Legislation sweetens Acts 20/22 incentives
By : JOHN MARINO
Edition: December 11, 2014 | Volume: 42 | No: 48
Bills awaiting enactment to enable more investors, professional service firms to benefit
New legislation expected to be enacted shortly by Gov. Alejandro García Padilla will increase the appeal of Acts 20 and 22 of 2012, which encourage the export of professional services from Puerto Rico and the relocation of millionaire investors to local shores with some of the best tax breaks in the world.
Penned by Senate Finance Committee Chairman José Nadal Power, Senate Bill 864 was approved last month and sent to La Fortaleza for the governor’s signature on Nov. 24, while Senate Bill 1020 was sent to La Fortaleza on Nov. 21 after winning approval from both chambers.
Senate Bill 864 increases the power of Act 22 to attract wealthy investors by reducing to six years, from 15, the amount of time an individual can’t have lived in Puerto Rico to qualify for its benefits, while also exempting investors who decide to move here from the island’s rigid inheritance laws.
Act 22 completely exempts these individuals from passive investment income taxes, including capital-gains taxes, which makes it perhaps the best tax deal in the world for U.S. investors.
With Puerto Rico’s economic downturn stretching back to 2006, amending the requirement by reducing to six years from 15 years “will allow professional Puerto Ricans, who currently form part of our diaspora, to benefit from these incentives” and will be “an additional tool in our efforts to incentivize the return of Puerto Ricans,” Nadal Power said in arguing for passage.
Detractors of the move say that with the huge pool of existing potential beneficiaries, there is no need to change the law to make it applicable to a few individuals who may yet return to Puerto Rico without the lure of the incentives.
Another aspect of the law would exempt investors benefiting under Act 22 from Puerto Rico’s “forced inheritance rules,” which leave very little discretion 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.
Most investors who have decided to move to Puerto Rico under Act 22 have been single, and local inheritance rules are a big hindrance for married investors with heirs. The rules also impede the effective utilization of tax strategies aimed at minimizing federal inheritance taxes and could invalidate many of the trusts these individuals established outside of Puerto Rico. It also bars them from leaving more than one-third of their estates to charity. The issue is important because most Act 22 beneficiaries are still subject to federal inheritance taxes that can go as high as 40% unless specific strategies are implemented.
The related Act 20 aims to encourage these investors to establish businesses in Puerto Rico by reducing the corporate tax rate to 4% on income generated from the export of professional services, whether financial, legal or high-tech. It also incentivizes local professionals and professional service firms to export their services in new offshore markets by offering them the same deal.
Senate Bill 1020 expands the type of businesses and services eligible to take advantage of Act 20, as well as other incentives available under Act 73 of 2008, including trading companies, certain marketing services, distribution and logistics, assembly, and bottling and management services.
Some 250 investors are expected to take advantage of the Act 22 tax decrees this year, according to the Economic Development & Commerce Department (DDEC by its Spanish acronym). 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, said DDEC Secretary Alberto Bacó Bagué.
Puerto Rico’s unique political status—under the jurisdiction of the U.S. but with a separate tax system—makes Act 22 particularly attractive to wealthy investors residing stateside. U.S.-based investors who move to the island 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 citizenship to take advantage of the tax-shelter offer. Taxpayers who opt to re-establish overseas to a foreign country have to surrender their U.S. passports and pay an exit tax of 23.8% on unrealized capital gains.
Critics, however, say the program’s economic-development potential is overstated. They also worry that the tax breaks aimed at the wealthiest U.S. taxpayers could spark a congressional backlash if it gets too successful.