take the position that the interest component of payday loans should be about the same as that of a junk bond. That’s a rate of around 6% to 10% per year.

However, payday loans often have an effective cost to the borrower of 200% to 600% per year. The average cost of a payday loan that rolls over a few times is 400%.

Thus it can be argued that US source income taxable where the borrower is located is 10% while the balance, 390% is Puerto Rico sourced income.

In very rough numbers, a payday lender might be able to move 98% of their income out of the Federal tax system and into the more favorable Puerto Rico tax regime. This will reduce your tax rate from 40% to 4% on any Puerto Rico sourced income.

Now for the kicker: if you’re willing to move to Puerto Rico, and qualify under Act 22, you can withdraw the profits of your Act 20 company tax free.

Also, any capital gains earned on personal investments you make after becoming a resident of Puerto Rico are taxed at zero. That’s right, your personal income tax rate on capital gains is 0% as a resident of Puerto Rico.

To be considered a resident of Puerto Rico, you must spend at least 183 days a year on the island and buy a home there. Basically, you must give up your home base in the United States and move your life to Puerto Rico.

I’ll conclude with a quick note on Act 273 banks.

Those who follow my blog know that I’m a big proponent of Puerto Rico’s offshore bank license, referred to as an Act 273 bank license. This is an excellent option for those looking to setup an offshore bank that doesn’t accept US clients or doesn’t make loans.

The reason Act 273 doesn’t fit the payday loan model is because such a bank would require FDIC insurance and all manner of Federal regulations would apply. Any US bank, even a 273 bank in Puerto Rico, that takes deposits, makes loans, and accepts US clients, must apply for FDIC. This is impossible for most payday lending banks.

A credit union in Puerto Rico is not obligated to apply for FDIC. This is why I recommend the credit union combined with an Act 20 management company for a payday lender looking to redomicile their business to a low tax jurisdiction.

I hope you’ve found this post on international tax planning for payday lenders to be helpful. For more information, please contact us at info@premieroffshore.com or call us at (619) 483-17083. 

You might also find this article interesting: How to operate an investment fund tax free from Puerto Rico

The above is a very general summation of complex tax issue and the related sourcing rules. Each payday loan company will have a different taxable rate. I strongly recommend you research this matter carefully and secure an opinion letter from a top firm before making any decisions.

operate an investment fund tax free from Puerto Rico
Christian Reeves

How to operate an investment fund tax free from Puerto Rico

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The best tax deal available to hedge fund traders and investment fund managers is Puerto Rico. There’s no tax holiday available anywhere in the world that can compete with the offer from Puerto Rico. Here’s how to setup and operate an investment fund tax free from Puerto Rico.

First, let me explain why Puerto Rico can make an offer to US hedge fund managers that no one can match. It’s because Puerto Rico is a US territory with its own tax code. Any US citizen that becomes a resident of Puerto Rico, and operates a business from the island, is exempted from Federal tax laws and pays only tax in Puerto Rico.

The same is not true when you move abroad or setup an offshore company. Federal tax laws apply to any business owned by a US citizen or green card holder… unless that business is in the US territory of Puerto Rico.

The fact that Puerto Rico is exempted from Federal tax laws is codified in US Code Section 933. It states, in part:

“In the case of an individual who is a bona fide resident of Puerto Rico during the entire taxable year, income derived from sources within Puerto Rico (except amounts received for services performed as an employee of the United States or any agency thereof); but such individual shall not be allowed as a deduction from his gross income any deductions (other than the deduction under section 151, relating to personal exemptions), or any credit, properly allocable to or chargeable against amounts excluded from gross income under this paragraph.” (26 U.S. Code § 933 – Income from sources within Puerto Rico)

So, if you’re living and operating your investment fund from Puerto Rico, you’ll pay only Puerto Rico tax. A resident of Puerto Rico is someone who spends at least 183 days a year on the island and otherwise qualifies for Act 22. In addition, Puerto Rico should be your home base and the center of your financial activity.

Your fund will need to be licensed under Act 73, the Economic Incentives for the Development of Puerto Rico Act. Act 73 offers a tax holiday to any investment fund providing services from Puerto Rico to individuals and companies outside of Puerto Rico. Eligible services include investment banking or other financial services including but not limited to:

  • Asset management,
  • Alternative investment management,
  • Management of private capital investment activities,
  • Management of hedging funds or high risk funds,
  • Pools of capital management,
  • Administration of trust that serve to coovert different groups of assets into securities, and
  • Escrow account administration services.

Note that Act 73 requires you provide services from Puerto Rico to persons or businesses outside of Puerto Rico. You don’t incorporate your fund in Puerto Rico… you operate it from Puerto Rico to qualify for Act 73. Operate as a standard offshore master feeder fund in Cayman or another tax free jurisdiction. Basically, the service of operating the fund is being exported from Puerto Rico to Cayman.

Your feeder funds should be organized based on where your clients are domiciled. For example, a Delaware LLP for US investors and an offshore feeder for foreign and tax exempt investors (such as US IRAs and pension funds). You, the general partner and manager would be a resident of Puerto Rico.

Under Act 73, your profits in the fund are taxed at 4%. When those profits are transferred to you, the fund owner/manager resident in Puerto Rico, they will be tax exempt dividends. Thus, your total tax burden is 4% on your profits.

Remember that, as a resident of Puerto Rico, Federal taxes do not apply to you. Thus, you will never pay US tax on these profits. This is not tax deferral as you see offshore… this is a tax rate of 4%, plain and simple.

I should point out that these tax benefits are not meant for your US resident investors. They get their K-1s just as they normally would from your domestic feeder. These tax incentives are meant for the owners of the fund who are resident in Puerto Rico.

  • Nonresident shareholders of the fund can achieve tax deferral on Puerto Rico sourced income while resident shareholders can take distributions tax free.

Also, the 4% rate applies to Puerto Rico sourced income. It does not apply to any US effectively connected income or US source income. Funds and REITS may have US taxable income from lending or any number of other activities in the States.

Structuring and operating a fund from Puerto Rico will dramatically decrease your US taxes. It will also reduce the complexity of your tax planning. So long as you meet the requirements of Act 73, you’re clean in the eyes of the IRS.

Act 73 is only one of several tax incentives available in Puerto Rico. For example, Act 20 allows any service business relocated to the island to receive this same 4% tax rate. For more, see: Puerto Rico is the Top Jurisdiction for US Businesses.

Large funds might decide to enter Puerto Rico using the offshore banking statute, Act 273. For more on this, see: Lowest Cost Offshore Bank License is Puerto Rico. This article is focused on deposit taking banks. There is a section of 273 for International Financial Entities that is used by some investment managers.

I hope this article on how to operate a fund or investment business tax free from Puerto Rico has been helpful. For more information, or to setup a business under Act 20 or 273, please contact us at info@premieroffshore.com or call us at (619) 483-1708. We will be happy to assist you to negotiate a tax holiday with the government of Puerto Rico.

EB-5 Business
Christian Reeves

Where to start an EB-5 business

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This article is about where to start an EB-5 business. Where to set up an EB-5 visa company with 10 employees, get your US green card and passport, and pay near zero in US taxes. If you’re considering where to open an EB-5 visa business, I bet you’ve never considered this tax trick.

First, a bit on the EB-5 investors visa. With the EB-5 program, you can invest $500,000 in an approved project or start your own business and invest $1 million. That business must employ at least 10 people and operate until you get your US passport. This article is focused on entrepreneurs who wish to start their own business to immigrate to the United States.

After you setup a business, it takes about a year for your US green card to be issued (for your EB-5 application to be approved). Then you wait 5 years to gain citizenship. Once you have your US passport, you have all the rights of a natural born American… your citizenship can’t be taken away for any reason.

That is to say, you must keep your business going, and 10 employees working, for those 6 years (or a bit more). If you can do that with an investment of $1 million, great. If not, you’ll need to put in more. If you make a profit, you can take it out as a distribution… just keep the business going at all costs.

The EB-5 program has been growing quickly. Back in 2009, investments totaled $300 million. It’s increased by about 30% per year, and brought in finds of around $7 billion in 2015. Experts expect it to grow by 30% to 50% in 2017.

The largest number of investments have come from China. 8,156 visas were issued to Chinese nationals in 2015 compared to 111 visas to persons from India (the second largest group).

One reason 2017 is expected to be a record year is that the United States Citizenship and Immigration Services has proposed significant changes to the EB-5 investor visa program. They’re looking to increase the minimum from $500,000 to $1.35 million and the stand alone business amount from $1 million to $2 million. Those who file before the increase will be allowed to proceed under the lower amount.

Now on to the focus of this article, where to start an EB-5 business.

The best place to start an EB-5 visa is San Juan, Puerto Rico. Period, end of discussion. No area or city in the United States can compete with Puerto Rico when it comes to starting an EB-5 business.

The reason to set up your EB-5 business ub Puerto Rico is simple and can be stated in one word: TAXES.

Once you have your green card, and eventually your passport, you’ll be taxed on your worldwide income. That includes income earned in your home country and money made in the United States. The US IRS wants a cut of every dollar you make!

That includes capital gains and passive income. When you sell real estate, stocks, or any other capital asset, you must pay US capital gains tax on the sale. Capital gains are currently taxed 23.8% and this is expected to go down to 20% once Obamacare is eliminated.

The same goes for income from your EB-5 business. You’ll pay Federal income tax on your profits at about 35% and another 10% to your state (if you’re in New York or California). You must pay your taxes, and keep your business going for at least 6 years, to receive your passport.

The only EB-5 region of the United States that won’t tax your business income and capital gains is the territory of Puerto Rico. If structured properly, you’ll pay only 4% in corporate tax on your EB-5 profits and zero in capital gains and dividends from foreign corporations (such as those in your home country).

This is to say, an EB-5 business set up in Puerto Rico will pay 4% in corporate tax and you’ll pay zero on your foreign sourced income (profits earned outside of Puerto Rico). You can cut your US tax from 40% to 4% by setting up your EB-5 business in  Puerto Rico.

In order to combine the US EB-5 investors visa with the tax benefits of Puerto Rico, we follow these steps:

  1. Form and license an Act 20 business in Puerto Rico with a minimum of 5 employees.
  2. Apply for the EB-5 visa.
  3. Once the EB-5 is granted, hire an additional 5 employees to reach the required number of 10. Act 20 required 5 employees while the EB-5 requires 10.
  4. You immigrate to the United States using your green card.
  5. Apply for the Act 22 personal tax holiday in Puerto Rico.

Once all of these steps are complete, you’ll have an Act 20 business taxed at 4% and zero tax on your worldwide income through Act 22. You’ll also have a green card and, if you keep the business going and in compliance, a passport after 5 years.

In order to qualify for Act 22 (step 5), you must be living in Puerto Rico. Specifically, you must buy a home on the island and spend at least 183 days a year there. You can spend the rest of your days abroad or in any part of the United States.

For example, we have clients that spend 100 days a year in New York, 183 days in Puerto Rico, and the remainder (80 days) traveling.

If you travel extensively, you must be sure to spend more time in Puerto Rico than you do in the United States. For example, 160 days in Puerto Rico, 40 days in the United States, and the rest traveling abroad.

I hope you’ve found this article on where to start an EB-5 business to be helpful. Please contact me at info@premieroffshore.com or call us at (619) 483-1708 with any questions. We’ll be happy to assist you through all stages of this process.

software development
Christian Reeves

Research and Development and Intangible Property Tax Breaks in Puerto Rico

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Puerto Rico has the best tax deals available to Americans… period. No offshore jurisdiction can compete with the US territory of Puerto Rico when it comes to cutting your taxes.

This post will focus on Puerto Rico’s research and development and intangible property tax breaks. Act 73 is for those who develop licensed or patented software that may be reproduced on a commercial scale and those who license intangible property.

I’ve also written on the more traditional business tax breaks available under Act 20. Basically, if you set up a business in Puerto Rico with at least 5 employees, your corporate tax rate on Puerto Rico sourced income will be 4%. For more, see: Puerto Rico is the Top Offshore Business Jurisdiction for Americans in 2016.

I focus on the the software development and intangible property or intellectual property development components of Act 73. These are 2 of the 12 industries covered by the Act. For example, tax breaks are also available to large scale manufacturing, scientific experiments and laboratories, recycling, hydroponics, etc.

Software developed under Puerto Rico’s Act 73 must be for commercial distribution. You may license or sell it, but it must be widely available. Software developed under the Act should not be for your company’s internal use or custom work done for a particular client.

Act 73 applies to any and all forms of intangible property. Intangible property is defined as something which a person or corporation can have ownership of and can transfer ownership to another person or corporation, but which has no physical substance. For example brand identity, knowledge, and intellectual property are forms of intangible property . Copyrights, trademarks, and patents are also forms of intangible property.

It doesn’t matter how the intangible property came to be owned by the Puerto Rico company. You may have developed it on the island within the corporation, or you can buy it from a related or unrelated company.

If you do develop the intangible property in Puerto Rico, you may receive additional tax incentives. Also, developing the IP in Puerto Rico rather than the United States will avoid a taxable event and transfer pricing issue when you sell / transfer the property to the Puerto Rico company.

Tax Exemptions Under Puerto Rico’s Act 73

Once you have your IP offshore, or begin selling your software, here are the applicable tax benefits. Remember that these replace the US federal income tax rates of 35% + your state (0 to 12%). In many cases, you can exchange a 40% tax rate for 4% or less.

The base tax rate for an Act 73 business in Puerto Rico is 4%. This rate is guaranteed for 15 years from the date your company is approved.

You might be thinking, wow, a 4% corporate tax rate is just too high. “Pioneer” activities in Puerto Rico are taxed at only 1%. Pioneer businesses are typically those who create or develop intangible property on the island.

If you’re still thinking this is too high, I say come on, give me a break… and it can still go lower. If you setup your business in an approved low income area, your corporate rate will be between 0.5% and 0%. Combine this with the tax credits below and you could have a net positive tax rate.

If you’re not a pioneer, you can get to a 3% tax rate. Any business where at least 50% of the shareholders are residents of Puerto Rico, the rate is lowered from 4% to 3%. The same goes for any small to medium sized software or IP development business operated from the island (where average gross income is $10 million or less during the previous three years).

Still not convinced? You will also find a 100% tax exemption on dividend distributions and a 2% or 12% withholding tax on royalty payments to foreign entities for intangible property used in the exempt business. The lower rate includes a 12% matching tax credit for royalties paid to foreign entities, so your rate may vary depending in your situation.

When you sell the business, you’ll pay a 4% fixed income tax rate on the gain. This tax on capital gains trumps any other Puerto Rico income tax code section. The 4% rate is guaranteed under Act 73 for 15 years, so you should have an exit strategy in place prior to this term expiring.

Other tax breaks include:

  • 90% tax exemption from personal property taxes.
  • 90% tax exemption from real property taxes.
  • 90% tax exemption on municipal license taxes.
  • 100% tax exemption on municipal construction taxes.
  • 100% tax exemption on excise taxes.

Remember that this article is focused on IP and software development businesses. I do not discuss accelerated depreciation, sales and use, and other tax benefits.

Puerto Rico’s Act 73 Tax Credits

The Act provides various tax credits, including:

  • 25% tax credit on purchases of products manufactured in Puerto Rico;
  • 35% tax credit on purchases of products manufactured in Puerto Rico made from recycled materials;
  • Tax credit for job creation during the first year of operations that ranges from $1,000 per job created in an industrial area of intermediate development (as determined by the Office of Industrial Tax Exemption) to $2,500 for jobs created in an industrial area of low development. In the case of businesses established in the municipalities of Vieques and Culebra, this tax credit is $5,000 per job;
  • 50% tax credit on eligible research and development activity costs; and
  • 12% tax credit for royalties paid to foreign entities with respect to intangible property used in the exempt business.

When comparing Act 73 to Act 20, note that there is not a minimum number of employees attached to Act 73. Act 20 requires at least 5 employees. Both Acts 73 and 20 can be combined with Act 22 for a personal tax exemption.

Act 22 gives a Puerto Rico resident a 0% tax rate on capital gains and dividends. If you’re living in the United States, you will pay US tax on distributions from your Puerto Rico corporation. You are not required to take any distributions, but when you do, they will be taxed in the United States.

I hope you’ve found this article on Puerto Rico’s Act 73 research and development and intangible property tax breaks helpful. Click here for a list of my other articles on Puerto Rico’s tax deal.

For more information, and a confidential consultation on moving your business to Puerto Rico, you can reach me at info@premieroffshore.com or (619) 483-1708.  

asset protection puerto rico
Christian Reeves

Asset Protection for a Puerto Rico Act 20 Business

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Once you have your Act 20 business in Puerto Rico up and running, you need to think about protecting its retained earnings or distributed profits. Asset protection for a Puerto Act 20 business  becomes urgent because of the amount of capital held in the company tax deferred.

There are two levels of asset protection for Puerto Rico Act 20 companies. The first is retained earnings within the Puerto Rico LLC or corporation and the second is asset protection of dividends taken out under Act 22.

When you operate an Act 20 business based in Puerto Rico from your home in the United States, you get tax deferral at 4%. That is to say, if the business owner is living in the US, you can hold  Puerto Rico sourced profits in the corporation tax deferred.

You will pay 4% tax on the net profits earned from work done in Puerto Rico. This cash must stay within the Puerto Rico corporate structure to continue to be tax deferred year after year. When you distribute those profits as a dividends to the US based owner, you will pay US tax on the qualified dividend at 20% to 23.5% + your state.

If you’re operating a business in Puerto Rico under Act 20, and living in Puerto Rico while qualifying for Act 22, then you can withdraw the corporate profits from the corporation each year. This is because residents of Puerto Rico pay zero tax on dividends from an Act 20 Puerto Rican business.

When it comes to protecting the assets of your company, remember that Puerto Rico is a US jurisdiction. Any US judgement will be enforceable in Puerto Rico just as it is in any other State. As a result, you must take steps to protect your cash without changing its status as tax deferred “offshore” profits.

The best asset protection for Puerto Rico Act 20 businesses is to move your cash out of Puerto Rico and into a safe and secure bank. We have relationships with a number of banks in Switzerland, Germany and Austria that will open accounts for your Act 20 company and allow you to hold retained earnings offshore and out of reach of civil creditors.

The next level of asset protection for a Puerto Rico Act 20 company is incorporating offshore subsidiaries. This is done to put a layer of insulation between the Puerto Rico company and the assets held offshore. We can form a corporation in Panama, Cook Islands, Cayman Islands, or any other solid asset protection jurisdiction to manage your corporate capital.

In order to maintain the tax benefits of tax deferral, these offshore companies must be wholly owned subsidiaries of the Puerto Rico Act 20 company. For example, we form a Panama Corporation owned by the Puerto Rico company. This gets us access to all of the banks and asset protection benefits of Panama and allows us to maintain our tax deferral status.

For this reason, we can’t use other more advanced techniques. It would not be possible for the owner of the Act 20 business to create a Cook Island Trust and fund the trust with retained earnings. Once those profits moved from the Puerto Rico company to the Cook Island Trust, they would become taxable in the United States as a distribution.

This limitation applies only to retained earnings. Residents of Puerto Rico operating under Act 22 may use any means necessary to protect their personal after tax assets from future civil creditors. Remember that, unlike a business based offshore, once you have paid your 4% corporate tax and withdrawn the dividends tax free, this is “after tax” money. You can invest and do with it whatever you like, just as you can with money taken from a US business after paying 40% in taxes.

If you’re new to the Puerto Rico tax holiday, and would like to compare it to traditional offshore tax plans, see Puerto Rico Tax Deal vs Foreign Earned Income Exclusion and Move Your Internet Business to Cayman Islands Tax Free

One of the best asset protection systems is to have capital paid directly to a Cook Island Trust. This will maximize the asset protection afforded your dividend distribution and keep it out of the reach of any civil creditor.

We can make arrangements for the dividends to pass directly to the Trust and bypassing any risk of a civil creditor reaching them. We can also setup a subsidiary of the Puerto Rico company in the Cook Islands to facilitate this transfer and the related cash management.

Another offshore asset protection strategy for Puerto Rico Act 20 business will allow you to carry forward the tax benefits of Puerto Rico once you move away from the island and no longer qualify for Act 22.

Let’s say you’ve been operating your Act 20 business for 5 years and have been living in Puerto Rico all of this time. You’ve taken out $10 million in tax free dividends, with the only tax paid being 4% to the government of Puerto Rico.

You’ve had enough of island life, your business has run its course, and are want to return to the United States. Once you make the move, all capital gains, dividends and passive income earned on that $10 million will become taxable by the IRS and your State.

One option is to invest this money into an offshore single pay premium life insurance policy. Money held in the policy will be protected from future civil creditors as well as the US taxing authorities.

This is because capital gains earned within the US compliant offshore life insurance policy are tax deferred. You only pay US tax on the gains if you close out the policy or otherwise remove the cash. Of course, you are free to borrow against the life policy with no tax cost.

If you hold the policy until your death, then the total value will transfer to your heirs tax free (or with a step-up in basis). If you put in $10 million, and it’s grown to $20 million, you’re heirs get $20 million tax free… and the only tax you ever paid on any of that cash is the 4% to Puerto Rico. Quite an amazing tax play.

I hope you’ve found this article on asset protection for a Puerto Rico Act 20 business helpful. Please contact me at info@premieroffshore.com or call (619) 483-1708 for more information on setting up your business in Puerto Rico or on protecting your retained earnings within that structure.

E-2 Treaty Investor Visa
Christian Reeves

US E-2 Treaty Investor Visa Tax Strategy

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Moving to the US on with the E-2 Treaty Investor Visa comes with a very big hidden cost. You are by definition a US tax resident and required to pay US tax on your worldwide income AND report your foreign assets to the US government each year. Here’s how to reduce or eliminate that tax cost for the E-2 Treaty Investor Visa.

First, a few words on the E-2 treaty investor visa. This US residency program allows you to live in the United States so long as you are operating a business that employs a few American citizens. If the business shuts down, you will be asked to leave.

The E-2 treaty investor visa requires two things: 1) you must be from a treaty country, and 2) you must make an investment in the US by starting a business here. For a list of treaty countries, see the US Department of State website. I think you will be surprised with who’s in and who’s out.

The E-2 treaty investor visa is not a path to a green card nor US citizenship. It’s a residency visa that allows you and your family to live in the US while you are working here and employing a few people. Most investors start a business with about $200,000 and hire around 5 employees including the owner (you, the E-2 treaty investor).

The E-2 treaty investor visa doesn’t have a minimum investment amount nor a minimum number of employees. In my experience, businesses that are well funded through break-even with $200,000, and which will add 4 jobs to the economy (5 including the owner) are likely to be approved.

A person in the US on an E-2 treaty investor visa is expected to be running the business on a day to day basis. This is not a program for passive investors. It’s for those who want to start a small business in the US and work in that business each and every day.

  • Passive investors should go with the EB-5 Investor Visa. Here’s a tax strategy article for that program: Coming to America Tax Free with the EB-5 Visa and Puerto Rico. The EB-5 visa gives you a green card and US citizenship within 5 years but requires 10 employees and an investment of $500,000 to $1 million.

The E-2 treaty investor visa is a “temporary” residency visa that needs to be renewed every few years. Basically your case officer will check to see that the business is operating and the you are employing the agreed number of persons.

Because of its temporary status, you should have a plan to return to your home country once the business has run its course. As a practical matter, these companies can operate for decades. So, as long as the business is profitable, or you can keep it going by adding more cash, you can reside in the US. But, during the application process, we need to show a plan to return home.

E-2 Treaty Investor Visa Tax Issues

Because you are operating the business from the United States to qualify for the E-2 visa, all income earned in that corporation is US source income taxed at about 35% Federal plus your State (0% to 12%). This is to be expected when operating from the US.

What’s often not expected is US tax on your worldwide income.

Here’s an example of the E-2 visa tax trap: Let’s say you bought a house in Colombia in 1995 for $100,000. You move to the US in January of 2016 on the E-2 treaty investor visa and sell the home for $1 million in March of 2016 (yes, Colombia has an E-2 visa treaty).

You pay 10% in capital gains tax to Colombia on the sale, which is that country’s standard tax rate. In addition, you report the entire sale on your US tax return for 2016. The US capital gains rate is about 23.5% and you get a tax credit for the 10% paid to Colombia using the Foreign Tax Credit.

As a result, you owe the US Federal government 13.5% x $900,000 gain or $121,500 on the sale of your home in Colombia. If you’re living in a high tax State like New York or California, you’ll pay an additional 10.5% in capital gains. A very expensive tactical error which could have been avoided by selling the home before becoming a US tax resident.

Note: Had the capital gains tax rate in Colombia been 24% rather than 10%, you would owe nothing to the US Federal government and only paid State tax on the gain. That is to say, if the taxes paid in your home country are higher than the US rate, the Foreign Tax Credit will step in and prevent double taxation. ‘

The same tax expense will apply as long as you are in the US on the E-2 treaty investor visa program. All capital gains, interest income, income from businesses operated outside of the US, and income from any source, will be taxed in the US less any foreign taxes paid.

E-2 Treaty Investor Visa Tax Strategy

Careful tax planning is required before the E-2 visa applicant moves to the United States. Once you’re a tax resident, many planning opportunities are closed. For a high net worth individual, the tax costs of moving to the US can far outweigh the costs of starting the business and complying with the requirements of the E-2 visa.

For example, our Colombian could have sold his home before moving to the US and saved a lot of money and reporting hastle. Other possibilities are that he could have gifted his home to a family member or his heirs, sold it to an offshore trust, or otherwise disposed of it before coming to America.

And the same goes for brokerage accounts and other passive investments. There are a variety of offshore trusts, life insurance structures, and tax strategies that will allow you to manage assets for the benefit of your heirs and avoid US capital gains on any sales.

Also, special consideration should be paid to the US death tax. In certain circumstances, an E-2 visa holder is a US resident for income tax purposes but not for estate tax purposes. If someone was to die in that situation, they would be taxed in the US on all of their US assets and allowed only a $60,000 exclusion. US citizens get a $5.2 million estate tax exclusion.

US trusts and other planning tools should be considered to ensure the E-2 visa holder gets the full $5.2 million exclusion. None of us like to talk about death, but it’s an important conversation to have prior to moving into the United States.

As for an active businesses, different rules apply depending on whether the company is controlled by the US resident or whether it’s a joint venture with a nonresident partner. “Control” means ownership or control of more than 50% of the business.

If you, the E-2 visa applicant, sell or transfer half of their foreign business (not the E-2 business) to a family member who will operate it while you are in the US, you may realize significant tax savings in the US. Note that I am referring to an active partner and not a nominee director.

There is one way to enter the US on an E-2 treaty investor visa and pay zero tax to the US government. If you setup your business in the US territory of Puerto Rico, you will pay only 4% in corporate tax on the profits earned from that endeavor.

Next, if you are a resident of Puerto Rico, and spend 183 days a year on the island, you will pay zero capital gains taxes and zero tax on dividends from your Puerto Rico company.

Combine these two tax strategies together and you get a 4% tax rate on business profits and zero tax on passive income, dividends and capital gains. Compared to the 45% rate some Americans in high tax states pay, this is an amazing offer.

And, as a US territory, an E-2 visa from Puerto Rico is identical to an E-2 visa from New York or California (except for the tax rate of course). You’ll have full access to the United States and the right to come and go as you please. Travel between Puerto Rico and the United States is a domestic flight and there’s no immigration checkpoint.

The tax holiday in Puerto Rico for businesses is Act 20. The holiday for personal income and capital gains is Act 22. For more on this, see: How to Maximize the Tax Benefits of Puerto Rico

Note that my articles on Act 20 and 22 are focused on US citizens moving their businesses to Puerto Rico. We can also combine Act 20, 22, and the E-2 treaty investor visa to get you residency in the US without the tax bill.

I hope you have found this article on US E-2 Treaty Investor Visa Tax Strategy helpful. Please contact me at info@premieroffshore.com or call (619) 483-1708 for more information. I will be happy to assist you to build a business in the US or Puerto Rico and qualify for residency.

Puerto Rico Act 20
Christian Reeves

What is Puerto Rico Sourced Income for an Act 20 Business

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Here’s how to maximize the value of your Puerto Rico Act 20 business using the income sourcing rules. Maximizing Puerto Rico sourced income in an Act 20 business, and thus minimizing US sourced income, is the key to unlocking the 4% tax rate offered in Puerto Rico.

The rule is simple: only Puerto Rico sourced income can be attributed to the Act 20 business and qualifies for the 4% tax rate. Likewise, income sourced to the United States is taxable in the United States at standard rates, even if you run it through a Puerto Rico Act 20 company.

If you’re new to Puerto Rico Act 20, the basics are this: set up a business on the island that employees at least 5 people and pay only 4% in tax on your corporate profits. The balance can be held tax deferred if you live in the US or taken out as a tax free dividend if you live in Puerto Rico.

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

To compare Puerto Rico to typical offshore tax plans, see: Puerto Rico Tax Deal vs Foreign Earned Income Exclusion

For such a simple statement, the Puerto Rico income sourcing rule sure causes a lot of questions. Especially for those who want to live in the United States and operate a business based in Puerto Rico. The same goes for US companies that open divisions in Puerto Rico to get that 4% corporate tax rate on a portion of their profits.

If you move you and your business to Puerto Rico, and break all ties with the United States, all business income will be Puerto Rico sourced income. This is because all of the work to generate sales made after the move will have occurred in Puerto Rico.

Another reason all income in an Act 20 business will be Puerto Rico sourced income is the type of activities that qualify for Act 20. A qualifying business will offer services from Puerto Rico to businesses and persons outside of Puerto Rico. Only service based income will qualify for Act 20.

Service based income is profit from work done in Puerto Rico. Compensation for labor is always taxed where the work is performed. It doesn’t matter where the customer is located… only where you and your employees are when doing the work.

Note that wholesale distribution of products can qualify for Act 20. This is because you are performing the service of sourcing, manufacturing, and/or importing goods that will be sold outside of Puerto Rico.

This only applies to wholesale operations based in Puerto Rico selling to a distributor in the United States. Retail sales, such as selling online to buyers in the US, is not Act 20 income and will be fully taxed in both the United States and in Puerto Rico.

Of course, there are many types of income that could be earned in Puerto Rico. But, only service based income will qualify for Act 20 tax benefits.

Here is a list of the various types of income and where they are sourced.

Item of Income Where Income is Sourced
Salaries, wages, and other compensation for labor or personal services Where labor or services are performed. This is the heart of Puerto Rico’s Act 20 for businesses.
Pensions Contributions: Where services were performed that earned the pension
Investment earnings: Where pension trust is located
Interest Puerto Rico if you are a legal resident of the island under Act 22
Dividends Where corporation or LLC is incorporated. Dividends from an Act 20 corporation will be tax free in Puerto Rico to a resident of the territory who qualifies under Act 22.
Dividends from US states are taxable where the company is formed.
Rents Location of property
Royalties on patents, copyrights, trademarks, etc.: Where property is used. If used by the Puerto Rico company, then taxed in Puerto Rico. Special benefits can apply to intellectual property created in in Puerto Rico.
Sale of business inventory—purchased Where sold. If you sell a physical good (inventory) in to the United States, you have US sourced income. For this reason, all Puerto Rico Act 20 businesses must offer a SERVICE and not sell inventory.
Sale of business inventory—produced Allocation if produced and sold in different locations
Sale of real estate Taxed where the property is located
Sale of personal property Seller’s tax home. Personal property includes such things as cars, trucks, money, stocks, bonds, furniture, clothing, bank accounts, money market funds, certificates of deposit, jewels, art, antiques, pensions, insurance, etc.

Above, I gave you the example of the perfect client – someone who moves herself and her business to Puerto Rico, breaking all ties with the United States. Such a person will maximize Puerto Rico sourced income and thus minimize her total taxes.

For more on this topic, see: How to Maximize the Tax Benefits of Puerto Rico

If you want to live in the United States and operate through a Puerto Rico company, determining Puerto Rico sourced income becomes much more difficult and contentious.

The rule is simple enough: Any value added in Puerto Rico is Puerto Rico sourced income and any value added in the United States is US sourced income. So, if you’re selling an online service for $50, and $25 of the value of that service comes from your 5 employees in Puerto Rico, then half your net profits can be attributed to Puerto Rico.

When you’re attributing income between the US with its 35% Federal + state taxes and Puerto Rico at 4%, you will want to maximize the perceived value of the work done in Puerto Rico.

For small businesses, you can look at the amount of hours spent in Puerto Rico vs the US. You can also estimate the value of work done in Puerto Rico by how much you would be willing to pay an independent and unrelated firm to provide those services to your US company.

When income sourcing between Puerto Rico and the US is a major issue ($1 million or more), then you need to hire a professional. Many large accounting firms have groups specialized in producing transfer pricing studies between the territory and the US. They will create a pricing model that will stand up to IRS scrutiny and remove any risk should you be audited.

The cost for a transfer pricing study will vary widely the the firm selected and the type of business you are operating.  I’ve seen quotes of $6,000 to $65,000 by big name firms in California and New York, as smaller providers in Puerto Rico.

I hope this information on what is Puerto Rico sourced income for an Act 20 business has been helpful. For more information, please contact me at info@premieroffshore.com or call (619) 483-1708. I will be happy to help you structure your business in Puerto Rico.

resident of puerto rico
Christian Reeves

Who is a Resident of Puerto Rico for US Tax Purposes

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If you are considering moving you and a business to Puerto Rico for the tax benefits, be aware that the definition of “resident of Puerto Rico” is a complex one.  The US IRS has created special forms and definitions as to who is and who is not a resident of Puerto Rico for US tax purposes.

If you’re reading this and saying to yourself, “what tax benefits is he talking about?” Let me begin by outlining them here.

First, you can move a business, or part of a business, from the United States to the US territory of Puerto Rico. So long as that business employees at least 5 residents of Puerto Rico, it will pay only 4% in corporate income tax. For more on how to get this 4% rate on Puerto Rico sourced income guaranteed for 20 years, see: Blood in the Streets Offshore Tax Planning.

Second, you can move yourself out of the United States and into Puerto Rico. By doing this you will be exempt from US and Puerto Rico tax on capital gains. You will also pay zero tax on dividends from your Puerto Rico corporation. This zero percent tax rate on capital gains applies to assets acquired after you move to Puerto Rico. For more, please read my article titled How to Maximize the Tax Benefits of Puerto Rico.

Puerto Rico is the only country or territory that can cut your capital gains and dividends tax. When you move offshore, you still pay US tax on capital gains and dividends. The only tax savings for expat Americans is the Foreign Tax Credit. For more on this see: Puerto Rico Tax Deal vs Foreign Earned Income Exclusion.

Third, foreign persons can immigrate to the United States by starting businesses in Puerto Rico and get these same tax benefits. Both the EB-5 business investor visa and the E-2 treaty investor visa are available from Puerto Rico. For more, see: Coming to America Tax Free with the EB-5 Visa and Puerto Rico.

Now that you’re caught up, let’s talk about who is a resident of Puerto Rico for US tax purposes.

IRS Publications 1321 and 570 define a resident of Puerto Rico as someone who:

  1. Meets the presence test by spending at least 183 days a year in Puerto Rico or qualifying under one of the other tests,
  2. Does not have a tax home outside of Puerto Rico, and
  3. Does not have a closer connection to the United States or to a foreign country than to Puerto Rico.

The first of these criteria for being considered a resident of Puerto Rico for US tax purposes is known as the physical presence test. The easiest way to satisfy this test by spending at least 183 days a calendar year on the island.

If you can’t hit 183 days (for example, you are starting your residency in November), then you need to qualify for Puerto Rico residency using the 3 year test. You are a tax resident of Puerto Rico if you spend a minimum of 60 days in Puerto Rico during each tax year and at least 549 days over 3 consecutive years.

Once you establish residency in Puerto Rico, and break ties with the United States, there are other tests you can use to ensure you are classified as a tax resident of Puerto Rico in future years.  

You can qualify as a resident of Puerto Rico if any of the following is true:

  1. You were present in the United States for no more than 90 days during the tax year.
  2. You had earned income in the United States of less than $3,000 and spent more days in Puerto Rico than you did in the United States during the tax year.
    1. Earned income is pay for personal services performed such as wages, salaries, or professional Fees. This amount does not include capital gains.
  3. You had no significant connection to the United States during the tax year.

Important Note: If you are moving to Puerto Rico from the United States, you must first qualify under the 183 day test or the 3 year test described above. Then, once residency is established, you can use these less restrictive tests.

Foreign Persons: If you are not a US resident or citizen, and are applying for an E-2 or EB-5 visa from Puerto Rico, you can use any of these tests to prove you are a tax resident of Puerto Rico. For example, so long as you are in the US less than 90 days of the year, it doesn’t matter how much time you spend in Puerto Rico.

The key to the Puerto Rico tax deal is to understand who is a tax resident of Puerto Rico. To determine who is a resident of Puerto Rico, we must consider what it means to be “present” in Puerto Rico and the United States.

You are considered to be present in the United States on any day that you are physically
in the US at any time during the day. So, if you make a quick trip to Miami to buy a new laptop, that is a day in the United States.

Connecting through a United States airport to a foreign country is usually not a day in the US. If you don’t leave the airport, you are not in the United States. If your flight is delayed, and you are in the airport for more than 24 hours, it will be counted as a day in America.

And, beginning this year (with tax year 2016), some days spent in a foreign country will be considered days in Puerto Rico for tax purposes. Under this new rule, you can count up to 30 days abroad as days in Puerto Rico. For more information, see IRS publication 570, page 4. Note that this 30 day bonus does not count for the 60 day rule when you are using the 3 year calculation described above.

You must also have more connections to Puerto Rico than the United States to qualify as a tax resident of Puerto Rico.You will be considered to have a closer connection to Puerto Rico than the United States if you have developed more contacts with the Puerto Rico and broken your ties to America.

The facts and circumstances around your move to Puerto Rico will be reviewed carefully if you’re spending a lot of time in the US, your wife and children are living in the US, etc. If you have significant tax free income in Puerto Rico, you should consider your US connections carefully. I expect audits on this issue to increase significantly in the coming years.

Ties to the US vs Puerto Rico for residency purposes include, but are not limited to:

  • Where is your permanent residence – note that Puerto Rico’s Act 22 requires you to buy a home on the island and that this must become your permanent home.
  • Where your spouse and children are living.
    • Note that US states will also try to tax your Puerto Rico income if your spouse is living outside of Puerto Rico. For example, if your wife is living in California, that state will consider half of your income CA source income to him or her under its community property rules.
  • The location of personal belongings, such as automobiles, furniture, clothing, and jewelry owned by you and your family.
  • The social, political, cultural, professional, or religious organizations that you belong. You should be cutting relationships with the US and joining clubs in Puerto Rico.
  • Where most of your banking activities take place. I suggest banking for a Puerto Rico company should be in Puerto Rico or offshore. We can open accounts in Switzerland elsewhere for Puerto Rico companies.
  • Where you have a driver’s license and where you vote. Both of these should be in Puerto Rico.
  • The location of charitable organizations to which you contribute.
  • Where you list as your residency in official government and legal documents. For example, the address you list on contracts, loan applications, and government documents such as Form W­8BEN or Form W­9, Request for Taxpayer Identification Number and Certification.

In an audit, your connections to Puerto Rico will be compared to your connections with the United States and foreign countries. They will also review your bank statements, airline history, and credit / debit cards to determine how many days you spent in the United States vs Puerto Rico.

When structured carefully, incorporating and operating from Puerto Rico will cut your US tax rate from 40% to 4% overnight and eliminate tax on capital gains for assets purchased after you move to the island. The key to this tax plan is proving you are a resident of Puerto Rico. Remember that the burden of proof is on you.

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

I hope you have found this article on who is a resident of Puerto Rico for US tax purposes to be helpful. Please contact me at info@premieroffshore.com or call (619) 483-1708 for more information on how to qualify for the tax benefits offered by Puerto Rico.

eb-5 visa
Christian Reeves

Coming to America Tax Free with the EB-5 Visa and Puerto Rico

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If you are thinking about coming to America, get ready for high taxes on your worldwide income. In this article, I will explain how to become a US citizen using the EB-5 Visa and Puerto Rico to pay near zero US taxes.

The US taxes its citizens, as well as green card holders and residents, on 100% of the money they make from all sources around the world. If you are living in the United States, America wants her share… and that share is often over 40% of your total earnings.

If you are operating a successful business from Hong Kong, and you move to the US, all profits of that Hong Kong business become taxable. If you move to America and then sell your home in Singapore, you will pay US tax on the capital gains realized.

There is one, and only one, way to get US citizenship without paying these taxes. That is to come to America tax free with the EB-5 Visa from Puerto Rico.

Because Puerto Rico is a US territory, US Federal immigration laws apply but US tax laws do not. The tax laws of Puerto Rico supersede the US tax rules for residents of the island. Because of this hybrid legal system, you can immigrate to the United States through Puerto Rico using the EB-5 visa and qualify to live tax free under Puerto Rico’s tax laws.

  • Resident: A “resident” of Puerto Rico is someone who spends at least 183 days a year on the island. Travel between Puerto Rico and the US is a domestic flight with no immigration checkpoint.  As an EB-5 visa holder, you may spend the rest of your time (180 days a year) in any part of the US you choose.

Once the EB-5 visa process is complete, you will be a US citizen with all of the rights and privileges of someone born in the US and who pays 40%+ in taxes. You will have a US passport and the right to live and work anywhere in the country.

The same is true of children born in Puerto Rico. Anyone born in Puerto Rico is a US citizen at birth, just as they are if born in a State. The only difference between Puerto Rico and the US in this case are its tax laws.

Here is a description of the EB-5 Investor Visa, a summary Puerto Rico’s tax laws, and how to maximize the benefits of both to become a US citizen tax free.

What is the EB-5 Investor Visa

The EB-5 investor visa is a path to US citizenship. Unlike many other US immigration programs, the EB-5 visa has no waiting lists, quotas, or lottery. The terms are simple – make the investment, wait five years, and become a US citizen by going through the naturalization process. If you follow the steps, citizenship and a US passport are guaranteed.

The investment required for the EB-5 investor visa is far higher than any other program. You must invest in a business that creates at least 10 new jobs and maintains those jobs for about 6 years (the total time to complete your citizenship process).

The amount of money you are required to invest will depend on where the business is located. Most cities in the US require an investment of $1 million. If you set up the business in a distressed region of the country, the investment is reduced to $500,000.

Basically, all of Puerto Rico is designated as a distressed region for the EB-5 investor visa. Any business created on the island will qualify for the discounted investment amount of $500,000.

Of course, you will need to keep the business operating and profitable for at least 6 years with 10 employees. If you can do that with $500,000 in capital, great. If it requires more, then you will need to invest more.

What is Puerto Rico Act 20 and 22

When the EB-5 investor visa is combined with the tax benefits of Puerto Rico, you may be able to immigrate to the United States, obtain a green card, and finally citizenship with a US passport, all without paying a dollar in tax.

In order to accomplish this feat, we combine the EB-5 Investor Visa with Act 20 and Act 22 in Puerto Rico. I will briefly summarize them here.

Act 20 is the business tax holiday that gets you a 4% corporate tax rate on any profits earned by your Puerto Rico company. The requirements are simple:

  1. The minimum number of employees required for Act 20 business is 5. However, to qualify for EB-5, you need 10. So, we setup an Act 20 company with 10 employees.
  2. The company must be providing a service from Puerto Rico to persons or companies outside of Puerto Rico. Internet marketing, call centers, import / export, sales teams, and any online business are good candidates for Act 20. Retail businesses, franchises and restaurants do not qualify for Act 20. They do qualify for the EB-5 visa, but not for the tax deal.

For more detailed information on Puerto Rico’s Act 20, see: How to Maximize the Benefits of Puerto Rico Act 20

Act 22 is the personal tax holiday. A legal resident of Puerto Rico, who purchases a home, spends at least 183 days a year on the island, and signs up for Act 22, will pay zero capital gains tax and zero tax on dividends from his or her Puerto Rico company.

When you combine Act 20 with 22, you get a corporate tax rate on profits of 4% and zero tax on distributions of dividends from those profits. The only tax paid is the 4% corporate rate.

I also note that salaries in Puerto Rico are lower than anywhere in the US and that they might be going lower. Minimum wage is $7.25 and a recent House bill exempts Puerto Rico from increases in the Federal minimum wage for the next 5 years.

For more information on recent legislation, see: Good News from Congress for Act 20 Business in Puerto Rico

How to Combine the EB-5 Investor Visa with Puerto Rico Act 20 and 22

In order to combine the immigration benefits of the EB-5 investor visa with the tax benefits of Puerto Rico, we can setup an internet business or other service based company for you on the island.  That company will have 10 employees and qualify under Act 20 and EB-5.

For example, the business might provide content, design, advertising, and SEO services to persons and companies outside of Puerto Rico. Alternatively, the business might import goods from China and sell them to a distributor in the US (may operate as a wholesaler but not a retailer).

For a complete list of services that qualify for Act 20, please send an email to info@premieroffshore.com.

You may fund the business with $500,000 to $1 million in capital. Remember that the business must be self sufficient for at least 6 years and that your investment should cover costs until break-even. Your business plan must show a stable and profitable business will be operating from the United States with at least 10 employees.  

As I said above, profits of this business will be taxed at 4%. Dividends to you, a resident of Puerto Rico, will be tax free.

What if you Don’t Want to Live in Puerto Rico?

You are not required to live in Puerto Rico to qualify for Act 20 or for the EB-5. Only Act 22, the personal tax holiday, requires you be a resident of the island.

If you immigrated to the US with an EB-5 investor visa, and setup an Act 20 company, but did not live in Puerto Rico, you would pay 4% in tax on Puerto Rico sourced income. You could then hold net profits from Puerto Rico sourced income in the corporation tax deferred.

If you are living in the US, you would pay US tax on any dividends or distributions from that Puerto Rico company. You would also pay US tax on income from your investments outside of the US.

So, Act 20 will get you tax deferral in your EB-5 business. Act 22 gets you tax free distributions from that EB-5 business. Act 22 also cuts your US tax rate to zero on capital gains on assets acquired after your move to Puerto Rico.

How to Use an E-2 Visa to Expedite an EB-5 Visa Application

The EB-5 visa process is a long one. Remember that it comes with guaranteed US citizenship and green card.  As such, the process is demanding.

It will take well over a year to have your EB-5 visa approved. If getting into the United States as quickly as possible is important to you, then you might apply under the E-2 visa program first.

We can setup an Act 20 business with an E-2 and get your temporary visa in 30 to 90 days. This gets you and your family into the country.

You then operate the business with 5 employees under E-2 until your EB-5 is approved. When you get your green card under the EB-5, you hire 5 more employees for a total of 10. This is because the E-2 and Act 20 require 5 employees. When you are ready to upgrade to the EB-5, you can add 5 more for a total of ten employees in Puerto Rico.

Note that the E-2 visa is only available to those from treaty countries and has different requirements from the EB-5. For more information, see E-2 Treaty Investor Visa

How I can Help

We can assist you from start to finish in setting up an EB-5 and Act 20 compliant business in Puerto Rico. This includes writing the business plan, financial analysis, and everything related to applying for the EB-5.

Next we will incorporate your business, lease office space, hire and train employees, and get the business operating. This will include an Act 20 contract with Puerto Rico that will guarantee your tax holiday for 20 years.

We provide a turnkey solution in Puerto Rico that will maximize the benefits of the EB-5 and tax benefits of Puerto Rico. For more information, you can reach me directly at info@premieroffshore.com or by calling (619) 483-1708.

act 20 business in puerto rico
Christian Reeves

Good News from Congress for Act 20 Business in Puerto Rico

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Good news out of Washington for Act 20 businesses in Puerto Rico. It appears that the US has decided to allow Puerto Rico to reorganize its debts in some manner… not formal bankruptcy, but a restructuring with court oversight.

The rules would be similar to Chapter 9 for municipal bankruptcies, with a few sections more favorable to creditors. The House was careful to avoid the term “bankruptcy,” and to avoid the stigma of a bailout. No cash is being sent to help Puerto Rico, only new rules.

The bill has two main provisions:

  • It creates a seven-member fiscal oversight board with members appointed by the president and congressional leaders that will have to approve Puerto Rico’s future fiscal plans.
  • It allows the island to legally pay less than 100 percent of what is owed on old debts.

This appears to be a one time deal. Had Puerto Rico been granted bankruptcy protection, they could have used it for future debt. Puerto Rico gets special consideration one time and then returns to its status as a Territory, along with the US Virgin Islands and Guam.

This is big because it means that Puerto Rico won’t lose its special tax status. It also means that the island won’t be torn asunder by its $70 billion debt, an amount approximately equal to 68% of Puerto Rico’s gross domestic product. The island defaulted on $2 billion of these obligations May 1, 2016 and says it’s unable to pay upcoming installments.

The reason Congress must act is that Puerto Rico is barred from the US bankruptcy courts. Because it’s not a State, Puerto Rico can’t declare bankruptcy like so many US cities and municipalities have done. Without intervention from Washington, the only option would have been years of court battles and uncertainty.

For an example of what could have been, consider Argentina. They defaulted in 2001 and 2010 on their bond obligations. The case was fought in the US courts for over a decade, finally being resolved in 2015. For many of those years Argentina was unable to borrow from the world markets, which put its economy in turmoil.

We were beginning to see signs of this in Puerto Rico. On May 4, 2016, Puerto Rico bondholders sued the Development Bank to stop payments of salaries and other distributions. They sought to freeze all transactions on the Island until they got paid… essentially holding the Puerto Rico economy hostage until their demands were met.  Exactly what the vulture funds did to Argentina.

With decisive action from the US Congress, these issues will be resolved in an orderly manner. Bondholders will take a haircut – and probably a substantial one to the tune of 70% – but business will go on  and money will flow.

This offers stability to Act 20 companies who hold bank accounts on the island. When you have a disorderly, hostile, and litigious situation, you are concerned about the reliability of local banks. Will the government seize funds in those accounts as they did in Cyprus? You never know  and don’t want to put your money at risk by keeping substantial sums in Puerto Rico banks.

Fortunately for Americans operating in Puerto Rico, your Puerto Rico company can open a bank account anywhere in the United States. You can take your PR company documents to your local Wells Fargo or Bank of America and open an account in a few minutes – something that is not possible with an offshore corporation.

But, now that the banking risk has passed, I suggest clients hold their operating capital and retained earnings in Puerto Rico. This minimizes your contact with the United States and can be a positive factor in an audit.  I am now recommended Scotiabank in Puerto Rico as the best business bank available to Act 20 companies.

This is all good news for Act 20 companies. As is the fact that Act 20 and 22 were not mentioned in the House bill. There is no attempt to put an end to these tax holidays. In fact, the US Treasury suggested that Puerto Rico should be required to do more to increase investment in the region, a suggestion that the House failed to include.

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

Even better news is the minimum wage moratorium included in the House bill. While US tax laws don’t apply to Puerto Rico, Federal minimum wage does. This is why the minimum salary in Puerto Rico is currently $7.25.

While Federal minimum wage is, by definition, the lowest wage allowed in the nation, it appears to be going up under Mr. Obama.  Any increase of the Federal wage is sure to be far lower than the 13 states and cities, including California, New York and Washington, D.C., who have passed $15 per hour minimum wage laws to be phased in over the next few years.

The moratorium contained in the House bill exempts Puerto Rico from increases in the Federal minimum wage for the next 5 years. So, no matter what the US does with salaries, they will be locked in at $7.25 for the next 5 years in Puerto Rico.

  • Technically, the oversight board (not the government of Puerto Rico) has the ability to lower its wage below the Federal minimum wage. Don’t expect it to drop below $7.25 without riots in the streets.

The bill also exempts Puerto Rico from Obama’s overtime rules. Combine this with a fixed minimum way, and you, the Act 20 business owner, see some cost savings and permanence in the House bill.

Add to this the fact that Act 20 comes with a 20 year guarantee on its 4% tax rate, and you have a uniquely low cost and stable situation in Puerto Rico.

If you’ve read this far in the article and have no idea what Act 20 is, I think you for your perseverance. Allow me to briefly summarize the offer here.

Act 20 is a statute in Puerto Rico that allows you to operate a business on the island with a minimum of 5 employees and pay only 4% in tax on corporate profits on Puerto Rico sourced income.

That business should be providing a service from Puerto Rico to persons and/or companies outside of Puerto Rico. Good candidates are internet marketing, loan servicing, import of goods for sale in the US, sales, website design, and just about any other portable service business.

Net profits of the business can be held in the corporation tax deferred. If the owner of the company moves to the island and qualifies under Act 22, he or she may withdraw profits as tax free dividends.

If your net profits are $500,000 or more, and you need 5 employees, you will find that the tax deal offered in Puerto Rico is far superior to anything available offshore. If your profit is less than $500,000, then you might get a better deal in a zero tax offshore jurisdiction like Cayman. For an article on this topic see Puerto Rico Tax Deal vs Foreign Earned Income Exclusion.

If you can’t use 5 employees in Puerto Rico, then stick with Panama, Cayman Islands and other jurisdictions. The purpose of Act 20 is to increase employment on the Island, so the minimum number is non-negotiable. For more information on Cayman, see Move Your Internet Business to Cayman Islands Tax Free.

I hope you have found this article helpful. For more information on moving your business to Puerto Rico, please contact me at info@premieroffshore.com or call (619) 483-1708. I will be happy to structure your business and negotiate an Act 20 license with the government of Puerto Rico on your behalf.

tax benefits of puerto rico
Christian Reeves

How to Maximize the Tax Benefits of Puerto Rico

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The tax benefits of Puerto Rico for Americans are incredible. Puerto Rico is by far the best deal available if you’re willing to move you and your business to the island for a few years. Even if you move only the business, while you remain in the United States, the offer is hard to pass up. Here’s how to maximize the tax benefits of Puerto Rico.

First, here’s a summary of the tax benefits  of Puerto Rico.

Act 20 is the business tax holiday offered by cash strapped Puerto Rico. Under Act 20, a service business with 5 employees on the island will pay only 4% tax on Puerto Rico sourced income. Good candidates include businesses (or divisions of a business) which provide sales and support, internet marketing, graphics design, product research, financial advisory, loan servicing, website and network design and support, call centers, and almost any other “portable” business.

The catch is that you must have 5 full time employees in Puerto Rico. These workers can be at any salary or skill level, but they must be working full time and creating Puerto Rico sourced income. The purpose of Act 20 from the government’s perspective is to offer training and jobs to its people.

It’s possible for the owner of the Puerto Rico business to live in the United States and operate the business remotely. In that case, you (that owner) will draw a salary at fair market value from the Puerto Rico corporation and pay tax in the US on your income.  Only profits attributable to the workers in Puerto Rico is Puerto Rico sourced income.

If the owner of the business is living in the US, you get to defer US tax on the profits of your Puerto Rico company (less the 4% tax paid to Puerto Rico). When you take the money out of the company you will pay US tax on the dividend. If you are a resident of Puerto Rico, you won’t pay tax on that dividend.

Act 22 is the personal tax holiday. If you move to Puerto Rico, become a legal resident, buy a home there, and sign up for Act 22, all dividends from a Puerto Rico corporation to a resident of Puerto Rico are tax free. In addition, you will pay zero tax on capital gains. That’s right, the tax rate on assets acquired after you move to Puerto Rico will be zero.

Those are the basics and there are a number of additional Puerto Rico tax holiday programs that are beyond the scope of this article. For example, Act 73 covers IP development and holding companies. Using this statute, you can get to a tax rate of 4 to 8% on income from IP. Also, a number of tax credits are available.

For an article on this, which briefly compares Act 73 to Act 20, see PWC Summary of Puerto Rico Tax Credits and Incentives. Also, here’s an article about Microsoft using Puerto Rico for IP  (from 2013) and another on Puerto Rico and the Pharmaceutical Industry.

Then there’s Act 273 that allows you to setup an “offshore” bank in Puerto Rico and pay only 4% in tax on profits. This is by far the lowest cost offshore banking license available. For more information, see Puerto Rico Offshore Banking License.

This is all to say that Puerto Rico is working hard to become the offshore center for American entrepreneurs. If your business provides a service or is portable, you should give Puerto Rico a look.  

Here’s how to maximize the tax benefits of Puerto Rico.

To truly maximize the tax benefits of Puerto Rico, you need to move you and your business to the island. If you can combine Act 20 with Act 22, you will have a tax deal unmatched by any other jurisdiction.

You will pay only 4% on your business profits (Puerto Rico sourced active business income) under Act 20. Then you will then withdraw those profits as a tax free dividend at the end of the year under Act 22.

So, Act 20 gets you tax deferred profits held in a Puerto Rico corporation. Act 22 allows you to take those profits out of the corporation tax free.

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

Above I said that the tax benefits of Puerto Rico are unmatched by any other jurisdiction. The reason for this is simple: even fiscal paradises like Cayman and Panama with zero tax rates can’t come close to duplicating the benefits for Americans available in Puerto Rico.

Yes, I know that a 0% tax rate in Panama and Cayman Island is less than 4%. But, because Puerto Rico is a US territory, it can offer a deal on dividend distributions that foreign countries can can’t match.

So long as you are a US citizen you will pay US taxes… unless you live in Puerto Rico.

An American living in Cayman or Panama will pay US taxes on all capital gains and dividends received. They will also pay US tax on any salary earned over the Foreign Earned Income Exclusion Amount of $101,300. They won’t pay tax to Panama or Cayman, but they will owe the IRS big time if they make more than $100,000 a year.

That same person living in Puerto Rico will pay tax on any salary earned, 4% on business profits, and then be eligible to withdraw those retained earnings from the corporation as a tax free dividend.

Let’s say you have a business with net profits of $2 million. You can set up in Cayman or Panama and take out a salary of $100,000 per year tax free. The rest of the money will stay in the corporation tax deferred. When you withdraw the $1.9 million, you will pay US tax at about 40% (Fed and State), or $760,000. You get tax deferral by operating offshore, but, one of these days, you must pay the piper.

If that same business were operated from Puerto Rico under Act 20 and Act 22, you would pay PR tax on your salary of $100,000 at about 30%. Then 4% corporate tax on $1.9 million for a total of $106,000. Your net effective rate is 5.6% and goes down towards 4% as income increases.

To sweeten the pot further, Puerto Rico’s Act 20 comes with a 20 year guarantee. Considering how the political winds are blowing against offshore tax structures, a guarantee from a US territory is very valuable.

As I said above, Puerto Rico requires 5 full time employees. If you don’t need that many people, or your profits are closer to $100,000 than $1 million, then a tax free jurisdiction offshore might be more efficient. Here’s an article on Moving Your Internet Business to Cayman Islands Tax Free.

I’ll close by considering how you might carry the tax benefits of Puerto Rico forward once you leave the island.

Ok, you’ve setup your business with 5 employees in Puerto Rico under Act 20. You also took the plunge and moved to Puerto Rico under Act 22. A few years have passed and corporation has $5 million dollars in retained earnings.

You’ve had enough of island life and this business venture has run its course. It’s time to stop the carnival, take your winnings, and return to the US of A.

As I said above, you can take out that $5 million in retained earnings tax free. This is because you are living in Puerto Rico, qualify under Act 22, and the dividends are coming from a Puerto Rico company. The only tax paid was 4% to Puerto Rico for the right to operate your business from their jurisdiction.

You can now return to the US with your $5 million in hand with no taxes due to the IRS. The money is free and clear.

Of course, once you move back to America, giving up your Act 22 status, any interest or capital gains you earn from this $5 million in savings will be taxable by the Feds and your State.

There is one way to carry forward the benefits of Puerto Rico…

Invest some of that $5 million in to a single pay premium offshore life policy before you abandon Puerto Rico.

By moving your savings earned under Act 22 in Puerto Rico in to a tax deferred single pay premium life insurance policy you can continue to defer US tax on any capital gains generated by that money. Basically, you can create a multi-million dollar tax deferred savings account or a massive defined benefit plan without any of the retirement account rules.

Your cash will grow tax deferred inside the life insurance policy, just as it did in Puerto Rico. If you need to use some of that money you can borrow against the policy. Of course, your focus should be on building a tax preferred investment portfolio.

Should something happen to you, this life insurance policy will pass on to your heirs tax free (with a step-up in basis). In this way, it’s possible for you to provide a family legacy without ever paying more than 4% in US taxes.

I hope you have found this article on maximizing the tax benefits of Puerto Rico helpful. Please note that we at PremierOffshore.com are not investment advisers nor do we sell insurance products. I will be happy to introduce you to an expert in this area.

For more information on moving you and/or your business to Puerto Rico, please contact me at info@premieroffshore.com or call (619) 483-1708. I will be happy to work with you to build a tax efficient operation in Puerto Rico.

Puerto Rico Bank License
Christian Reeves

Lowest Cost Offshore Bank License is Puerto Rico

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Want to setup an offshore bank? Looking for an international banking license? Obtaining an offshore bank license and negotiating offshore correspondent accounts have become extremely difficult in every jurisdiction except one. The lowest cost offshore bank license is Puerto Rico. Yes, the US territory of Puerto Rico is the best island in the Caribbean to negotiate an offshore bank license.

Puerto Rico is the lowest cost offshore bank license available anywhere in the world. And, it comes with the ability to get US correspondent banking relationships more efficiently than other offshore bank licensing jurisdictions.

Let me first clarify two terms.

When I write about an offshore bank license, I mean a banking license that allows you to do all types of international banking business. The only limitation is that you can’t accept clients from the issuing jurisdiction. So, an offshore bank licensed in Puerto Rico can accept clients from anywhere in the world (including the United States) except Puerto Rico. Likewise, an offshore bank licensed in Panama can accept clients from anywhere but Panama.

And, when I say Puerto Rico is the lowest cost offshore bank license jurisdiction, I mean the lowest set up, capital, and operating cost by a long shot. I mean that an offshore bank license in Puerto Rico can be had for a fraction of the cost and capital of any other jurisdiction.

To give you an idea of the cost difference, it would require 10 times the capital of Puerto Rico to set up in the country of Belize. The cost of operating in Cayman would be 17 times higher than the cost of operating in Puerto Rico.

  • The annual fee for the international banking license in PR is $5,000. This compares to $85,365.85 in Cayman. The cost of labor and all other services are dramatically higher in Cayman than Puerto Rico.

Puerto Rico has been aggressive in courting financial service, hedge fund, and banking companies since 2013. Their Act 20 which any US business to move to Puerto Rico and pay only 4% in tax. They also approved Act 22 which cuts the capital gains rate to zero for any American who moves to Puerto Rico and spends at least 183 days per year on the island (becoming a legal and tax resident of Puerto Rico).

An offshore bank licensed in Puerto Rico under Act 273 receives the same  4% tax rate. This tax holiday is guaranteed for 15 years. Also, full property and municipal license tax exemptions, 6% income tax rate on distributions to PR resident shareholders and a 0% tax rate on distributions to non-PR resident shareholders, are available to offshore banks licensed in Puerto Rico.

  • This article focuses on Act 273 and not Act 20  and 22. When doing your research, note the distinction between 273 for banks and 20 / 22. For example, Act 273 guarantees you a 4% rate for 15 years where Act 20 guarantees you the same for 20 years. Act 273 requires 4 employees where the latest version of Act 20 requires 5 employees.

Here’s a summary of the offshore bank license options in Puerto Rico:

Puerto Rico Full International Banking License – Requires capital of at least $300,000 to held by the central bank or in a bond (as stated in the Act: $300,000 financial guarantees acceptable to OCFI). Authorized shares are to be at least $5 million. Of this, only $250,000 must be paid-in.

Puerto Rico Restricted International Banking License – Capital held by the central bank or in a bond of $300,000 (as stated in the Act: $300,000 financial guarantees acceptable to OCFI). The authorized capital stock or the proposed capital, as the case may be, shall not be less than $500,000, out of which at least $50,000 shall be paid in full at the time the license is issued. This can also be referred to as a captive license.

In most cases, a full international banking license is required. Of the many banks licensed in Puerto Rico, only 1 has a restricted license.

A full international license in Puerto Rico allows you to provide financial services to other international financial institutions or to persons outside of Puerto Rico.  “Financial services” are any service which is generally accepted in the banking industry of the United States and Puerto Rico including:

  1. Accept deposits and borrow money from non-residents of PR.
  2. Accept deposits and borrow money from certain government institutions
  3. Place deposits in any PR bank and foreign banks organized in PR.
  4. Make loans to non-residents of PR. Issue letters of credit to non-residents or PR.
  5. Issue letters of credit for export activities to both PR resident and non-residents.
  6. Discount money orders and bills of exchange to non-PR residents.
  7. Invest in securities and stocks as well as PR government bonds exempt from tax
  8. Carry transactions in any currency and gold or silver and foreign currency trade.
  9. Underwrite and trade notes and debt instruments issued by a non-PR residents
  10. Engage in trade financing of import  and export of raw materials and finished goods.
  11. Act as a fiduciary, executor, administrator, registrar of stocks and bonds, custodian, trustee, agent and any other fiduciary capacity with non-residents of PR after obtaining a special permit from the government.
  12. Acquire and lease personal property on behalf of non-PR residents.
  13. Buy and sell security outside of PR on behalf of non-PR residents.
  14. Act as a clearinghouse of instruments of foreign persons
  15. Organize and manage international financial entities not related to residents of PR.
  16. Lend or guarantee loans originated in some governmental institutions.
  17. Purchase sub-standards non-performing loans from a PR bank.
  18. Establish branches outside PR in the continental USA or in other foreign country.
  19. Provide the following services:
    • Asset management.
    • Management of alternative investments.
    • Management of private capital.
    • Management of hedge funds
    • Management of pools of capital
    • Administration of trusts
    • Management of escrow  funds for non-residents of PR.

An offshore bank licensed in Puerto Rico gives you access to the US market and a wide range of corresponding banks.  In addition to the usual suspects, corresponding bank options include:

  • Scotiabank *
  • FirstBank Puerto Rico
  • Banco Popular de Puerto Rico
  • Banco Popular North America (US Bank at https://www.popularcommunitybank.com/)
  • Centennial Bank (a US bank in FL https://www.my100bank.com/)

    * Scotia has a partnership deal with Bank of America that can be leveraged.

Puerto Rico is the second largest offshore banking jurisdiction in the Caribbean after Cayman Islands. The Cayman Island has decades more history, 40 of the top 50 banks in the world, and a total of 196 banks licensed as of the end of June 2015.

This compares to about 50 offshore banks operating from Puerto Rico. That’s more than all of the other Caribbean islands combined… not counting Cayman, of course.

So, next time you hear about offshore banking jurisdiction “hotbed” like Belize with 6 banks, all combined holding less capital than one bank in Puerto Rico, you will have some sense of scale.  

Here is a partial list of the active banks in PR.

  • Pfizer International Bank – Int. License
  • Santander Overseas Bank – Int Lic.
  • Bank of Nova Scotia – General
  • Chase Manhattan – Int Lic
  • Citibank – General, but operate as an international bank
  • Popular Bank – General & Int. Lic ( publicly traded, operated in PR for 120 years, 52 yrs in US)
  • Puerto Rico International – Int. Lic
  • Metro America Int – Int Lic
  • Amtrade International Bank of Georgia – General
  • Charles Schwab Bank – General
  • BNC International – Int Lic
  • FirstBank International – Int Lic
  • Santander Overseas – Int Lic
  • WesternBank – Int Lic
  • OBT International – Int Lic
  • SB Pharmco (owned by Glaxo) – Int Lic
  • Bank of Southeast Europe – Int. Lic.
  • First Bankcorp – Int Lic
  • Oriental Bank – This is one of the larger local banks
  • VS International – Int Lic
  • Face Bank – Int Lic
  • BST – Int Lic
  • BBO Private – Int Lic
  • Paramount International – Int Lic
  • Bancredito Int – Int Lic
  • Italbank – Int Lic
  • Activo – Int Lic
  • ARCA – Int Lic
  • Nodus – Int Lic
  • Andcapital – Int Lic
  • Elite International – Inc Lic

For more information, please review my articles on offshore bank licensing and operation. I’ve been working in offshore banking for over a decade, so there are a few older posts floating around the web. My recent articles on the topic are:

I hope you have found this review of offshore bank licenses in Puerto Rico helpful. If you would like to setup a licensed bank in Puerto Rico, please contact me for a confidential consultation at info@premieroffshore.com or call (619) 483-1708.

Puerto Rico Tax Deal
Christian Reeves

Puerto Rico Tax Deal vs Foreign Earned Income Exclusion

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The Puerto Rico tax deal is the inverse of the Foreign Earned Income Exclusion. Here’s why:

  • With a Puerto Rico tax contract you can live in the US, your first $100,000 or so in salary is taxable, with rest deferred at 4%.
  • If you live offshore and qualify for the FEIE, your first $101,300 is tax free in 2016 and the rest is taxable in the US as earned.

The FEIE is intended for those living abroad and operating a business that earns $100,000 to $200,000 max. The Puerto Rico deal is intended for those who live in the US or PR and net $400,000 or more.

This article will compare and contrast the Foreign Earned Income Exclusion with the Puerto Rico Tax Deal. There are still deals out there for Americans if you know how to work the system.

Here’s how the Foreign Earned Income Exclusion works:

If you live abroad and work for someone else, or have your own business, the Foreign Earned Income Exclusion is the best tool in your expat toolbox. The FEIE allows you to exclude up to $101,300 in salary in 2016 from your US taxes.

This salary can come from your own offshore corporation or from your employer. So long as the company is located outside of the US, and you qualify for the Exclusion, you’re golden.

If a husband and wife are both working in the business, they can each earn $101,300 in salary tax free for a total of $202,600. Take out more, and the excess is taxable in the US at about 40%.

Likewise, if you work for someone else, the amount you earn over the FEIE is taxable in the United States. If you work for yourself, and hold earnings in an offshore corporation, you can usually defer tax on these retained earnings.

To qualify for the Foreign Earned Income Exclusion, you must be 1) outside of the US for 330 out of any 365 days, or 2) be a legal resident of a foreign country, file taxes in that country, and travel to the US only occasionally for work or vacation.

  • What qualifies you a resident of a foreign country is a complex matter. For a more detailed article on the FEIE, see: Foreign Earned Income Exclusion Basics
  • The above assumes you are living in a low or no tax country and does not consider the Foreign Tax Credit.

The Foreign Earned Income Exclusion is an excellent tax tool for those willing to live and work outside of the US. If you wish to spend more than a couple months a year in the US, or to take out a salary of more than $101,300, the FEIE might not be your best bet.

Here’s how the Puerto Rico Act 20 tax deal works:

If you incorporate your business in Puerto Rico, you can qualify for an 4% corporate tax rate. That is to say, you can live in the US, operate your business through a Puerto Rico company, and get tax deferral at 4%.

In order to qualify, you must hire at least 5 full time employees in Puerto Rico and provide a service from the island to businesses or individuals outside of PR. Popular examples are affiliate marketers, website developers, investment funds, phone and online support providers, and any other business that is portable or operates via the internet. Really, any company that can put a division in Puerto Rico can benefit from Act 20.

  • If you don’t need 5 employees, we might create a joint venture that allows partners to share employees in one corporation that benefits the group.
  • 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

If you, the business owner and operator, live in the US, you must take a “fair market” salary that’s taxable and reported on Form W-2. This might be around $100,000, but the exact amount will depend on many factors. The remaining net profits of the income attributable to the Puerto Rican company will be taxed at 4%.

This is basically the inverse of the Foreign Earned Income Exclusion. With a Puerto Rico contract, you pay tax on your fair market salary and defer the balance at 4%. With the FEIE, the first $100,000 (or $200,000 if married and both are working in the business) is tax free and the excess is taxable at ordinary rates.

I note that the Act 20 offer is a better deal than the multinationals have in Europe. Most of them are paying about 12.5% for tax deferral. Even at 12.5%, their tax contracts are under constant attack by the US and the EU. If you want to out maneuver Apple, and get an offshore tax deal blessed by the US government, move your business to Puerto Rico!

So, what’s different about Puerto Rico? As a US territory, it’s tax code trumps the Federal Code… or, more properly put, PR’s tax code is on equal footing with the US Federal code.

This is not the case in a foreign jurisdiction. So long as you hold a US passport, you’re subject to US taxation. The IRS doesn’t give a damn about the laws of your new country. They want their cut.

The US code is clear when it comes to Puerto Rico: Income earned in a Puerto Rican corporation, or as a resident of Puerto Rico, is exempt from US taxation. See: 26 U.S. Code § 933 – Income from sources within Puerto Rico.  

The code as applied to foreign jurisdictions is incredibly complex. Try reading up Controlled Foreign Corporations, Passive Foreign Investment Company rules, and Sub Part F of the code.

I suggest a Puerto Rico tax contract is best suited to firms with at least $400,000 in net profits that can benefit from (or, at least, break-even on) three employees in Puerto Rico. 

In contrast, the FEIE is great for those who wish to live outside of the United States and earn a profit of of $100,000 to $200,000 from a business. Additional tax deferral is available to business owners who live abroad operate through an offshore corporation.

I hope you have found this article on the Foreign Earned Income Exclusion vs. the Puerto Rico Tax Deal helpful. For more information, please send an email to info@premieroffshore.com or give me a call at (619) 483-1708. 

Offshore Tax Planning Puerto Rico
Christian Reeves

Blood in the Streets Offshore Tax Planning

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You’ve heard the adage of investing when there’s blood in the streets… to buy when all hell is breaking loose and the market is at bottom. Well, now is your opportunity for some offshore tax planning while there’s blood in the streets. An offshore tax planning opportunity that will cut your corporate rate to 4%!

  • Baron Rothschild, an eighteenth century British nobleman, is reputed to have said, “The time to buy is when there is blood in the streets.” Those words are so true today in Puerto Rico and their offshore tax planning deal.

If you have not been reading the papers lately, PR is broke and the Federal Govt doesn’t want to bail them out. Specifically, the GOP says no way to a Puerto Rico bailout.

So the Feds have allowed Puerto Rico to create a Tax Incentive Strategy to try and bail out PR by offering a 20 year deal where companies only pay 4% on their retained earnings.

Yes you read that correctly only 4% – that is lower than what many very large corporations are presently paying to Ireland 12.5%. It’s the best offshore tax planning deal available to US citizens.

If you’re a small to medium sized internet business, or one that can spin off a division like marketing, call center, or similar group, here’s your chance to pay only 4% on your profits. Here’s how to make an offshore tax planning deal with a desperate government to defer tax offshore like the Apples and Googles of the world.

In fact, you can negotiate a offshore tax planning deal far better than the big guys. Most of their tax contracts in Ireland and Luxembourg are at around 12.5%.

The US government is offering you an offshore tax planning contract that allows you to live in the United States and cut your corporate tax to 4%. No need to move abroad, uproot your family, etc. It’s akin to the offshore tax planning tool generally referred to as a corporate inversion. These inversions have become all the rage where the business operations are outside of the U.S. but the headquarters and business executives remain here.

Here’s how this unique offshore tax planning opportunity works:

The U.S. territory of Puerto Rico is broke. The island is essentially bankrupt – owing creditors over $70 billion with no chance of repayment and a US bailout seems unlikely. But, as territory, PR is prohibited from declaring bankruptcy. As of December 1, 2015, they are out of cash.

Puerto Rico’s laws are a mixture of US Federal statutes and local ordinances. And that is where your opportunity exist: Income earned in a Puerto Rican corporation or as a resident of Puerto Rico is exempt from U.S. taxation. See: 26 U.S. Code § 933 – Income from sources within Puerto Rico.  

In order increase employment, motivate investment, and benefit from it’s unique position in the US code, the island offers two tax deals:

1. Start a business in Puerto Rico with at least 5 employees, apply for an Act 20 tax contract, and receive a 20 year agreement with a corporate tax rate of 4%.

or

2. Move to Puerto Rico, be approved for an Act 22 contract, and pay $0 capital gains tax on assets purchased after you become a resident and sold during your time on the island.  

Act 22 requires you to live in Puerto Rico for at least 6 months of the year. Act 20 does not. In this article I’ll focus on the Act 20 offshore tax planning contract for business owners.

If you don’t require 5 employees, we can create a joint venture company that will share costs and benefit the group. For example, if 2 partners come together in a “captive” internet marketing firm, they could license one business under Act 20. Different classes of stock and separate bank accounts could protect each partner’s interests.

To qualify under Act 20, your business should be providing a service in Puerto Rico to corporations or individuals outside of Puerto Rico. Internet marketers, website developers, investment advisors, hedge funds, call centers, and any other type of “portable” business are good candidates.

  • No matter your industry, if you can spin-off a division into a Puerto Rico corporation, you can benefit from an Act 20 contract. For example, I recently assisted a manufacturing company setup a web marketing group on the island.

Next, you need to hire at least 3 full time employees in Puerto Rico. These workers must be earning the minimum wage (currently $7.25) or better, be W-2 employees and not independent contractors, come into the office each day, and work at least 40 hours per week (full time).

Then, you, as the owner and operator of the business, must draw a fair market salary from the Puerto Rican company. This salary is taxable in the U.S. because it’s earned from work you did while living in the States.

The remainder of the income you earn in Puerto Rico is taxed at 4%. In other words, net profits in excess of your salary are taxed at 4%. You may retain these profits in your Puerto Rican corporation indefinitely tax deferred… an absolutely amazing offshore tax planning deal!

This gets you to a similar place as the Microsofts of the world… low cost offshore tax deferral. In fact, you’ve out maneuvered these giants by securing a deal at 4% rather than the typical 12.5%.

Puerto Rican profits must be left in the corporation, or can be moved to an offshore subsidiary. They can be used to grow the business and generally managed as corporate capital. You may not borrow against them or otherwise personally benefit from these retained earnings. They belong to the corporation until taken out as a distribution or dividend.

Now, here’s where things get really interesting in the Puerto Rico offshore tax plan:

With a typical offshore tax plan, profits are locked in the corporation. When taken as a dividend or distribution, they come out at ordinary income rates. Lower qualified dividend rates do not apply to distributions from a foreign corporation.  

Puerto Rico provides a path to tax free dividends not available in other offshore tax plans. If you decide to move to Puerto Rico after a few years of operating the business, and qualify as a resident under Act 22, dividends from your Puerto Rican corporation will be tax free.

Of course, you’re not required to move to Puerto Rico to cut your corporate tax rate to 4%. You may leave the money in the company tax deferred, take it out years or decades later and pay the tax, or continue to use it to grow the business.You can hold the Act 22 card in your back pocket should you decide to play it.

We can assist you to implement the Puerto Rico offshore tax plan in two ways.

  1. We can setup your corporate entity, negotiate an Act 20 contract in Puerto Rico, and write a custom a game plan / opinion letter on how to operate your Puerto Rican business in compliance with PR and US tax laws.

or

  1.   Provide a turnkey solution in Puerto Rico with office space, employees, etc. to maximize the benefits of your offshore tax plan.

Our turnkey solution includes analysis, tax and business planning, tax opinion letter with “action plan,” Act 20 application and negotiation, Act 20 license, and opening a PR bank account. It also includes sourcing and negotiating an office lease, hiring 3 qualified employees, 12 months of employee management, and 12 months of tax and business consulting service.

  • We will locate and hire 5 employees to your specifications. You can interview them by Skype or in person. We will also replace these employees if they resign or are not pulling their weight, manage their time, and handle all office and employment matters.
  • Our turnkey solution is intended to cover all first year costs related to setting up shop in Puerto Rico except salary, payroll taxes, and office rent.

I hope you have found this article on the offshore tax planning benefits of Puerto Rico helpful. For more information, please send an email to info@premieroffshore.com or give me a call at (619) 483-1708. 

For more information, you might read my post comparing the Puerto Rico tax deal with the Foreign Earned Income Exclusion.

Puerto Rico Tax deal
Christian Reeves

Puerto Rico Tax Deals for Corporations

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Thinking about moving your business offshore? If you are a US citizen, and your profits exceed $400,000, I guarantee Puerto Rico has a better deal for you.

As I reported last month, a US citizen can move to Puerto Rico and pay zero capital gains tax on his or her passive income and investments. That’s right, no US Federal or State tax on capital gains tax from real estate, stocks, and/or other investments acquired after you move to and become a resident of Puerto Rico.

This time around, I am here to tell you that Puerto Rico has a deal for business owners and entrepreneurs…a deal you can’t find anywhere else in the world unless you turn in your US passport.

Puerto Rico is offering business owners a tax contract similar to the one Switzerland and Russia negotiates with high net worth Europeans. Yes, Snowden’s Russia is a tax haven. For example, the actor Gérard Depardieu, angry over a plan by the French government to raise taxes to 75 percent for the wealthy, accepted a Russian passport from President Vladimir V. Putin. Russia has a flat tax rate of 13 percent.

A tax contract with Puerto Rico will allow you to cut your total (worldwide) tax rate down to 10% or lower without the need for any complex planning or structuring. Once you enter in to a contract, it can’t be modified or revoked by the government until 2036. Of course, you can leave Puerto Rico, thereby opting out of the tax deal, at any time. You can also spend a few months a year in the United States.

To receive these benefits, you are required to move yourself and your business to Puerto Rico, spend at least 183 days a year on the island, become a legal resident of this territory, and enter in to a tax contract with the government. Once you have relocated, you have opted out of the US Federal and State tax systems and in to the Puerto Rico tax code…which trumps the Federal code.

  • As a US territory, Puerto Rico’s tax code takes precedent over the US Federal tax code. While US Expats are bound by Federal tax law, American’s in Puerto Rico need only follow local tax rules.

Such a contract is the inverse of the Foreign Earned Income Exclusion (FEIE) and allows you to pay all of your taxes now at a reduced rate without the need to lock earnings in to an offshore corporation, captive insurance company, or some other complex tax deferral mechanism.

Let me explain: If you qualify for the FEIE you can earn up to $97,600 in salary free of Federal income tax in 2013. If a husband and wife are both working in the business, they might take out $195,200 combined. That is a major tax break which allows a properly structured offshore business earning $195,200 to be completely free of US tax.

Well, what if your business earns significantly more than the FEIE amount? You can usually retain excess profits in to your corporation and thereby defer US tax until you distribute these profits as a dividend. Capital gains, interest income and other returns derived from these retained earnings are taxable (may not be deferred) and dividends are taxed as ordinary income.

While the FEIE works great for those with business profits near the exclusion amount, it is not so wonderful for those earning significantly more. If you net $1 million a year and want to take that money as income now, then you are stuck paying US tax on the amount over the FEIE at 39.6% in 2013. This comes to about $318,000 in Federal income tax assuming a husband and wife both qualified for the FEIE and no State tax is due (($1m – $195,000) x .396) = $318,000. If only one person qualifies for the FEIE, your tax bill will be about $357,350 (($1m – $97,600) x .396) = $357,350.

In Puerto Rico, you pay income tax on the first $250,000 (using a graduated rate of up to 33%) and 4% on income over $250,000. There is no need to retain earnings in an offshore corporation and no issues related to tax deferral. You are paying tax each year as the money is earned…at a lower rate compared to those of us in the States, but no deferral or retainer earnings to worry about.

For example, on $1 million of business profits, your tax bill in Puerto Rico will be about $105,000, significantly less than the same US owned business operating offshore using the FEIE. This equates to an effective tax rate of about 10% ((.30 x 250,000) + (.04 x 750,000)) = $105,000 or 10%.

As your net profits increase, the benefit of Puerto Rico’s tax system increase and your effective tax rate drops. For example, on net profits of $3 million, your tax is approximately $185,000, for an effective tax rate of 6.2% ((.30 x 250,000) + (.04 x 2,750,000)) = $185,000 or 6.2%.

As stated above, if your net profit is anywhere near the FEIE amount, then living and working abroad and operating through a foreign corporation will give you the best tax deal. If your profits are between $100,000 and $500,000, then you might need to run the numbers to determine whether Puerto Rico or the FEIE provides the better option. Such an analysis would take in to account how much you are willing to retain in to an offshore corporation, how long you can lock those profits away, and the deductions you have available on your US personal income tax return (itemized deductions such as mortgage interest, property tax, charitable contributions, etc.). I have not considered these issues in the examples provided.

What about those of us earning less than $1 million from our business? In Puerto Rico, you will be required to take salary of 1/3 of your net profits, up to a maximum salary of $250,000, and pay 4% on the remaining 2/3. So, if you earn $300,000 in total profits, your tax would be about $38,000 or 12.6% ((.3 x $100,000) + (.04 x $200,000)) = $38,000 or 12.6%.

If that same $300,000 was earned as salary by a US citizen using the FEIE and an offshore corporation, the first $97,600 would be tax free and the remaining $202,400 would be taxed at around 31% in 2013. This means your US Federal income tax will be about $62,644 (($300,000 – $97,600) x .31) = $62,644 for an effective rate of about 20%.

If a husband and wife are both working in that business with a net of $300,000, the FEIE amount becomes $195,200, and the balance is taxed at approximately 29%, for a total tax of $30,392. Therefore, at this income level it will be more efficient for a single person to operate in Puerto Rico and a married couple to be based offshore (($300,000 – $195,200) x .29) = $30,392 or about 10%.

When you combine these business tax incentives with the personal tax benefits of zero capital gains, you have a very strong contender in Puerto Rico. It is a deal that no country in the world can offer a US citizen.

So, why is Puerto Rico doing this? This island territory is in its 8th year of recession and is desperate to attract some wealth and prosperity. 4% tax on business profits is better than no business and no tax revenues.

How bad is the economy? Puerto Rican bonds are sold in the US with yield above 10%, which is extremely high. So high that Puerto Rico was forced to cut its offering this week the island’s Government Development Bank announced it would cut bond sales to between $500 million and $1.2 billion for the rest of the year. This yield compares to California municipal bonds at a current high of 3.13%, up from 2.17% at the end of 2012.

As the territory struggles with $70 billion in public debt and a 13.9% unemployment rate, higher than any U.S. state, it is searching for new ways to bring in capital, employment and investment. The government hopes to cut its $820 million budget deficit in half by 2015.

But, there is hope for Puerto Rico. While the US is completely out of control, Puerto Rico’s deficit has been reduced from $2.4 billion over the last couple of years. The island’s five-year economic plan calls for creating more than 90,000 jobs that would add as much as $7 billion to the economy by 2016, and another 130,000 jobs and as much as $12 billion of growth by 2018.

While these tough economic times might prevent a firm from building a large factory, or committing millions to the Island, they should not deter a high net-worth investor and business owner from picking up and moving. These tax incentives are guaranteed by the government until 2036 and can’t be withdrawn or amended. Even a law change would have no affect because your earnings are not locked in to the corporation, as they are with retained earnings in excess of the FEIE.

For more information, here are some links to other sites.

Links to Outside Resources

If you are considering moving your business  to Puerto Rico or abroad, please contact me for a confidential consultation. You can reach me directly at info@premieroffshore.com or (619) 483-1708.

Puerto Rico Pic
Christian Reeves

Move to Puerto Rico and Pay Zero Capital Gains Tax

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Are you tired of paying in to the Obamanation? Is most of your income from capital gains taxed at 24% plus whatever your State grabs? You can eliminate tax on interest, dividends and capital gains by moving to Puerto Rico…immediately and legally.

Those of you who have been following me on  Live and Invest Overseas and PremierOffshore.com for a while know I am focused on showing business owners how they can move their operations offshore to eliminate or defer US tax using the Foreign Earned Income Exclusion. While this model works great for the entrepreneur or small business owner, it provides little benefit for retirees or those who make a living trading stocks and investing.

While the US is taxing and redistributing wealth as quick as it can, Puerto Rico has seized upon this opportunity (an Obamatunity if you will) to entice high net worth individuals to move to their happy islands. Puerto Rico has completely eliminated tax on capital gains, interest and dividends. Yes, that’s right, once you become a resident of PR, you can legally pay zero capital gains tax. No more Federal tax, no complex planning, and no fear of the US government finding your offshore account.

I am not talking about only cutting out your State tax…I am saying you can jettison ALL United States tax on interest, dividends, and capital gains. This is possible because Puerto Rico, while a commonwealth of the United States, is treated as separate for tax purposes. By moving to PR, you can opt out of the Federal tax system and in to the PR tax program. This is because, under the Internal Revenue Code (IRC), capital gains are sourced to your place of residence and the IRC has one section detailing Federal law and another specifying laws of the territories.

Retired? Puerto Rico does not tax social security or unemployment income.

I would like to note here that moving to a foreign country with a low capital gains tax rate does not reduce your effective tax rate on passive investments. This can only be accomplished by relocating to a tax friendly US territory. As a US citizen, you are taxed by the US IRC on your worldwide income no matter where you live. When you move abroad, you remain under the jurisdiction of the Federal Government. So, if your country of residence taxes your gains at 5%, and the US at 20%, then you pay 5% to your country and 15% to Uncle Sam for the right to carry his passport. But, when you move to Puerto Rico, you fall under a unique section of the US tax code for the Commonwealth which trumps Federal law. You are opting out of the IRC Federal system and opting in to the IRC commonwealth system.

In other words, once a U.S. citizen becomes a resident of Puerto Rico, any income derived by that person from sources within Puerto Rico is excluded from U.S. Federal income tax, and taxed under the Puerto Rican income tax code. However, any income derived from outside of PR remains taxed under the Federal law.

So, capital assets (such as land, stocks, bonds, etc.) acquired after moving to PR are tax free. As for property acquired prior to becoming a resident, special provisions can result in a 10% long term rate from the day you qualify and a 5% tax rate applies to property acquired prior to becoming a resident and held for at least 10 years thereafter. See details below.

Why is Puerto Rico Doing This?

While I could pontificate on how PR sees the error of our ways and is a bastion of freedom and capitalism, the truth is probably less grandiose. Puerto Rico’s per-capita income is around $15,200, half that of Mississippi, the poorest state in the nation. Puerto Rico has been battered by several years of recession and its unemployment rate is over 13 percent, well above the national rate, and its economy remains in a funk. Moody’s Investors Services rates the island’s debt one notch above junk status; and in a recent research note, Breckenridge Capital Advisors said the island was “flirting with insolvency.” The island has the weakest pension fund in America and by some estimates could run out of money as soon as 2014.

I also note that these tax breaks apply only to new residents and not those currently living in Puerto Rico. More specifically, they are available to individuals who have not been residents of Puerto Rico within in the last 15 years and who become residents of Puerto Rico on or before December 31, 2035. As such, PR is obviously attempting to bring in new money to revitalize their fledgling economy.

Qualifications

To qualify, you must become a tax resident of Puerto Rico, reside in PR for at least 183 days a year, and file an application for the exemption with the local tax authority. Once approved, the decree establishes the terms of the exemption and has the effect and force of a contract during the entire benefit period. Considering the weakness of the PR economy, and how frequently tax laws change, this contract status is a major benefit.

Incentives

The tax incentives available to individuals are as follows:

  • 100% tax exemption on interest and dividend income earned after the nonresident individual becomes a resident of Puerto Rico; also applies with respect to alternative minimum tax (AMT) up to tax year 2036
  • 100% tax exemption on interest, financial charges, dividends or distributive share on partnership income from international banking entities in Puerto Rico including AMT
  • 100% tax exemption on long-term capital gains realized and recognized after becoming a resident of Puerto Rico but before January 1, 2036
  • If not realized and recognized within the incentive timeframe, regular individual long-term capital gain applies (currently at 10%)
  • Applies to appreciation of property after becoming a resident of Puerto Rico
  • 5% tax on long-term capital gains realized before becoming a resident of Puerto Rico, but recognized after 10 years of becoming a resident of Puerto Rico, as long as recognized before January 1, 2036
  • This 5% long-term capital gain tax only applies to the portion of gain that relates to the appreciation of the property while the individual lived outside Puerto Rico
  • If the long-term capital gain is not recognized within these time periods, applicable individual long-term capital gain rate would apply on any Puerto Rico-source long-term capital gain

Puerto Rico also has great incentives for business owners, based around the tax breaks on dividend payments, which I will detail in a future article. If you are considering living and working abroad, give Puerto Rico a chance. Because of its status as a US territory, these islands can offer tax incentives to US citizens that are not available anywhere else in the world.