LIVESTREAM- Are Tax Weary Americans Moving to Puerto Rico? (24th January 2023)

Voiceover:

This podcast channel is about you. Successful international entrepreneurs, successful expats, successful investors, sponsored by HTJ.tax

Derren Joseph:

All right. And we are recording and we are live, welcome to HTJ.tax firm, where we try to create these videos that demystify the sometimes confusing world of cross-border tax and compliance. And to do that today, we have a very special guest all the way from sunny Puerto Rico, and that’s Giancarlo. Welcome, please introduce yourself.

Giancarlo Esquilín-Lebrón:

Thank you for the invitation. I’m happy to be here. I know both of you, we are some kind of tax nerds, so probably I can elaborate, from my side in Puerto Rico. So, I would like to know more about your practice and how we do from a tax perspective and benefits in Puerto Rico compared with what you do in Dubai and Singapore. So let’s talk about this on some minutes.

Derren Joseph:

Well, wonderful. And to those who may be watching us on whatever platform you’re on, we invited you guys to submit questions in advance. Some of you did. And for that we are grateful. We’re gonna go through them in the order, in which we received it. If you guys have any questions, feel free to type in the box below and time permitting, we will get to them in the order, in which we receive them. But do bear in mind why we, why we may be task consultants. We are not your task consultants. So we’re having a general conversation, general principles. Nothing we are saying here should be construed as advice.

If you want actionable intelligence telling me to your unique situation, you need to retain a firm or a team that, that you can instruct and that would guide you accordingly. So general conversation, general principles, this is not advice. And with that in mind, let’s jump into the first question. Okay. Like, I mean, this is very generic, very general. So what is the main attractiveness of, obviously Puerto.?Rico is a beautiful territory, a beautiful island, right? But from a US jurisdiction, what is the main benefit of moving to Puerto Rico from the US.

Giancarlo Esquilín-Lebrón:

Yeah. Well, let me give you some political status. What, what means in Puerto Rico Puerto Rico is a territory of the United States, but being a territory, we have some particular exemptions, but okay, Puerto Ricans are born and raised or US citizens by first. So that means that, you know, you pay taxes to the US based on citizenship. But there is a particular situation in the case of Puerto Rico bonafide residents, right?

And Puerto Rico one five residents is particularly or provided by section 9 37 of the US tax code. And that basically allows Puerto Rico bonafide residents to not pay us taxes on Puerto Rico source income. But it’s Puerto Rico source income only based on section 9 33. So those are the main two sections that allows Puerto Rico residents to not pay us taxes.

But that doesn’t mean that if you generate income from other sources, interest dividends if you have a rental home in the US, that means US source income. So even if you live in Puerto Rico, you may be subject to US or state income taxes. Okay. So basically one of the principal benefits of moving in or living in Puerto Rico for, for income taxes is principally those tax benefits that the Puerto Rico government has been offering for decades.

Now, there is an evolution from manufacturing activities from pharma airplanes, systems, and services. And since 2012, basically, Puerto connected Act 20 and 22, which is now Act 60. But basically, those laws basically promote the location of individuals and businesses to Puerto Rico under the premise that they will not pay US tax.

But principally the benefit is that if you live in Puerto Rico if you comply with the bonafide resident test, that is a home test, present test and closer connection, you will be able to exclude from US gross income, the Puerto Rico gross income. But basically, that’s it. And under the tax benefits, it’s principally associated in the case of the individual Investors Act or Act 60.

Now it, it’s basically passive income. So it doesn’t mean that you move to Puerto Rico and you will not pay more US taxes. So it’s only a matter of interest dividends and certain capital gain from Puerto Puerto sources. But you may be exempt at Pthe uerto Puerto level from dividends and interest in income taxes. But if the interests and dividends are paid by a US entity or foreign entity, they are still foreign sources, right?

Income to the US. So it’s a matter of making sure that the analysis is completed accordingly with the law taking into consideration that this is only an exemption at Puerto Rico level. So Puerto Rico may say this is exempt here, but the US may still charge some taxes on it. So it’s, it’s kind of interesting. But principally, and in Puerto Rico, commonly Puerto Rico residents don’t pay US taxes if they are principally W2 persons professional services, et cetera.

So it’s kind of interesting, but again, it’s a territory. We are US citizens, we commonly don’t pay US taxes to the extent that the income that we generate or the people generate in Puerto Rico are percent right. So Puerto Rico sources income based on the US tax law. So it’s like permission provided by the US tax code to generate some kind of income without paying US tax.

Derren Joseph:

Okay. Understood. So this is, as you mentioned, it’s at the equivalent of the federal level. You get tax relief from federal tax. If you have states source income from one of the other states of territories, it’ll be subject to tax as it normally would be. And you also mentioned it’s particularly attractive to those who enjoy passive income, interest dividends, and capital gains. But if you have earned income, so for example, let’s say your consultant and you sit in Puerto Rico, that income, that earned income would also be tax-free.

Giancarlo Esquilín-Lebrón

Yeah, well, basically the earned income and the service income part is not free nor tax-free. There are tax benefits for that. And basically t, hat’s another disposition that was previously under Act 20. Now under Act 60. And this is the Export Service Act or the export tax benefits that basically allows a company or an individual to relocate to Puerto Rico or open a new company in Puerto Rico and export services from Puerto Rico to any part of the world.

So if they provide the services while working in Puerto Rico that you can say, Hey, if you provided the services in Puerto Rico, that’s Puerto Rico source income as described by the Puerto Rico tax code and the US tax code, that will be subject to a preferential tax rate of 4% tax. That is a flat tax of 4% tax. And if it is a company and the income that is generated is subject to the 4% tax dividends paid by that income from that corporation are fully exempt.

So that basically means that certainly if there is an owner-employee, you need to analyze if they need to have a reasonable compensation that he needs, needs to pay their social security Medicare taxes, some kind of income taxes on his board. But certainly, dividends pay from return earnings accumulated from the export service activity are exempt at the individual level. So one of the best strategies is certainly to, if the owner is a Puerto Puerto, one of our residents and the corporation that provides the services is a Puerto Rico T entity.

Dividends paid by that corporation are treated like Puerto Rico source income under Theis of the I r s. You will pay, or the company will pay 4% tax dividends received by the owner will be fully exempt at Puerto Rico federal level. And the owner may pay some kind of income taxes on his daily due income and any other income that he may generate. But in Puerto Rico common only, you’ll find a combination of individuals and Investors as owners of the export service activity as well.

So they may have dividends and interest from other sources that will be exempt in Puerto Rico probably interest and dividends paid by US corporations or in investor’s accounts in the US or any other part of the world be to federal taxes. But in the case of capital gains, they may be exempt in Puerto Rico. And in the case of capital gain, it’s very important to take into consideration what the I r S says is that the capital gain has principally two rules applicable to Puerto Rico residents.

If they are private equity. It depends on the holding period, right? If, if you move to Puerto Rico and you hold that investment for 10 years before moving in, that doesn’t mean that the gain that you realize after you just move will be Puerto, Rico Sarco, right? They always say, hey, take a look back and let’s calculate based on your holding period. So that’s one of the principal errors that occur. And the other side is the marketable security that is based on full market value as of the movement to Puerto Rico.

So those individual Investors decide, hey if my investments were down at the time that I move, I may have a loss or minimum gain in the US. And any agent after moving to Puerto Rico is the one that will be treated as Puerto Rico sourcing. So it’s a matter of analyzing correctly each taxpayer and what they have on their pockets to see how it benefits each one of them. Yeah.

Derren Joseph:

Okay. So if I get it, so you have a company that’s properly domiciled in Puerto Rico and the nature of its business is export, so it doesn’t have domestic source income, then the corporate tax will be 4%, right?

Giancarlo Esquilín-Lebrón:

The corporate tax is 4% tax to the extent that it is export service,

Derren Joseph:

Export service. And if it’s, if it engaged in some sort of Puerto Rico domestic activity, then what would be the corporate tax on that?

Giancarlo Esquilín-Lebrón:

Well, it’s from 18.5 up to 37.5. So it’s, it’s dramatically they change. Yeah, yeah, yeah,

Derren Joseph:

Yeah. Okay. Understood. Understood. So I think that’s pretty clear. So it’s very attractive to those on so-called passive income, particularly capital gains. If it is, it’s a company, you just need to make sure that a company is internationally focused, not domestic, to Puerto Rico, and you get that 4%, but the dividends that are derived from it would also betax-freee, at least at the federal level. Okay. Yeah, makes a lot of sense. So I, I noticed that you said it was Act 2022, which has now become Act 60. Yeah. So, what have been the big changes from a legislative perspective recently?

Giancarlo Esquilín-Lebrón:

Okay, well, act 20 and 22 were enacted in 2012. In 2019, the Puerto Rico government basically decided to consolidate all the tax incentives in, in one law. It’s act 60 now. So that includes manufacturing, pharma, tourism in industrial creative industries, et cetera. And includes as well individual Investors and Export Services Act 20, principally, that was the Export Service Act requires basically only to exportation services and didn’t have any particular requirement at the beginning.

They required five employees, they, they reduced the employee requirement by the end. They didn’t request any activity or, or basically employees. I always say to, to my clients, Hey, you need to have some kind of employees on their company, that export services, right? It is expected that someone is providing services. So now on their Act 60, that typically part actually provides 2% at the beginning for the first years.

For small businesses, that means a company that sells less than three millions. So it’s not 4%, it’s on, it’s 2% at the beginning, 4% get you sell more, but at the time that you have more than three millions in cross sales, you need to have at least one employee. That’s one of the principle changes in the case of Act 22, that is now Act 60 as well, individuals that trail located to Puerto Rico, certainly they have some change based on who is managing the government and, and politics.

But now there is a requirement to make a five, a 5,000 annual fee with a tax return associated with the animal compliance with the degree. And they make, they need to make a $10,000 annual charitable contribution to a Puerto Rico or for-profit plus acquire a residence if they’re principal residence in Puerto, Rico within two years after movement. So before those changes on the Act 60 people and Right, right.

People that apply before those changes have run, followed rules. So they may rent only and they are in compliance, they no need to contributions there at the beginning. There were no Charito contributions. They implemented 5K by the end of Act 22, and now is 10K every year. So it depends, right? When we do some kind of compliance for any Act 22 or these types of individuals, we need to take a look into the tax grant, right?

The tax run is a, is a contract between the taxpayer, the government. And so they, they provide some protections to the individual’s Investors and the companies as well. And those are the rules, right? And the rules that apply are those that were valid at the time of the application. So that basically is the process to.

Derren Joseph:

Okay, so really the rules were around what we would term economic substance. So you need, if you have a company, they must be local employees, can’t just be a shell company, as an individual, you need to have your primary residence in Puerto Rico. But you, you mentioned that you had to buy a property, can you rent? So you’re not allowed to rent a primary residence, you have to purchase one.

Giancarlo Esquilín-Lebrón:

That’s a requirement within the, within the first two years as an individual that you relocate. And this rule is applicable only to the individuals Investors, right? That they to buy the house. But basically, and this is not automatic, right? If you move and you have the benefits, you need to go through a process with the government, submit some kind of tax incentive applications, the government evaluates, and then each of the tax degree, the, the important part here is that tax decrease may take some time, few months or let’s say a year from the government to issue the, the tax degree, but they are retroactive to the date that you apply for it.

So basically if you move and you commence separation, let’s say that you apply in February and you take your grant by December, it will be retroactive to February. That is the data you commence operations. So those are some kind of benefits. Right now, actually, after the implementation of Act 60, there were a boom of applications before because the Act 60 entered into effect January 1st, 2020. So there were a lot of applications by the end of 2019 trying to be grandfathered under the previous law.

So that basically makes some efforts from the government. It’s taking more time to get an approval, but they are now taking reasonable efforts to make it happen as soon as possible.

Derren Joseph:

Okay, understood. So it’s for the investors. So in terms of the property purchase, it’ll be for those that come in as Investors if, if someone just relocates as an employee, like chief whatever, officer or CEO something like that?

Giancarlo Esquilín-Lebrón:

Yeah, yeah. Most of they need to buy companies is the same owner, the same employee. They get probably, they moved to Puerto Rico, they relocate with the family, they hit their, their business in the us and they charge some management fees from Puerto. Rico. Certainly it’s always recommended to do some kind of transfer pricing,

Derren Joseph:

Right? Of course,

Giancarlo Esquilín-Lebrón:

Yeah. To China, even Puerto Rico doesn’t have some kind of transfer rules implemented. The Puerto Rico government commonly follows us guidelines. And certainly if the company do business in the US, the expenses to a foreign control corporation will be under the same or under the eyes of the IRS as well. And Puerto Rico US gap. So arm transactions persist,

Derren Joseph:

Right? So that’s in terms of transfer pricing. But going back to someone who’s not an investor per se, but they’re just like a senior employee, let’s say in a company and they, do they need to purchase a home as well? Or can they rent their primary residence in Puerto Rico?

Giancarlo Esquilín-Lebrón:

Well, if they don’t, if he’s not an investor and he wants to export services, they, he doesn’t have a requirement to buy the house in Puerto. Rico, okay.

Derren Joseph:

Right. Okay, gotcha.

Giancarlo Esquilín-Lebrón:

The requirement for purchase and a house if, for those that apply for the Investors Act.

Derren Joseph:

Investors Act, okay. Right. So basically like business owners Gotcha. People

Giancarlo Esquilín-Lebrón:

Is interested in capital gain. That is the extension provided by that side of the loan.

Derren Joseph:

Okay. Understood. Understood. Okay. So generally, so clearly it’s very nuanced. You can’t just say, Hey, I’m gonna move to Puerto Rico and I’ll be living tax free. They’re very, very intricate laws to, to read and to understand and to comply with. From your experience as a professional, like what are the, the three or four main mistakes that people make in moving to Puerto Rico? What, what things do they not really understand and they mess up?

Giancarlo Esquilín-Lebrón:

Well, commonly it’s a closer connection Egypt, right? But they commonly fail with the closer connection stuff. Let’s say about keeping, and for example, this is a married taxpayer. His wife didn’t want to move to Puerto Rico. So he keep, she, she keep living in, in the US mainland with their kids. Certainly under the guidelines provided by the irs. Closer connection means that your closer family is with you in the territory.

So that certainly expose the taxpayer to be non-compliance. And basically for one of my residency, the, the taxpayer needs to comply with the tree test. It’s not one of another. So it needs to comply with presence test. He needs to comply with closer connection and the tax home. So he needs to comply with three. He, he may be in Puerto Rico for more than 183 days. He may work for a Puerto Rico entity or from Puerto Rico. But if he doesn’t comply with closer connection, that’s certainly expose him for the for, for non-compliance.

Another error is to, to think that basically capital gain for Puerto Rico is a full accept territory, capital gains. It depends on what’s the asset, right? That generated that gain, especially as I mentioned with respect to marketable securities versus private equity. If it is real estate property located in the us, that’s still a US source income. So most of them think, Hey, I’m moving to Puerto Rico, I will liquidate all my investments right after my movement, I will you take a look into the holding period or the acquisition date.

Yeah, there’s something to be allocated to Puerto. Rico, okay. Yeah. Those are the main errors that I have seen. Keeping your days right is an issue that is very important. There are three apps, there are many ways to keep your count, to count your days. It’s very important to do that. And another error that we have found that it’s right, you can fix that crossing your fingers with the meeting, with the i s is to notify correctly the i s right.

There is a specific form that is filed with the US. So you need to notify the IRS that you move to a US territory on time. Okay? It’s due by the, by the same due day of the first 10 40 right after your movement. So it’s very, very important to notify the IRS accordingly. And that means that you need to update your address, right? With all the stuff. Yeah. And use a bank, Puerto Rico banning institution, at least for your ordinary expenditures, right?

Pay your bills, pay all the stuff so you can demonstrate that you have closing with the territory.

Derren Joseph:

Okay, so physical presence, closer connection tax home. Right? So I, I’ve heard people say, hey, the, the best thing is about this opportunity is that you have to move to Puerto Rico. But then some people say the challenge with this opportunity is that you have to move to Puerto Rico because you know, everybody’s different and for some people it’s not what they wanna do, right? They’ve been, you know, there’s obviously an interest I guess in certain discussion groups that I see online with somehow figuring out a way of taking advantage of this incredible opportunity without actually moving to Puerto Rico. Are there any loopholes at all or have they all been closed up in the last few years with changes in the law?

Giancarlo Esquilín-Lebrón:

Well, yeah, well probably, and this is a very, very loophole or gray area on compliance. It’s a matter of how it is defined almost right? Residency in Puerto, Rico tax school means a person that live in Puerto Rico at least 183 days or it is domicile to Puerto Rico. But the other part, you take a look into the section 9 37, 1 of the close present test options to be in compliance with the IRS and the US tax code is to be no more than 90 days in the states, in the US mainland.

So for if you comply with the tax fund with your closer connection to Puerto Rico, but in the case of present test, you are no more than 90 days in the US You may say that you comply as well with the present test in the US and claim Puerto Rico residency, but that only works for passive income, right? Because if the, if the person is dedicated to export services as well, in addition to the passive income, the source of the income will be attached to the location that you provided those services.

And those are some loopholes, right? That expose you for other issues with compliance, especially when you are a business owner. Let’s say that you over operate as well an export company in Puerto Rico, but you don’t want to be in Puerto Rico, then those services will be attached to the location that they were provided. And I met, I forgot to mention another common errors that occurs is a person that open a Puerto Rico entity transferred all his contracts to the Puerto Rico entity to export services through the Puerto Rico entity.

But he wants to live nine months in Puerto Rico three months in the us. Those three months are US source income income. So you may expose the Puerto Rico company to be considered a foreign incorporation doing business in the us subject to US income taxes to subject to branch profit tax. The salaries received by the employee living in the US for those three months will not be excluded by section 9 33 because those are sourcing income services provided while living or working outside of the Puerto Rico.

So those are things that are commonly analyzed in the process. Sometimes if you will be working outside of Puerto Rico to that personal level, not to the Puerto Rico company. So you only offset federal taxes and self-employment tax on that side of the income to avoid bringing the company to pay us taxes. So those are, that those are issues that we commonly handle to make sure that there are full compliance and clients wants to sleep well.

Derren Joseph:

Okay. So, so I get that if you set up a company in Puerto Rico and you then go and run it from the us you’ve created permanent establishment in the US and obviously that’ll, that’ll be a taxable presence. However, what if you put a full management team in play in Puerto, Rico, A CEO, you know, whatever, and then you move back to the US while the company is still effectively managed and controlled from Puerto Rico. So does it matter that maybe the 100% owner sits in the US if the full staff operations in Puerto Rico?

Giancarlo Esquilín-Lebrón:

Okay? So it’s just a matter of actually making sure that the services are exported from Puerto Rico. So if you are a US owner of a Puerto Rico entity that export services, that company that has the management team and works completely for Puerto, Rico will pay the 4% tax. What you as a US owner may take into consideration is possible issues with the guilty tax because Puerto Rico entities are treated as foreign corporations for the eyes of the i s.

So those are the main considerations that may be exposed because even that you pay a 4% tax that there may be an 11.5 effective tax rate based on the guilty tax if the company is, is taxed as a corporation, right In in for the is of the IRS. And let me give you some background. Puerto Rico entity, either it is a single member LLC that is organized under Puerto. Rico law is automatically treated as a C corp for the irs.

Okay? Unless you actually make the elections and check the box to treat that LLC or corporations differently in the eyes of the IRS, okay? Certainly US owners, et cetera. So commonly Puerto Rico entities are treated as foreign partnership or pastor entities in the eyes of the IRS. But we commonly use also Puerto Rico LLCs for state tax planning and investments because if the owner is a US citizen, you can elect to be taxed as a disregarded.

So any passive thing income generated by the entity is taxed at the individuals level, at the federal level as well. So right. Those are five important parts, but that important, that question that you there is very important, especially for possible issues with the guilty for setting up entities in Puerto Rico, but still living in the US as a US holder.

Derren Joseph:

So that is, that is a very interesting point. Well two, two very interesting points that bounced up me. One was the fact that just like with an L L C in a, a reg, a regular US state, one has the ability to elect for it to be treated as a corporation or as a a pass, right? So Puerto Rico does afford that, that election as well. Is there an election for the equivalent of an S corp? Is that possible?

Giancarlo Esquilín-Lebrón:

Can repeat that one, sorry.

Derren Joseph:

S-corp. So in the US with an LLC.

Giancarlo Esquilín-Lebrón:

Can, yeah. Well, in Puerto Rico we don’t have scor, we have what isa corporation of individuals that is a kind of as corporation, but basically a corporation in Puerto. Rico now kind of like to be taxed as a disregarded entity in Puerto, Puerto Puerto that starts with 2022 tax year. So taxpayers can mmake selectionsuntil the actual tax is due. But basically an LLC with one member can be taxed as a passthrough entity, as a disregarded entity or as a C-corp.

The automatic treatment is to be taxed as a C-Corp in Puerto Rico, okay? Certainly Puerto Rico has those regional compensations as well, et cetera. But basically those are the main issues as well right now.

Derren Joseph:

Okay. So that’s the first one that the idea of those elections that are available. Another interesting point that you raise is the fact that as you, as you pointed out that the Puerto Rican entity is treated as a foreign company from a US federal tax perspective. So it will be subject potentially to guilty and it would also be subject I assume to prefix potentially as well. They, Okay, so that, that is, that is quite interesting to note.

So for those who may be going to set up that, you know, trigger CFC basically by setting up that, that company in Puerto Rico, a controlled foreign corp, some measure of tax planning is probably worthwhile to understand, if not potentially mitigate some of these less desired tax effects of a structure. Okay. So, that is interesting to know. I I absolutely didn’t know that.

So the fact that protocol is US territory, you people born in Puerto, Rico, you are US citizens, yet the companies created in Puerto Rico are treated as foreign. So the natural people are US persons, but the entities are not US person. So that’s a bit of a paradox in law.

Giancarlo Esquilín-Lebrón:

Yes, yes. And, and think that once, that’s why basically the tax system in Puerto Rico it is like it is, right? The economic system has been developed on the premises of tax incentives that may be provided to foreign corporations, including US entities. So that’s why you have bigpharmas in Puerto Rico from us doing work here for the tax benefit and tax loopholes, but basically for a tax perspective, we are foreign for citizenship from birth.

So individuals still need to pay us taxes on, unless the income is actually excluded by the US tax code. And for example the exclusion for wages from Puerto Rico sources is excluded for general tax payer. But if the, if it is a Puerto Rico born and raised citizen that worked for the federal government, those federal wages are still subject to US income taxes. So those federal employees cannot exclude from US gross income, the income receive even that it was provided in Puerto Rico. So it’s not a hundred percent,

Derren Joseph:

Okay. So for the US, someone born in the US mainland and they move across a Puerto Rico and they be, they receive the equivalent of W2 income from a Puerto Rico company or maybe not from a US company, but they’re based in Puerto Rico and this section nine 11, if they were outside, like if they’re in another jurisdiction like Canada or whatever, and the section nine 11, they can have the foreigner income exclusion, right, based on the fiscal presence as the bonafide resident says, can they enjoy that being based in Puerto Rico as well? Can they enjoy the foreign and income exclusion?

Giancarlo Esquilín-Lebrón:

Okay. You cannot, you cannot, no, you can, for example, everybody, if you, are you a citizen or person working in Puerto Rico, but you are not a Puerto Rico born and resident, you first pay taxes to Puerto Rico and Puerto Rico income taxes are fully credible against federal income taxes and foreign tax, right? Yeah.

Derren Joseph:

Right. Okay. So you paid Puerto Rico taxes first and what for individuals for that have earned income from Puerto Rico, what are the marginal income tax rates?

Giancarlo Esquilín-Lebrón:

Well, it’s from seven to 33%.

Derren Joseph:

Seven to 33%. Right. And so then you got a credit against your liability to the US Yes. Okay. But you, so you, you have to work on foreign tax credits. So the form 1116 as opposed to the 25 55 foreign and income exclusion.

Giancarlo Esquilín-Lebrón:

That’s correct. That’s correct.

Derren Joseph:

Okay, gotcha. That is quite interesting. So having realized again, how incredibly nuanced this is, what advice or how do you advise US persons who are thinking of making that move from the mainland to Puerto Rico? Like what is the steps you would normally take in helping them make that transition?

Giancarlo Esquilín-Lebrón:

Well, commonly, I first ask if you’re actually willing to move, right? And to comply with the US tax law, because this is a full exemption, but it’s provided to the extent that you comply with the US tax law because Puerto Rico will give you the exemption, right? If you comply with the grant, et cetera, with those check marks. But you need to comply with those tests provided by, by the US tax law. The first thing is what, what basically know your plans, what type of incomes do you have and why are your expectations, right?

This is not something that you move to Puerto Rico in 2023 liquidate investments and go back in 2024 because the, the IRS expects some kind of cool down period, right? At least three years, something like that, to, to make sure that you were fully interested and domicile with your family, et cetera, with Puerto Rico. Because if not, it will see, they will see that as a movement to, to avoid taxes and some kind of evasion, et cetera. So first thing is to know your plans, certainly what type of income do you have?

Because not, this is not for basically for everyone. For example, if you expect to export services to Puerto Rico, but you don’t have investments like interest dividends or capital gain, you don’t need to apply for both tax incentives. Probably by applying for the export service side, you pay the 4% tax, you, you receive a W2 and the dividends will be exempt either way because the tax degree provided granted to the go to the company will provide fully exempt dividends.

So you will not need the other part of the law for individuals Investors. So that’s one of the things that we common only explain because compliant with the individuals Investors Act, it’s more expensive. Charit will contributions you need to actually purchase a home in Puerto, Rico, Rico filing fees, et cetera. The other party for individuals Investors, right? You want to move to Puerto Rico, let’s evaluate your investments. We can calculate some projections or expected tax liability in the future depending when you liquidate your investments, especially on marketable securities.

And, and in the case of private equity, right, because if you hold those investments for many years, you need to hold that in a additional years after moving because it, it is not the same rule, right? Especially if you have the person have kids, if they’re willing to move to a Puerto Rico school or if they are in a school that allows them to live there, that’s different because they then they may keep us residency because they have a place to live and that they are not required to live with their parents.

Okay? But if one of the parents needs to be with their kids, that will trigger eachs with closer connections. Okay. So those are the principle questions that we commonly, right. Investments, Puerto Rico. Now it’s very similar to the US with respect to information with crypto assets with foreign accounts, Puerto Rico, this is the first year that will ask on their tax returns if the person has some bank accounts located in a foreign jurisdiction like the Fbar.

So it’s basically the same stuff even that it applied right for every citizen, your citizen to, to notify to the F bar those ownerships. Now the Puerto Rico wants that information as well. So on the Puerto Rico Treasury Church, significant information with the IRS authorities for investigations and all this stuff. So those is, that’s very important, right? To to know your, your movement and I, I like to know my, my clients to see it is actually make sense for them for the movement, right? Because if not, their risk is, may be high, right? For non-complianc,e because it will be fully monitored  by the IRS sometime.

Derren Joseph:

Right? So, you know, I guess it’s helping the client just to kind of summarize that I’ve, what I’ve picked up. So it’s really helping that client understand the nuances of the law and while at the same time ensuring that they are ready to become a bonafide resident of Puerto. Rico is not just a matter of going over counting days and running back and forth. Exactly. You basically, your center of life must shift from the US mainland to Puerto Rico, your life has to move. Okay?

Giancarlo Esquilín-Lebrón:

Exactly. Yeah, yeah. It’s not, it’s just not movement, right? It’s make sure that you comply with all rules.

Derren Joseph:

Okay. That’s, that’s great. Okay, this is, this is an interesting question we got from somebody on, on YouTube. Someone asked to compare Puerto Rico to Dubai. And if I could, you know, from what I’ve learned and from picked up from you, if, if someone is a business owner versus it may be a dierent, I mean everybody’s situation is gonna be completely unique, purely from a tax point of view. If it is your business owner might be a set, you may be leaning in one to one jurisdiction, whereas if you were an employee, then you may lean towards another.

So if it is that you have earned income, then if you earn income as a bonafide resident in Puerto Rico, you’re gonna be paying taxes in marginal tax research goes up to 30 something percent. Whereas if you sit in Dubai the first, well, it moves with inflation under section nine 11. So right now it’s the first hundred and 12,000 of income will be tax tax-freee you form the file of form 2555 or whatever. So it could be completely tax tax-freeh to Dubai, cuz Dubai is no taxes.

A little bit of asterisk there because it does, but generally speaking, no taxes to Dubai and at least the first hundred and 12,000 can be tax-free to the US Above that you pay to the US. So again, generally speaking, if you are a mid lower to mid-level income earner, then maybe Dubai will be better off for you. If it is that you are an investor because of the benefit with no capital gains, then Puerto Rico is definitely the one for you because they, being a resident of Dubai is not gonna shelter you from US capital gains taxes.

If it is that you are a business owner trying to run a company, you’re probably not gonna be much better off either way because guilty’s gonna catch you. So, so that it’s, it really depends on your portfolio, what your income streams may be. But generally speaking, I I think those, some of the considerations of as a US taxpayer, if you’re not a US taxpayer, it’s completely different. Okay. Any, any thoughts on that? Any feedback on that?

Giancarlo Esquilín-Lebrón:

No, it’s, it is kind of interesting, but certainly you, you, you learn correctly what Puerto Rico rules are, but it all depends, right? Principally with the line that you said streamlines of income, that changed basically everything from the decision-making to see if it’s Puerto, Rico makes sense or do Dubai, etc. Because certainly Puerto, Rico is kind of the only places, small, small amounts of places that you can keep your citizenship, right? Still use citizen and don’t pay us taxes on capital gains, passive certain passive income. But it’s important, right? It’s not only the type of income that you generate, it’s the source of the income that was, because you may be fully exempt at Puerto Rico or interest and dividends, but they’re still made, they may still start into US taxes because they are foreign sources.

Derren Joseph:

Yeah, exactly, exactly. So, that leads us to another topic. I think another question, how sustainable is all of this? Because there’s a sense, you know, when you look at the narrative in the international tax base to talk about a global minimum tax that talk about income should never go untaxed anywhere. The EU puts pressure on its member states to close those, not just loopholes, but tax incentives that, you know, that skew the, the movement of labor and capital, even Dubai, the, the bastion of tax-free life taxes are being phase in some years ago we had the introduction of their sales taxes, which is v a t, now you have the imposition of a corporate tax for domestic facing companies and there’s probably consensus, quite consensus among task professionals that say in the next 40 to 50 years, Dubai’s gonna have taxes like everywhere else.

So Dubai is the last man standing is gonna fall soon. Puerto Rico, I mean, what’s your sense, obviously you don’t have a crystal ball, but what’s your sense, how sustainable is this?

Giancarlo Esquilín-Lebrón:

Well, I think that basically, at least from the individual investor sector, probably, I don’t think that they will con let’s say have a lot of years of future for new applicants. Probably there are political ions right now in Puerto Rico because all, all of these movements in real estate, there’s a bubble right now on market prices and all the stuff. And basically if you want to make sure that this type of tax benefits may make sense for the economy of the law of the territory, you need to actually act for another part, right?

Right now they only have to or purchase home in Puerto Rico, but let’s say to invest in or put their cash on Puerto Rico financial institution so that, so you can like some kind of boom the availability of funds in Puerto Rico financial institution to provide loans to that or to for the economic movement. So probably if they persist, they think that they will need some changes that they actually requires more than only living in Puerto Rico and purchasing a home and, but respect the 4% tax.

It has been decades in Puerto Rico for, for, for the tax benefits, but certainly and the global minimum tax as well based on the discussion. I think that that may change some kind of the rules for big companies. But at the end, from, from my perspective, I prefer that territories like Puerto Rico that doesn’t necessarily have all the powers to do or enter into international agreements or international tax release because we cannot do that.

We are limited by the US to do that and we, and Puerto Rico does not participate in any of the US tax series. So I, I think that from the, from that perspective, you need to give or allow these type of territories to promote their economics and incentive by their own because they don’t necessarily have all the resources like any other big country with the, the all the resources that they have to promote the economic development and all this stuff.

So we can, we need to offer something right, to, to make sure that people move in or open businesses here. But at the end, from the government side, you need to ask for compliance for investments in Puerto Rico for bringing funds, Puerto Rico, the creation of employment and all this stuff. So I think that the global minimum tax makes sense for certain areas and certain type of level of companies, but at the end I think that you, you cannot limit countries to promote their location.

For example, Puerto Rico is completely full around, is an island. So the tourism is very important in Puerto Rico. So Puerto Rico promotes the development of hotels. Short rentals provides actually tax credits for the investments and the construction of, and hotels in Puerto Rico. So, and also a purpose percent tax or 90% exemptions on property tax, et cetera. So they need to persist, right? If you want to keep moving the economy, creating employees employment and all this stuff.

So it’s a matter of making a balance, right? Making sure that you are from a government perspective is you are fiscal responsible with all the stuff. You have an issue with making sure that you don’t have significant tax rates for small and million families and persons in Puerto Rico, but does not bring all the tax benefit to big companies, right? Because certainly there is a dispar on changes in in the persons and actually political pressures to change that.

Derren Joseph:

Yeah. So just to kinda summarize what my takeaway is from that the two areas to look at, there’s the one era in terms of having Puerto Rico your center of life. Look, there’ll probably be adjustments around that, either loosening it up a little bit or maybe tightening it as, as things evolve on the other side, the tax rate may move in the various spaces, but it’ll always be at a discount to the mainland to create an incentive for businesses and individuals to make Puerto Rico the economic home and to bring economic activity.

So it, you, it may not be 4% forever, but it’ll be less than whatever the US mainland is asking for. I gotcha. Gotcha. Jan, thank you very much. You’ve been super helpful in shedding a light on an often misunderstood area of international attacks which is US persons and businesses moving to Puerto. Rico, do you have any final words? If someone wants to find out more about this and engage you and your firm, what’s the best way to reach you?

Giancarlo Esquilín-Lebrón:

Yeah, well basically first thank you for the invitation. It’s really a pleasure. I really enjoyed our conversations back in Harvard a few months ago and hopefully, we can join together another way. And basically, our friend is located in the capital of Puerto Rico in San Juan, my friend. You can find us either on Facebook, LinkedIn or, on our website around Tribe CPA and we do taxes, right?

I love all this stuff and making sure that the compliance is very, very, very good. So, I really enjoy talking with people, persons like you that are really interested in this conversation and I’m following you on all the chores, so I keep informed while you do it.

Derren Joseph:

Thank you very much. So just repeat, Thriv without the E CPA.

Giancarlo Esquilín-Lebrón:

Yes, that’s great.

Derren Joseph:

Fantastic. Have a great day ahead and we’ll see you next time. Bye-bye now.

Giancarlo Esquilín-Lebrón:

Thank you. Take care. Bye.

Voiceover:

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Table of Contents: LIVESTREAM- Are Tax Weary Americans Moving to Puerto Rico? (24th January 2023)

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