The Billionaire Tax Move That Could Be For You: Puerto Rico

Entrepreneurs 5/23/2014 @ 10:45AM 5,720 views

The Billionaire Tax Move That Could Be For You: Puerto Rico

Last month, the billionaire hedge fund manager John Paulson called the island “the Singapore of the Caribbean.” He even briefly, it was reported, considered moving there. What’s so appealing that a lifelong New Yorker would ponder leaving the Manhattan skyline behind? Not the sunnier skies, probably, or the coquis, or even the snorkeling.

What Puerto Rico offers now is tax breaks that for entrepreneurs that add up to astonishing savings.

If you can creditably relocate yourself and much of your business, especially before you retire and your cash out of your company, you can potentially slice income, capital gains and dividend taxes.

Gabriel Hernandez, tax partner with BDO, an accounting firm with a 155-staff on the island, said the strategy tends to work well for service-based companies with markets outside Puerto Rico, especially those in finance and technology, and perhaps a dozen or so employees. He said he knows of about 200 people who have made the move so far.

“If you are an IT developer, and you and some members of the team move here, a lot of that works well,” he said.

There are three places you’ll see tax breaks:

• On personal income. The income tax in Puerto Rico is only 4%. Compare that with the combined federal and state income tax burden that can reach 50-60% for successful entrepreneurs in places like New York and California, and you begin to see how powerful a move could be.

English: Caribbean Sea, Navio Beach, Vieques I...

Caribbean Sea, Navio Beach, Vieques Island, Puerto Rico (Photo credit: Wikipedia)

• On dividend income. There is no dividend tax at all, compared with a 15 or 20% tax on dividends in the mainland, depending on your tax bracket (people in the lowest two tax brackets pay no dividend tax on the mainland, either). That could be huge, if you are receiving distributions from your company’s profits, or have substantial investments from which you receive dividends — or if you plan to use those strategies as part of your retirement income.

• On capital gains. Again, no capital gains tax at all, compared with 20% in the mainland. So if you move to the island, jot down the value of any shares you own at the time. When later, you sell, you owe no tax on the gain in between.

Because Puerto Rico is part of the United States, you’d still be operating under all the legal and intellectual property protections that hold sway on the mainland, Hernandez noted.

There are risks, of course. “Having a tax home in PR is critical to realizing full benefits of the idea and one has to virtually eliminate all prior connections to the mainland to resist a claim by the United States that you are still a U.S. resident,” said Ramon Camacho, international tax technical lead at Chicago-based McGladrey LLP, an accounting firm that focuses on middle market companies, in an email. “In theory this risk is easy to manage – sell your home, move your immediate family, sever your connections to the community – but challenging to implement in practice, though a number of folks are finding this option attractive enough to try. If the U.S. is successful in bringing you back in to the U.S. tax net, then you will be liable for back taxes, penalties and interest, so the stakes are high. But the tax benefits are staggering.”

OK, but what about the hurricanes? Hernandez says there haven’t been any major ones in his memory, and in any case, the island is equipped. “Our windows are as thick as walls,” he says.

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