Puerto Rico woos the rich but so far gains little


Markets | Fri Apr 17, 2015 11:22am EDT

Puerto Rico woos the rich but so far gains little

DORADO, Puerto Rico (Reuters) – Hedge fund manager Robb Rill grins. He has just had word that U.S. financial regulators have finally closed Puerto Rico’s ailing lender Doral Financial, a stock he has been shorting for the past six months.

“Doral is no more,” he tells staff in his office, its marble desk tops, dark wood furniture and leather chairs more reminiscent of a New England country club than a Puerto Rico beach town.

Rill is one of a cohort of money managers from the mainland who moved to the U.S. territory lured by tax breaks introduced in 2011 to boost the flagging economy and betting against a troubled local bank may not be what the authorities had in mind.

To be sure, Rill’s fund played no part in the lender’s downfall and its business plan focuses on investing in tech and financial firms. But the Doral transactions serve to symbolize Puerto Rico’s challenge of ensuring that the tax breaks spur enough economic activity to reverse years of decline.

Almost four years on, the economic payoffs still appear elusive.

The government says nearly 900 individuals and firms have moved under the tax relief program, creating 7,000 jobs.

So far, however, economic data and those with a front row view of the territory’s economy – real estate brokers, investors and lawyers dealing with cross-border transactions – have yet to register a significant upswing.

“We are starting to see some activity – not huge, it’s very slow,” says Fernando Toro, a real estate agent at Cushman and Wakefield in San Juan, about interest in rental office space.

Mark Leeds, tax partner with international law firm Mayer Brown, says interest in the tax breaks only picked up last year.

“I have not seen a rush toward this,” he said. “For whatever reason it doesn’t seem to be for everybody.”


Strict residency conditions, which include spending half of the year on the island and selling or leasing home on the mainland, discourage some individuals. The precarious state of government finances and fears that tax rules could change again, seem to keep bigger firms sidelined, lawyers and brokers say.

“What we’re talking about right now is very small dollars and a very nominal piece of the overall GDP of the island,”

Todd Hagerman, a spokesman for the Government Development Bank in Puerto Rico says.

The government expects each new company to create 30 jobs on average, but Hagerman says most firms that have moved are small businesses, with the exception of call centers that employ hundreds and flatter the overall jobs count.

However, he voices optimism that the tax program would gain momentum, echoing its chief architect Alberto Baco, who says the number of new jobs it brings will double this year and 82,500 more will be added to the $100 billion economy over the next five years.

Yet so far the island, which has been in an out of recession for the past nine years, lost 36,000 jobs since 2011. Between 2010 and 2013 twice as many Puerto Ricans left for the mainland than in two decades to 2000.

The tax program that covers financial services firms, other companies that export services and wealthy individuals offers a flat 4 percent corporate income tax, and exemption from capital gains tax and certain interest and dividends taxes.

The territory counts prominent hedge fund manager John Paulson among its investors and supporters, although he has not taken up tax residency there or moved his firm to the island. Paulson, who redeveloped San Juan’s five-star Vanderbilt hotel is investing in commercial real estate and called Puerto Rico the “Singapore of the Caribbean.”

But Paulson, who manages $19.3 billion in assets, is hardly representative for 509 individuals and 346 firms that have taken advantage of the tax incentives through the end of 2014. Most of the hedge funds and traders on the island appear to be relatively small outfits trading in public markets, such as Rill’s sub-$100 million fund.

Based in Dorado, a resort town outside San Juan, the fund has a local staff of eight, which is already a significant contribution to the local economy, Rill says.

“We are picking up people in the professional class that are outstanding that otherwise simply wouldn’t have any opportunity,” Rill says.

Rill says his firm is looking at launching a fund focused on local investments after Puerto Rico last year introduced tax breaks for private equity investments on the island.

A $4.7 million KPMG study that Puerto Rico commissioned to guide its tax overhaul criticized the tax breaks as “inordinately complex” and suggested scrapping the incentives for individuals and linking corporate ones to economic activity.

Nick Prouty, a Puerto Rico-based real estate investor with $500 million worth of projects on the island, says it badly needs more capital, but it is equally important how that capital will be put to work.

“Will these people make investments in Puerto Rico or will they sit in Dorado and trade?”

(This story corrects names in penultimate and first paragraphs)

(Reporting by Edward Krudy; Editing by Tomasz Janowski)

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Puerto Rico Rolling Out The Welcome Mat For Millionaires


Puerto Rico Rolling Out The Welcome Mat For Millionaires
June 28, 2013 4:17 PM ET

Children play on a beach in San Juan, Puerto Rico. The Puerto Rican government hopes that convincing wealthy investors to relocate here will boost the island's economy.

Children play on a beach in San Juan, Puerto Rico. The Puerto Rican government hopes that convincing wealthy investors to relocate here will boost the island’s economy. Brennan Linsley/AP

A few weeks ago, Alberto Baco Bague arrived in New York for a roadshow of sorts. In just 48 hours, Baco, Puerto Rico’s secretary of economic development and commerce, met with more than 30 hedge fund managers, investors and others who could be classified as very well-off.

His mission might seem quixotic at best: trying to convince these well-heeled New Yorkers to uproot themselves from Manhattan and relocate to Puerto Rico. But he says they are starting to come.

For Baco and the Puerto Rican government, the benefits of injecting more rich people into the island are clear. “We are a poor island, and this is our way of developing [and] developing employment in Puerto Rico. We are very serious about that,” he says.

Baco has an enticing carrot for the investors. Under laws enacted in 2012, when someone moves to the island, all of that person’s investment income, like capital gains, dividends and the like — is completely tax-free. Plus, service income — say, a hedge fund’s management fees, is taxed at just 4 percent. And, as it is for all Puerto Rico residents, there’s no federal income tax.

Occasional Visitors Need Not Apply

The catch is that you can’t just set up a post office box and call yourself a resident. You have to move for real. Like Damon Vickers has.

“I love it. I love Puerto Rico, I love the climate, I love the people, I love the energy of the place,” Vickers says, sitting by the pool at the La Concha resort in Puerto Rico’s capital, San Juan.

Vickers moved his hedge fund and his family here from Seattle earlier this year. He had been eyeing the U.S. Virgin Islands for a move, but then caught wind of Puerto Rico’s new tax benefits. For him, it’s about simple math.

“I like making money. And we want to go to a place where our money is treated the best, so we might benefit ourselves, and we might also benefit our investors,” he says.

His friends in the investing world are watching closely to see how he fares. Many are unaware the island even has a financial district, much less modern highways and shopping malls. Once they learn more, many worry about the crime, including a murder rate six times the U.S. average.

And, given its gritty reputation, word hasn’t gotten out that the wealthy can live well in Puerto Rico.

Paco Diaz, with Trillion Realty Group, the local affiliate of Christie’s, is among those trying to convince them. Picking them up in his late-model BMW SUV, he takes investors around tony neighborhoods like Condado on the San Juan beachfront, pointing out homes selling for millions.

He shows off resort hotels, new condo buildings and high-end stores along a segment he says many call “the Puerto Rican version of Fifth Avenue.” New York’s storied shopping strip doesn’t have anything to worry about, but one block here does feature Louis Vuitton and Cartier.

To take advantage of the tax breaks, the rules say you must live in Puerto Rico at least 183 days a year and prove that you’re really part of the community. Your spouse must live with you, and your kids must go to local schools. Some of the best, like the private Saint John’s School, are just feet from the ocean, which Diaz uses as a selling point. He points out students attending a surfing school behind him. “They just go across the street with their surfing boards to catch some waves,” he says.

If the city life is not to the investors’ liking, Diaz takes them to the suburb of Dorado. It’s a gated community on steroids. Past its guards, you’ll find lush palm trees, golf courses, private beach clubs and a water park. A few nights at the Ritz Carlton resort here costs about what the average Puerto Rican makes in a year. Singer Ricky Martin lives around the corner.

Diaz’s colleague Coco Millares says the tax incentives are already boosting her business. “We have had, since they passed the law, much more interest in Dorado than we had before,” she says.

Hoping To Boost A Weak Economy

But back in San Juan, few residents had even heard of these tax breaks. When told the details, their reactions were mixed. One thought it could bring some much-needed money to the island. But others, like restaurant worker Estefania Colon, were resentful that locals pay taxes while the newcomers are exempt from many of them.

“They’re already rich, and they’re making more money from us?” she says.

Tax incentives are nothing new to Puerto Rico. For decades, tax breaks brought manufacturing and pharmaceutical firms to the island. But many incentives have been phased out, and some officials believe that’s one reason the island’s recession has been so deep. Unemployment is nearly 14 percent, and the average income is about half that of Mississippi.

The hope is that a few super-rich people will help turn some of that around and beef up the service and financial sectors, while also buying real estate, eating at restaurants, hiring locals and, eventually, maybe even invest their own money in big projects on the island.

The zero percent tax on investment income, and the 4 percent corporate tax, went into effect at the start of 2012. The goal is for 500 wealthy investors to come in the next four years. So far, 77 have applied.

The investment tax breaks are guaranteed until 2036. Only congressional action — or granting Puerto Rico statehood — would put a stop to them. But while some say this is just Puerto Rico becoming the latest tax haven, there has been little serious opposition.

Mauro Guillen, a professor of international management at the University of Pennsylvania’s Wharton School, says Puerto Rico officials are being a bit optimistic about the direct effects.

“It is not going to create a major migration to Puerto Rico,” Guillen says. The biggest boon could be indirect, he explains. Even if just a few people move, it could change the conversation about the island.

“Puerto Rico will be making the headlines. It will be perceived as a location where you should do business in,” Guillen says.

Lawyer Fernando Goyco, who advises many of the investors, says in his practice, it’s millionaires, not billionaires, who are showing the most interest in moving for the tax deal. That could be a good thing for Puerto Rico, he says — too many super-rich moving here to avoid taxes could draw congressional scrutiny.

And he’s not surprised big honchos aren’t flocking to his island. “Moving somebody from New York to Puerto Rico, that’s very difficult, that’s very difficult. Moving somebody from Kansas to Puerto Rico [or] from North Carolina to Puerto Rico — it’s a different story,” he says, chuckling.

But as the word spreads, he says, millionaires are calling his office.

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Acts 20/22 gain huge momentum


Issued : Monday, February 23, 2015 12:00 AM 

Acts 20/22 gain huge momentum

Edition: February 26, 2015 | Volume: 43 | No: 7

When the Puerto Rico Investment Summit kicks off today at the Puerto Rico Convention Center, a new crop of successful business millionaires will hear about the tremendous tax incentives contained in Acts 20/22 of 2012 that the island offers. Under Act 22, anyone who sets up a new residence in Puerto Rico—under the U.S. flag—for 183 days out of the year enjoys 0% tax rate on locally sourced dividends; Act 20 provides a 4% tax on service income for exporters of services.

Importantly, the tremendous incentives in those two laws begun under the previous administration of former Gov. Luis Fortuño have been adopted and aggressively promoted by Gov. Alejandro García Padilla’s administration. The shared vision of two administrations has led to a virtual conga line of investors coming to Puerto Rico.

It has also helped greatly that hedge-fund king John Paulson drew global attention to Puerto Rico when he invested more than $1 billion combined in the Condado Vanderbilt hotel, the six-star Bahía Beach St. Regis Resort and other properties, besides being a major stockholder in our biggest bank. Likewise, Nicholas Prouty, whose Putnam Bridge helped revive the once moribund La Ciudadela housing complex in San Juan’s Santurce district, made a very clear statement that Puerto Rico is an attractive place to do business.

This second investment summit is a milestone to be celebrated because it signals that the continued promotion of these important tax incentives has led to the steady stream of investors who will be adopting both Act 20 and Act 22 tax decrees. The crop of new investors has some observers saying that Puerto Rico could be at a tipping point—a defining moment for the Acts 20/22 movement that will see investors descend on Puerto Rico with wildfire strength—one investor leading to 10; 10 leading to 100, pushing investment in Puerto Rico into the billions of dollars.

Economic Development & Commerce Secretary Alberto Bacó Bagué told CARIBBEAN BUSINESS that as many as 400 new companies and 600 new residents could be adopting Acts 20/22 tax decrees by the end of 2015. The viral spread of Acts 20/22 has the potential to attract as much as $5 billion annually during the next four years, according to economists interviewed by this newspaper.

It is why some people believe that Puerto Rico can become the next Singapore. The Asian island-nation increased its gross domestic product from $74.5 billion in 2000 to $348.7 billion today by increasing capital through tax incentives and getting capital to invest in small and midsize businesses to create jobs on a massive scale. This part is still missing from our laws. It can be done in Puerto Rico, but it takes aggressive promotion of tax lures. Up to now, most investments have been in distressed properties with giant discounts and large grants from the government.

Those were the ingredients that led Puerto Rico to become an important turnaround story in the days of Operation Bootstrap, the industrialization program commenced in the 1950s that led to the island’s transformation from the poorhouse of the Caribbean to an industrial powerhouse.

It was achieved by bringing in New Deal economists—among them former Gov. Rexford Tugwell, Hugh Barton, Alvin Mayne, Morris Moses and Mohinder Bhatia—who together with Puerto Rico’s first-elected Gov. Luis Muñoz Marín and Fomento then-administrator Teodoro Moscoso, helped industrialize Puerto Rico. They devised a plan and recruited an army of professionals who worked at offices all over the world to promote Puerto Rico’s industrial tax incentives.

It was done before and it can be done again. Puerto Rico has the perfect opportunity to become a huge turnaround story—the tax breaks are there and the continuity is there. Now we must promote Acts 20/22 with Operation Bootstrap strength—with an army of promoters in offices across the world, as Singapore has done. And when the capital comes, it must be invested in small and midsize businesses. That is the only way to help create the tens of thousands of jobs that Puerto Rico needs to help ignite significant economic development.

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Acts 20/22 proving powerful lure for millionaire investors


Issued : Wednesday, October 8, 2014 12:00 AM

Acts 20/22 proving powerful lure for millionaire investors

Edition: October 9, 2014 | Volume: 42 | No: 39

Florida-based hedge-fund manager Robb Rill relocated about 18 months ago to Puerto Rico, lured by tax incentives that seemed too good to be true and which nobody seemed to be talking about too loudly.

In fact, Rill was originally exploring a potential move to the U.S. Virgin Islands and wound up in Puerto Rico only after hearing about the local incentives from officials in the neighboring jurisdiction because of the tough competition they posed to their efforts to lure investors to its shores through tax breaks.

A pioneer in taking advantage of the twin incentives offered by Puerto Rico’s Acts 20/22, Rill and his wife had to acclimate to their new home and navigate their way through government red tape largely on their own.

“When we first moved here, since there was really nobody else but a handful of others, it did in the early days feel somewhat isolating,” Rill recalled during a recent gathering of Puerto Rico’s new crop of millionaire residents, all seeking benefits under Acts 20/22. “I was seen as the oddball gringo coming here for some new incentives that may or may not actually exist.”

Rill began the Act 20/22 Society organization out of the “simple need for an epicenter for companies and individuals, where they could get guidance and assistance acclimating to their new home and have a community they could immediately identify with.”

However, hours before its first event was held, Rill was struck with a fear of failure because the directions that were sent out were wrong due to road construction.

“I obviously didn’t have enough faith in recipients who have uprooted their entire lives and moved their companies to a foreign place to have the skill set necessary to find a venue without the need for turn-by-turn directions. It was a good litmus test, and all but one person showed up,” Rill said. “Ironically, that person left the island a short time later.”

A lot has changed in 18 months. Rill may have been a trailblazer, but dozens of other wealthy professionals followed in his wake, and prominent investors such as hedge-fund king John Paulson are betting billions that the stream of millionaire investors moving to Puerto Rico will turn into a flood. Meanwhile, the Society has grown into a community force.

“As you can see by looking around you, what started as a small group of people has grown into something much larger and more significant,” Rill said during a speech at the Society’s annual meeting last month at the Dorado Beach Ritz Reserve, which drew a crowd of more than 200, including husbands and wives.

The Society still functions to create a sense of community for members, organizing monthly Friday night dinners, private forums where people can share information, as well as trips to spas and racetracks. However, it has also morphed into an organization intent on contributing to its members’ newfound home, funding projects that help the homeless dog population and putting technology in the hands of needy children, among others.

“We really believe in the idea of giving back to the community that provides us with so much opportunity. We are setting up a foundation as a formal way to contribute to Puerto Rico,” Rill explained.

The Society also complements efforts by the government and private sector to promote the program and help “potential recipients determine if they qualify for these incentives and if so, if it is the right move for them to make, given their particular circumstances. We assist prospective recipients by giving them as much information about these topics as they need to make an educated decision and answering their questions about anything they may have concerns about,” he added.

The Society has also “realized the importance of having a voice,” and advocates for changes to improve the island’s investment landscape and works to defend programs such as Act 22 from attack.

“There is safety in a united front. We need to be concerned about other legislation that could affect our investment and life on the Enchanted Island. We don’t want our program here to get lumped into other political hotbed issues such as tax inversions, which sound similar to the layman, but which in reality are completely different,” Rill said, adding that Act 22 is Puerto Rico simply using the tools at its disposal to drive its economic development.


The twin Act 20/22 incentives are responsible for practically the only bright economic news coming out of Puerto Rico these days. This year, the Economic Development & Commerce Department (DDEC by its Spanish acronym) expects to lure a total 250 investors under Act 22, versus 155 in 2013.

Implemented under the previous administration of former Gov. Luis Fortuño and aggressively promoted by Gov. Alejandro García Padilla’s economic development team, the incentives constitute one of the rare programs to be fully embraced by Puerto Rico’s two main political parties, which bodes well for its continuity and future growth.

Former DDEC Secretary José Ramón Pérez-Riera was the principal architect and advocate for the Act 20/22 program, and his successor, current DDEC chief Alberto Bacó Bagué, is among the program’s biggest promoters.

“I make it a point every chance I get to recognize the previous administration’s role and the vision it had in enacting these laws,” Bacó recently told reporters.

Pérez-Riera, now a partner at Madison Astur LLC and the Puerto Rico Economic Development Co., a San Juan-based private economic-development group, credits the new administration for recognizing the potential of the laws and embracing them.

“If Acts 20/22 are to fulfill their transformative potential, we need to view them as part of a long-term strategy that needs to be maintained for decades rather than years. I give much credit to the current administration for promoting the laws as they have been doing. Executing on someone else’s strategies to obtain the best results, without pride of ownership getting in the way, is a selfless act that needs to be recognized and admired, and which we don’t see enough of in public service,” Pérez-Riera said.

Former chief of staff under Fortuño, Marcos Rodríguez-Ema, said that the program should be looked at from an economic-development perspective rather than a political one.

“I can imagine what the arguments might be from members of both [main] political parties. These arguments, of course, have counter arguments, and at the end of it all, they probably wash each other out. Therefore, we should forget about making these laws about local politics, and focus on making them work for Puerto Rico’s economic development, the way that they were designed to do,” said Rodríguez-Ema, who is now a partner at Madison Astur LLC and the Puerto Rico Economic Development Co.

Act 22 is primarily designed to attract high-net-worth individuals to Puerto Rico, by eliminating all taxes on passive income that accrue after they relocate to the island. While dividends and interest income earned by Puerto Rico residents on U.S. securities are generally taxed by the federal government, capital-gains taxes on their sales are based on residence.

Puerto Rico’s unique political status—under the jurisdiction of the U.S. but with a separate tax system—makes this pitch particularly attractive to wealthy investors residing stateside. U.S.-based millionaires and billionaires who move to the island would avoid taxation on the sale of securities, which are normally taxed federally at a 23.8% rate.

The Puerto Rico program has an advantage over foreign jurisdictions because investors don’t have to renounce their U.S. citizenship to take advantage of the tax-shelter offer. In contrast, wealthy taxpayers who opt to re-establish to a foreign country have to surrender their U.S. passports and pay an exit tax of 23.8% on unrealized capital gains.

Puerto Rico’s laws have resonance with worldwide investors as well. One particular appealing aspect of the law is not only the tax breaks it provides, but also that it includes a Puerto Rico tax decree to protect investors who move here, guaranteeing the incentives through 2035 from any subsequent changes in local legislation.

Act 20, meanwhile, establishes a fl at 4% tax on earnings from companies that export professional services to off-island markets. The companion law is meant to lure Act 22 beneficiaries to bring at least a portion of their eligible businesses to Puerto Rico with them, and most are doing so. The DDEC expects to approve 180 Act 20 applications this year, up from 125 last year.

Rill said that initially, the first wave of professionals to take advantage of the incentives were financial industry professionals, including hedge-fund directors, but there has since been an evolution to include high-technology, legal and other professionals.

The combination of the two laws is a big driver in the offshore investment taking place on the island, and is a big part of the reason why Paulson is betting that Puerto Rico is poised to become the “Singapore of the Caribbean.”

“Acts 20/22 were conceived to be a game-changing economic-development strategy, and thus far, it certainly looks as if the vision that led to their creation was correct,” Pérez-Riera said.

“Time will tell whether the full extent of the benefits envisioned for Puerto Rico as a result of these laws comes to fruition, but as long as Acts 20/22 continue to be the sole beach of positive news around the world regarding Puerto Rico during these turbulent economic times, it behooves all of us who have a stake in Puerto Rico to support the effort by promoting the laws,” he added.


During his first campaign for the governorship, Fortuño pledged to bring capital from abroad by tapping into high-net-worth individuals interested in investing on the island.

“For far too long, Puerto Rico let the rest of the world pass it by as it rested on its past economic laurels. We decided to change that and focus on Puerto Rico’s economic future instead of its economic past, and as a result, we are now seeing Puerto Rico’s economy slowly begin a transformation process into becoming a services hub that can, with time, place Puerto Rico once again on the path to long-term economic growth,” said Fortuño, who is now a partner at the Washington, D.C.-based law firm Steptoe & Johnson LLP.

But it wasn’t clear exactly how that would be done. The task fell to his DDEC chief, Pérez-Riera, who headed all economic-development initiatives during Fortuño’s four-year term. Supporters say that Pérez-Riera, relying on his business experience and legal acumen, was adept at finding creative solutions that redefined the role of Puerto Rico’s DDEC secretary. As the main architect and proponent of Acts No. 20 & 22 of 2012, Pérez-Riera championed the approval of these two laws, prepared the comprehensive sets of regulations and procedures that made the laws operational after their approval, and produced the marketing materials that are now being used extensively to promote them. He got the word out to the local, national and international press on the new incentives, and went on several road shows with investors to explain the virtues of the laws that had been approved. He was the single voice that challenged naysayers and detractors of the laws at that time, explaining that they would someday transform our economy into a professional-services juggernaut—under the U.S. flag—that would eventually challenge Singapore in that regard.

“José Ramón [Pérez-Riera] worked around the clock to get these laws approved and make them operational in a very short period of time leading up to the election. He understood better than anyone how important these laws would be for Puerto Rico’s future, and he was on a mission to complete everything and at a level of quality that met his high standards. I should say that although José Ramón’s self-imposed work ethic was legendary throughout our administration, he seemed to kick it up to another level to make Acts 20/22 a reality,” said former Gov. Fortuño.

It took three years until the laws were enacted in January 2012—three years after the fiscal and economic storm that the incoming Fortuño team inherited upon taking office in 2009—with the island’s stark challenges complicated by a worldwide fiscal crisis, pushing other priorities ahead of it.

Stabilization was the first order of business, and Pérez-Riera was one of the five members of the Fiscal Reconstruction & Stabilization Board established by Act No. 7 of 2009, through which the government of Puerto Rico was able to “save the house” and the government’s credit rating. The former DDEC secretary was also instrumental in the creation and implementation of Act No. 154 of 2010, which has generated more than $6 billion to date and now accounts for about 20% of the total annual revenue of the Puerto Rico Treasury Department.

The Georgetown University-educated (as is Fortuño) banker and lawyer, who is bar-certified in Puerto Rico, New York, Florida and Washington, D.C., also held key positions within the previous administration as executive director of the Puerto Rico Industrial Development Co. and the Puerto Rico Trade & Export Co., heading all economic-development initiatives during Fortuño’s four-year term.

These included lowering taxes for companies and individuals alike through a comprehensive Tax Reform (Act No. 1 of 2011); establishing a public-private-partnership program to stimulate private sector investment in infrastructure (Act No. 9 of 2009); reducing government bureaucracy and modernizing Puerto Rico’s permitting process (Act No. 161 of 2009); establishing a renewable-energy policy for Puerto Rico along with an incentives program to stimulate its adoption (Acts No. 82 & 83 of 2010); establishing tourism, gaming, cruise industry and hospitality incentives (Acts No. 74 & 118 of 2010, Act No. 113 of 2011); stimulating the housing market (Act No. 132 of 2010, Acts No. 115 & 216 of 2012); converting Puerto Rico into an international finance center (Act No. 273 of 2012); and establishing incentives for film and creative services (Act No. 27 of 2011). Pérez-Riera also took on substantial infrastructure-improvement projects, such as his tenure’s signature Bahía Urbana waterfront redevelopment project, which had been languishing for nearly 20 years before the completion of the first two stages of the project in 2012.

However, perhaps Pérez-Riera’s greatest achievement while serving as DDEC secretary—and what may ultimately become the lasting legacy of his time in government—is the creation and implementation of Acts 20/22, providing incentives that would bring capital from abroad, and that allowed for Puerto Rico to position itself as a world-class services center. While the initial plan took shape in 2010, it wouldn’t be until two years later that the laws were enacted.

At that time, the former administration was about to file the game-changing legislation that became Act No. 154 of 2010, which entailed long negotiations with U.S. Treasury Department and Internal Revenue Service officials to ensure the Act 154 excise tax’s treatment as a foreign tax that could be credited against a payer’s federal tax obligations. Given the importance of Act 154 to the administration’s efforts to strengthen Puerto Rico’s fiscal situation, Pérez-Riera had to keep his plans under wraps because of the negotiations with federal government officials. Also, for most of 2011, Pérez-Riera met with the top management of the affected companies, often traveling to their headquarters in the mainland U.S. and Europe to stabilize their reaction to the tax and maintain the partnership they have traditionally kept with Puerto Rico.

During the year, he was quietly gearing up the work for Acts 20/22, creating a small team to work on the closely guarded effort, including DDEC officials Edward Calvesbert, Adriana Ramírez and Roxana Cruz, who worked on crafting the laws and regulations, and Raúl Vidal and Luis Rodríguez, who worked on promoting the laws. The team also counted with a group of outside counsel that included Edgar Ríos (PietrantoniMéndez & Álvarez in Puerto Rico) and José R. González- Magaz (Steptoe & Johnson LLP), who proved “instrumental” in the laws’ creation.

Ríos, a partner at Pietrantoni Méndez & Álvarez, had nothing but praise for the former DDEC chief.

“There’s a saying in Spanish that ‘success has many fathers,’ and that was the case with Acts 20/22. However, having been involved in the creation of these laws from the beginning, I can tell you that José Ramón is the real father of these laws,” Ríos noted.

“José Ramón led the outside counsel directly and every step of the way, and was immersed himself in the nuts and bolts of the process. He figured out how to walk the line between incentivizing economic development and generating government revenue. He’s also extremely hardworking. It was hard to keep up with him. Eventually, we became accustomed to his telephone conferences into the morning hours. If you consider the incentives he established and his contributions on the fiscal side, Pérez-Riera is the most effective secretary of Economic Development & Commerce that Puerto Rico has had to date,” González-Magaz added.


It was not only the full agenda, but also politics that slowed progress on the “transcendental” initiative. In fact, the Popular Democratic Party (PDP) minority at that time, now in the majority, opposed Act 22 when it was under consideration. Gov. García Padilla, San Juan Mayor Carmen Yulín Cruz, Senate President Eduardo Bhatia, House Speaker Jaime Perelló, Sen. José Luis Dalmau, Rep. Luis Vega Ramos, La Fortaleza Public Affairs Secretary Jorge Colberg Toro, Puerto Rico Federal Affairs Administration head Juan Eugenio Hernández Mayoral, PDP Electoral Commissioner Eder Ortiz Ortiz and former Sen. Sila M. González Calderón, all voted against the bill. Act 22 was approved by a final tally of 19 in favor and 9 against in the Senate, and 33 in favor and 16 against in the House.

Given the political opposition to the laws at the time, Pérez-Riera said the administration worked hard to ensure the Legislature understood their importance and were onboard with their approval, and he credits former Senate President Thomas Rivera Schatz as being their biggest supporter as well as instrumental in controlling and focusing the legislative process.

“Unfortunately, the Senate minority leadership at that time opposed these laws, and they were attempting to block me from achieving their approval. However, the laws were well-designed, with input from the Legislature from the beginning of the process, and I felt that it was important for Puerto Rico that they be approved. Time has now shown that we were right, and that those that opposed the laws were either wrong, or were playing politics with matters in which there is no space for politics, particularly given the difficult economic times we are experiencing,” Rivera Schatz said.

There was also resistance from within the administration, particularly by the Treasury Department. To win its support, the original legislation left out certain benefits that were added through later amendments, such as the concept of a tax decree for individuals benefiting from Act 22, as well as the inclusion of short-term capital gains in the tax exemptions provided in the law. The concept of a tax decree for individuals was significant because it was the first time it was done by the Puerto Rico government.

“As it turns out, we are lucky that the amendments were achieved, as the notion of a personal tax decree for Act 22 beneficiaries has been one of its strongest selling points, providing a guarantee that the benefits conferred shall remain in place up until the tax decree expires,” Pérez- Riera said.


Because the laws were approved during an election year, officials endeavored to avoid having them turned into campaign fodder, and a low-key approach to promotion was taken.

Pérez-Riera believes that the private sector must take the lead to promote incentives for Puerto Rico to reap the best results from them, and he gathered a group of prominent professionals with national and international platforms from which to promote the laws. Besides González- Magaz and Ríos, Pérez-Riera tapped Francisco Cerezo (Foley & Lardner in Miamiand New York), Inocencio Galindo (Morgan & Morgan in Panama), Juan Sabater (Valor Equity Partners in Chicago), Letty Brunet González and Francisco Díaz Fournier (Christie’s International Real Estate), and various other professionals who were in a position to tap into their existing clients and marketing networks to provide information on the laws.

“Quite frankly, the results were remarkable, as our clients understood the allure and benefits of the incentives. Indeed, many have indicated that they themselves have become promoters of the benefits of Acts 20/22 with their friends, families and business colleagues, which means that you are reaching exactly the types of individuals the laws are targeting,” said Cerezo, who in 2012 was selected as one of the “50 Influentials” by Hispanic Business magazine, and is considered one of the leading cross-border attorneys among global law firms with a focus on Latin America.

“Pérez-Riera did a great job of putting these laws together, but just as important, the marketing and promotional materials he created were world-class. The rollout was on par to significant and successful efforts we have seen in other jurisdictions such as Panama, Singapore and Dubai. The level of commitment and competence that he brought to the position of secretary of Economic Development & Commerce was outstanding and certainly essential to the conception, creation and rollout of Acts 20/22,” Cerezo continued.

“It really was a stroke of genius to put such a program in place, and we have been promoting it ever since with great results for our clients and Puerto Rico,” added Brunet González, who believes that Christie’s International Real Estate is poised to help accelerate the pace of adoption of the incentives.


The low-key but effective initial promotional approach has been scaled up by the García Padilla administration, forming a core strategy employed by DDEC Secretary Bacó in his efforts to bring back sustainable economic development to the island. The financiers and entrepreneurs moving to the island to cash in on big tax savings are expected to invest $10 billion in Puerto Rico by 2017, he said.

“The smart money knows that Puerto Rico’s financial future doesn’t hinge on what has happened in the past, but on what is happening now,” Bacó said.

Big feature news reports on the incentives have been published in the New York Times and Bloomberg Businessweek, among other key media outlets, and hundred of potential investors and clients gathered at the first Puerto Rico Investment Summit earlier this year, where they were told that Puerto Rico is the new land of opportunity. With exponential growth of Act 20/22 beneficiaries expected to continue, it is clear that many investors are getting the message.

Some of the most passionate testimonials for Puerto Rico’s economic opportunities are coming from investors themselves, including Paulson of Paulson & Co. and Nicholas Prouty of Putnam Bridge Funding, who are betting hundreds of millions each on Puerto Rico’s turnaround.

“We are investing here because we think we are getting involved on the ground floor,” Paulson told investors at the Summit, and famously predicted that Puerto Rico will become “the Singapore of the Caribbean.”

“Puerto Rico is in the process of a great reinvention. We are at an infl ection point and, after years of decline, asset values here are creating generational opportunities,” Prouty added in a recent speech.

Acts 20/22 are not only here to stay, but are also slated to be fine-tuned so that they are even a greater lure for investment.

Senate Finance Committee Chairman José R. Nadal Power has authored legislation to improve both incentive laws and expects his initiatives to be approved this term.

One proposed change would significantly expand the universe of potential investors under Act 22 by shortening an eligibility requirement that potential beneficiaries couldn’t have lived in Puerto Rico for the past 15 years to only six years. The change is aimed at luring back home some of the talented Puerto Ricans who have left the island during the years-long economic downturn that began in 2006. Detractors of the move say that with the monumental pool of existing potential beneficiaries, there is no need to change the law to make it applicable to a few individuals that may yet return to Puerto Rico without the lure of the incentives.

Another aspect of Nadal Power’s proposal would exempt investors benefiting under Act 22 from Puerto Rico’s “forced inheritance rules,” which leave very little discretion to the wealthy individual on how he or she wants to distribute accumulated wealth after his or her death. For example, Puerto Rico law spells out minimum portions of the estate to which the widowed spouse and heirs are entitled. The forced inheritance rules also apply to Puerto Rico real estate owned by nonresidents.

Puerto Rico law impedes the effective utilization of tax strategies aimed at minimizing federal inheritance taxes, which still apply to investors who move here, and could invalidate many of the trusts these individuals established outside the island. The changes would recognize trusts and wills established outside of Puerto Rico.

Another proposal would widen the number of professional services that could qualify for Act 20 incentives. Nadal Power said the proposed changes are very important to the Acts 20/22 community on the island and would significantly strengthen the twin incentives program.

“The laws have already been very successful, and these changes are aimed at making them even more attractive,” Nadal Power said. “They are an important part of our economic- development strategy and can help Puerto Rico fulfill its potential to become a hub for new professional-service businesses.”

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KPMG report would increase taxes by $2.5 billion a year


KPMG report would increase taxes by $2.5 billion a year
marino@caribbeanbusiness.pr; rosario@caribbeanbusiness.pr; cbprdigital@gmail.com
Edition: February 12, 2015 | Volume: 43 | No: 5

Broad range of interest groups clamoring for exemptions

Stating its case that Puerto Rico’s current tax structures are “inordinately complex, due principally to a plethora of special provisions that for the most part were adopted in a haphazard manner over time,” KPMG, the consultants hired by La Fortaleza, have drawn up a sweeping tax reform that would increase government revenue by $2.5 billion annually through a broad-based 16% value-added tax (VAT).

However, sources indicated that the government must raise at least $1.5 billion in additional revenue a year—or $1 billion less than KPMG’s original proposal—to deal with its precarious fiscal situation. That figure will likely rise since last week a federal judge ruled the Puerto Rico Public Corporations Debt Compliance & Recovery Act unconstitutional, complicating matters further. The law outlines a bankruptcy-like procedure for most public corporations to restructure their debts.

Analysts told CARIBBEAN BUSINESS the decision would mean the commonwealth now needs a bigger financial cushion and will likely have to pay its obligations as they come due. With the Recovery Act in place, the commonwealth could negotiate with creditors because it could invoke the law as a “threat,” analysts said. That bargaining chip has now fallen by the wayside.

The VAT, or IVA by its Spanish acronym, is levied across the distribution chain and would replace the current 7% sales & use tax (IVU by its Spanish acronym).

The existing 7% IVU didn’t receive high marks from KPMG. “The existing consumption tax exempts numerous goods and services, the consequences of which are reduced revenue, complexity, increased administrative costs and tax-avoidance opportunities. Indeed the current compliance rate is estimated at 56%,” the KPMG report states, calling this “an obviously unacceptable number.”

Instead, KPMG’s proposal calls for a broad-based 16% VAT, providing regressivity relief for the poor and working poor. The plan would eliminate most of the existing consumption-tax exemptions, with the 16% tax placed on unprepared food and medicine, providing exemptions only on exported goods and services, financial services, residential housing, water and electricity, fuel, and hotel services.

As CARIBBEAN BUSINESS went to press, officials were reportedly fine-tuning the list of exemptions, as many special interest groups, including those representing hospitals, pharmacies, restaurants, farmers and developers, have made their way to La Fortaleza, clamoring that their goods and services be exempt. It is widely believed that unprepared food and prescription drugs will be exempt from the proposed VAT.

The proposed reform would increase taxes for all taxpayers except those earning less than $21,800 annually, who would pay no additional tax, according to the KPMG report.

Taxpayers earning $21,800 to $33,000 would pay an additional $508 a year, while those earning $33,050 to $84,170 would get hit with a tax hike of between $1,761 and $1,836, the report indicates. Taxpayers earning more than $84,170 annually would be subject to a $4,548 tax hike.

The reform would also eliminate most income-tax exemptions, including the Act 22 tax break for wealthy investors who move here. The mortgage-interest deduction would be converted to a tax credit that phases out as a homeowner’s income increases.

In addition, the plan would subject Social Security earnings in Puerto Rico to taxes for the first time.

Since the VAT is a regressive tax, placing a higher burden on the poor, regressivity relief would be provided. Low-income residents would be spared the pain of the 16% tax through direct cash payments to totally eliminate the tax burden on food, medicine, education and clothing, which would total $1.42 billion annually. Government officials are contemplating possible refunds of up to $2,000 a year on VAT payments for people on the lowest rungs of the income ladder.

Individual income taxes would be cut by 28.8%, with those earning $35,000 or less and married couples earning $70,000 or less completely exempt from taxes, and those earning more than that being subject to either 15%, 20% or 30% rates, depending on income.

Meanwhile, corporate taxes would be slashed by 30.6%, with most of the relief coming through the elimination of the gross receipts tax, locally known as the patente nacional. Under the reform, businesses would be subject to a fl at 30% corporate rate.

Officials have pledged to introduce tax-reform legislation by Feb. 15.

KPMG officials said the implementation of the new system usually takes 18 months to two years.

“The objectives of tax reform are to ensure adequate revenues to the commonwealth and promote economic growth by broadening the tax base, assuring an equitable distribution of the tax burden and enhancing compliance,” the KPMG report states.

La Fortaleza spent $4.7 million on the tax reform report.

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Governor signs bills to allow private equity funds, cut auto excise taxes


Governor signs bills to allow private equity funds, cut auto excise taxes
By CB Online Staff
cbnews@caribbeanbusinesspr.com; cbprdigital@gmail.com

Gov. Alejandro García Padilla signed legislation Tuesday enabling the local launch of private-equity funds, a move proponents say could raise $1 billion a year in fresh capital to help drive economic development.

The governor also signed a law that cuts the excise tax on automobiles by 15 percent in a bid to jump-start auto sales that remain in a deep and prolonged skid amid the island’s ongoing economic downturn.

Authored by Senate Finance Committee Chairman José R. Nadal Power, the Private Equity Funds Act (Senate Bill 862) was approved by the House in October following Senate approval June 2 in a 25 to 1 vote.

The law aims to provide a financing alternative for Puerto Rican start-ups or existing companies that are privately held to find capital for expansion.

Nadal Power has said the banking system here isn’t filling the whole need and not all companies can go public.

By creating a new investment vehicle, the proposed law is also expected to spur employment in Puerto Rico’s financial services industry.

Regulations will have to be enacted and the first private-equity funds in Puerto Rico will make their appearance in early 2015, according to Nadal Power.

Private-equity funds have played a key role in the U.S. economic recovery by providing capital to companies that don’t have access to public-equity markets such as the New York Stock Exchange, Nasdaq (National Association of Securities Dealers Automated Quotation System) and other financial markets. In 2009, for example, these funds raised $90 billion worldwide with 36% of this capital invested in the U.S.

Yet, Puerto Rico has stood alone among capitalist jurisdictions in not allowing for the creation of private-equity funds, said financial industry veteran Miguel Ferrer, who has been pushing for their development for the past two decades.

“We have the talent, we have the capital, but we haven’t had the vehicle in which to invest,” Ferrer told CARIBBEAN BUSINESS, estimating it will attract $1 billion annually in new capital to Puerto Rico. “There are many potential investments in Puerto Rico that can help businesses and turn them into exporters. We have a lot of good brands that don’t export enough. But first we have to bring capital here.”

The legislation touts private-equity funds as a “proven investment alternative” that has financed expansions of businesses, restructured businesses at risk of failure and promoted pioneering industries in the initial stages of development.

At the same time, by attracting outside capital to Puerto Rico, the new funds will create jobs in the island’s important financial services industry.

Private-equity funds are for wealthy sophisticated investors because they make high-risk investments with the potential for big returns and big losses. Individuals must have a net worth of at least $1 million, and the funds themselves must have at least $10 million.

The law provides special preferential tax treatment for these investments and clarifies that investors in these funds can benefit from current rules regarding investing through partnerships or limited liability companies, which protect them from the high risk of the investment.

Ferrer said the investment vehicle itself, in which the fund manager actually makes the investment decisions, is another important benefit because it has been very hard to arrange private-equity deals in Puerto Rico due to the difficulty in reaching consensus among investors on backing specific projects.

The law limits the amount of money that can be invested in any single investment to 20% of the fund’s total. Investors will be taxed at a fixed rate of 10% on income derived from interest and dividends, and capital gains will be completely exempt from income tax. Investors who sell their interest in the fund will be subject to a 5% tax on these earnings unless the investor reinvests these earnings in another private-equity fund, in which case there will be no capital-gains tax due.

There are two options for private-equity funds regarding the amount of investment that must take place in Puerto Rico. Under one option, 60% of the fund must be invested in local investments, with 20% invested in start-ups anywhere and 20% invested in other securities. Another option would only require 20% of the fund to be invested in Puerto Rico sources, but the tax deductions available are much less for investors, Nadal Power said.

The senator explained that the legislation is a great complement to Acts 20 and 22 and that many Act 20 beneficiaries are interested in launching private-equity funds in Puerto Rico, which will create jobs and bring fresh capital here.

Act 22 is primarily designed to attract high-net-worth individuals to Puerto Rico by eliminating all taxes on passive income that accrue after they relocate to the island. While dividends and interest income earned by Puerto Rico residents on U.S. securities are generally taxed by the federal government, capital-gains taxes on their sales are based on residence.

Act 20, meanwhile, establishes a fl at 4% tax on earnings from companies that export professional services to markets abroad. The companion law is meant to lure Act 22 beneficiaries to bring at least a portion of their eligible businesses to Puerto Rico with them.

Nadal Power said many Act 22 beneficiaries are from the financial industry, and launching private-equity funds is a way for them to benefit from Act 20 while contributing to Puerto Rico’s economic development.

The Private Equity Funds Act is one of several administration initiatives aimed at sparking an economic recovery in Puerto Rico by attracting offshore capital and fomenting the growth of local capital, he added.

Nadal Power has authored legislation to improve both incentive laws and expects his initiatives to be approved this term. One proposed change would significantly expand the universe of potential investors under Act 22 by shortening an eligibility requirement that potential beneficiaries couldn’t have lived in Puerto Rico for the past 15 years to only six years. The change is aimed at luring back home some of the talented Puerto Ricans who have left the island during the years-long economic downturn that began in 2006. Another proposal would exempt investors benefiting under Act 22 from Puerto Rico’s “forced inheritance rules,” which leave very little discretion on how to distribute accumulated wealth after his or her death. This also impedes the effective utilization of tax strategies aimed at minimizing federal inheritance taxes, which still apply to investors who move here, and could invalidate many of the trusts these individuals established outside the island. The changes would recognize trusts and wills established outside of Puerto Rico. Another proposal would widen the number of professional services that could qualify for Act 20 incentives.

“These three bills are interrelated and aimed at fomenting the ecosystem to attract capital and create jobs in Puerto Rico,” Nadal Power said.

Law enacted to cut excise taxes on motor vehicles

García Padilla had sent legislation to the Capitol just last week that will cut excise taxes on automobiles by 15 percent.

The measure comes amid a long and deep skid in auto sales in Puerto Rico that has hit the local industry and pulled down tax revenues.

“This measure is a clear example how my administration attends to the government’s fiscal situation while also offering relief to the pockets of Puerto Rico residents,” the governor said in a statement.

“The sale of new vehicles benefits the island economy and promotes savings for consumers who acquire more efficient vehicles at better prices,” he added.

The excise tax on motorcycles will be lowered from 10 percent to 8 percent.

The measure will cover automobiles delivered after October 31, 2014 and new and used vehicles in inventory that have not yet paid the levy. Importers and dealers can seek tax credits on vehicles that have paid the current excise tax after October 31.

La Fortaleza said the legislation aims to jump-start auto sales to shore up revenues and represents an inroad on the first phase of a sprawling tax reform that is in the works.

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Wealthy potential investor from the states disappointed with poor customer service from realtors


One that got away
Edition: February 12, 2015 | Volume: 43 | No: 5

With the Puerto Rico government trying to lure as many investors to move to the island, as part of the Act 22 initiative, here’s a story of one wealthy fish who got away. A businessman from the Pacific Northwest was recently in Puerto Rico for about two weeks, exploring the possibility of moving here under Act 22. The potential investor told CARIBBEAN BUSINESS sources that he was impressed with what he saw and was particularly enamored of Old San Juan. The businessman, intent on buying property in the Old City, contacted real-estate agents, but was very disappointed when he received poor customer service. Accustomed to receiving quality treatment in other places, the potential investor left Puerto Rico, indicating he was no longer enthusiastic about moving here.

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