Tax incentives to Promote the Relocation of Individual Investors to Puerto Rico

ACT 22 Of 2012

The Act to Promote the Relocation of Individual Investors, Act No. 22 of January 17, 2012, as amended, (“Act No. 22 of 2012”) looks to promote the relocation of investors that are nonresidents of Puerto Rico by providing Puerto Rico income tax exemption on all passive income earned or accrued after becoming Puerto Rico bona fide residents, as well as capital gains in certain cases.

I. Eligible Individuals

Nonresident individuals that establish their tax residency in Puerto Rico before the taxable year ending on December 31, 2035, may benefit from Act No. 22 of 2012. In order to be eligible for the incentives, individuals could not have been Puerto Rico residents for tax purposes during the 15 years prior to Act No. 22 of ­2012’s effective date. In other words, an individual will not be eligible for the incentives provided under Act No. 22 of 2012 if he/she was a Puerto Rico resident at any time during the period from January 16, 1997 to January 16, 2012.

II. Residency Requirements

For Puerto Rico tax purposes, an individual who is physically present in Puerto Rico for a period of 183 days during the taxable year will be presumed to be a Puerto Rico resident. However, special attention should be given to Section 937 of the U.S. Tax Code, which states that, in general, to be considered a bona fide resident of Puerto Rico, the following test must be met:

  • The individual is present in Puerto Rico at least 183 days (the “Presence Test”)
  • The individual has no tax home outside of Puerto Rico (the “Tax Home Test”)
  • The individual has no close connection to the U.S. or a foreign country (the “Closer Connection Test”).

III. Incentives

A) Interest and Dividend Income

Pursuant to Act No. 22 of 2012, interest and dividend income from all sources that is earned by the individual after becoming a Puerto Rico resident is exempt from Puerto Rico income taxes (including the alternative minimum tax). This total exemption also applies to interests, finance charges, dividends and partnership benefits received from international banking entities duly authorized pursuant to the Banking Center Regulatory Act, Act No. 52 of August 11, 1989, as amended.

B) Capital Gains

  • Pre-­Domicile Long-­Term Capital Gains: During the first 10 years of residency in Puerto Rico, Act No. 22-­‐ 2012 states that a 10% income tax rate will apply on long-­‐term capital gains accrued and unrealized that are attributable to the increase in value of the securities before the individual becomes a Puerto Rico resident. However, after said period, a reduced 5% income tax rate will apply to such long term capital gains that are recognized before January 1st, 2036.

  • After-­Domicile Short and Long Term Capital Gains: Both short and long term capital gains accrued after the individual becomes a Puerto Rico resident and that are recognized before January 1st, 2036, will be fully exempt from Puerto Rico income taxes. In the case of securities acquired by the individual before becoming a Puerto Rico resident, the total exemption applies only to the extent that the short or long term capital gain is attributable to the increase in value of the securities after the individual becomes a Puerto Rico resident.

VI. Expiration and Effective Date for Incentives

All incentives offered by Act No. 22 of 2012 will expire on December 31, 2035. Act No. 22 is effective as of January 17, 2012.

 


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