Acts 20/22 here to stay, DDEC’s Bacó says

Acts 20/22 here to stay, DDEC’s Bacó says
Edition: February 12, 2015 | Volume: 43 | No: 5

While KPMG’s tax-reform report calls for changes to the Acts 20/22 program, these lures to attract capital investment are here to stay, said Alberto Bacó Bagué, secretary of the Economic Development & Commerce Department (DDEC by its Spanish acronym).

“Act 20 and the rest of the incentives laws should be subject to periodic evaluation to make sure they fulfill their objective of economic growth,” he conceded.

“Our public policy is clear: We are steadily converting Puerto Rico into an international services hub. The vibrant promotion of our six main incentives laws [Act 20, Act 22, Act 27, Act 84, Act 273 and Act 399] has made viable the second grand economic transformation of Puerto Rico,” Bacó said.

To date, more than 400 people have moved to the island under Acts 20/22, investing more than $6 billion in Puerto Rico and creating more than 1,000 jobs, according to government estimates. Former Gov. Luis Fortuño passed the incentives, established under former DDEC Secretary José Ramón Pérez-Riera, with little publicity in 2012. Since then, Gov. Alejandro García Padilla’s administration has been touting these tax breaks to promote investments and attract foreign businesses to the island.

KPMG’s report calls for the repeal of Act 22, which provides 0% tax on investment income for individual investors. The report classifies these benefits as tax expenditures and recommends Act 22’s repeal or modification to simplify tax reporting and increase compliance.

“This recommendation won’t be adopted,” Bacó said, who noted Acts 20/22 were expanded last year—to include people who have lived in the mainland U.S. for at least six years, instead of 15—after KPMG issued its report. “Individuals under Act 22 are subject to Puerto Rico taxes on all other streams of income not covered by Act 22, thus broadening the tax base,” he noted.

KPMG also calls for a revision of Act 20—which provides 4% tax on service income, such as a hedge fund’s management fees—”to condition the receipt of benefits under the law on a certain minimum threshold of activity in Puerto Rico, based either on number of employees, payroll expense or property owned in Puerto Rico.”

Since January 2013, DDEC has established a strict policy that requires a minimum of three employees for each Act 20 company, Bacó noted.

“Since enactment, these laws have allowed local, small, midsize and multinational companies to provide services in the global market from Puerto Rico,” Bacó said. “We reiterate our commitment to an already successful program and trust that we will continue seeing positive results for many years to come.”

“While it’s still too early to tell, all the available signals indicate this program has been super-successful,” said Miguel A. Ferrer, a veteran investment banker with more than 50 years’ experience in finance who served as president and then chairman of UBS-Puerto Rico from 1983 to July 2014. “These acts all by themselves have revived Puerto Rico’s luxury real-estate market, which now has much more demand than product.

“The Acts 20/22 program goes to the core of turning around our economy, which is economic development,” Ferrer said.

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Legislation sweetens Acts 20/22 incentives

Legislation sweetens Acts 20/22 incentives

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.

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Useful links to apply for Act 20 of 2012, Act 22 of 2012 for Puerto Rico tax decree

ACT 20 – Export Services Act – for establishing a business with 3 or more employees

ACT 22 – Individual Investors Act

You can fill out the forms on your own or pay a lawyer $1000-2000 to do it for you. I recommend doing it yourself, especially if applying for Act 22, because the forms are fairly straightforward.

You can apply for Act 20, Act 22, or both.

Some pointers:
You truly have to move to Puerto Rico and have a closer connection to Puerto Rico than the states for Act 22. The consequences for failing to comply mean that you would lose your tax benefits retroactively. You have to live 183 days or more in Puerto Rico, or at least live more days in Puerto Rico than the states.

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Treasure Island: Puerto Rico Bids To Become New Age Tax Haven
Forbes 2/11/2015 @ 6:05AM
Treasure Island: Puerto Rico Bids To Become New Age Tax Haven
This story appears in the March 2, 2015 issue of Forbes.
By Philip DeMuth and Lauren Gensler

As the U.S. Treasury Department continues to tighten its noose around offshore accounts, a new tax haven has sprung up under its nose in the Caribbean. Welcome to Puerto Rico–island of tropical breezes, and (for new arrivals only) a 0% tax rate on certain dividends, interest and capital gains.

Puerto Rico is about the same size as Connecticut but with more palm trees, twice the unemployment rate, a third the median household income and a tiny fraction of the hedge funds–a deficiency the financially teetering territory aims to correct by turning itself into a refuge for tax-oppressed millionaires and billionaires.

Yes, this is legal. While the U.S. asserts a sweeping right to tax citizens’ income wherever they live and wherever it’s earned, Section 933 of the tax code exempts residents of Puerto Rico from paying U.S. income tax on their Puerto Rico-sourced income. Instead, the Commonwealth of Puerto Rico has the exclusive right to tax local income as it sees fit.

“The way the U.S. tax code is written, I could be on Mars and be taxed on intergalactic income but not if I’m sitting on this island in the Caribbean. It’s kind of in a twilight zone,” marvels Irvine, Calif. money manager Mohnish Pabrai.

To exploit this special status and help rescue its economy, Puerto Rico’s Legislative Assembly adopted two laws in 2012 and expanded them last year. Act 20 entices hedge funds, family offices, professional service firms and even software developers to locate there by taxing their corporate profits from exported services at a flat 4% rate and allowing those profits to be paid out to the owners free of Puerto Rico income tax. So far the government has okayed 346 export companies, with 400 approvals expected this year.

Pabrai used Act 20 to set up a new private equity venture in Puerto Rico last year and figures he’ll save as much as $10 million in tax a year, as well as half a million in operating costs. (There’s an abundance of educated Puerto Ricans ready to work for less than their California counterparts. Office space is cheaper, too.)

Act 22 grants new Puerto Rico residents (including, after a recent amendment, returning Puerto Ricans who left before 2006) a 0% rate on locally sourced interest and dividends as well as all capital gains accrued after they become residents, a particular benefit for active traders. So far 509 tax refugees have been granted Act 22 status and another 600 will get it this year, Puerto Rico’s Department of Economic Development & Commerce projects.

Puerto Rico? Really? When the property crime rate in the San Juan metropolitan area is six times that of the New York City area?

It depends on how you want your pocket picked. Since 2013, when rate hikes on the wealthy and a 3.8% ObamaCare tax on net investment income both kicked in, the top effective combined federal and state tax rate on long-term capital gains and qualified dividends has been 32.7% for New York City residents, 33% in California and 29% in Connecticut. On short-term gains and taxable interest it’s now a hefty 52.3% in NYC, 52.6% in California and 48.6% in Connecticut.

Sadly, moving to Puerto Rico won’t buy you a total dispensation from the Internal Revenue Service. Uncle Sam still wants his cut on dividends you receive from U.S. public companies, profits from mainland private businesses, pensions and deferred compensation earned in the states, and Social Security benefits.

Plus, any unrealized capital gain accrued before you moved to Puerto Rico–say, on that Apple AAPL +2.33% stock you bought for a split-adjusted $10 a share–is subject to U.S. tax if you sell within ten years after your move. During that period Puerto Rico will also impose a 10% tax on your pre-move gains, which gets credited against what you owe Uncle Sam. After ten years the U.S tax on preexisting gains disappears and the Puerto Rican bite drops to just 5%.

This is a much sweeter deal than you can get these days by renouncing U.S. citizenship. In 2008, after years of stories in FORBES and elsewhere about billionaire tax expatriates, including Campbell Soup CPB -0.42% heir John Dorrance and Styrofoam cup heir Kenneth Dart, Congress decided that anyone worth more than $2 million would have to pay taxes on unrealized gains above a certain amount ($690,000 for 2015) when giving up citizenship–just as if they’d sold all their assets.

If you take up residence in Puerto Rico, you get to keep your citizenship and the dollars in your wallet and you don’t have to ante up any U.S. gains tax unless you sell within the next ten years.

Make no mistake: To benefit from Act 22 you must become a bona fide Puerto Rico resident, which means being on the island at least 183 days a year. You can’t just rent a post office box in San Juan and call it “home” while keeping a $5 million house and your ties back in the States. Your business, family, bank and brokerage accounts, driver’s license and yacht should all move with you to the island.

But you don’t really have to spend 183 full days in Puerto Rico. “If you arrive at 11:59 at night that is counted as a day in Puerto Rico,” says San Juan tax attorney Edgar Rios-Mendez. Conveniently, San Juan is 3 1/2 hours or less by private jet from New York’s LaGuardia Airport.

(Be careful. Remember, you must convince not only Puerto Rico’s friendly officials that your residence is on the island but also the possibly hostile auditors from the high-tax jurisdiction you’ve just fled–and they, too, can count partial days to claim you as a resident.)

Pabrai considers the Act 22 personal tax deal so good that he’s surprised thousands of rich Americans haven’t already moved to Puerto Rico. Yet he himself has not for the sort of personal reason that could be holding others back, too: His wife, Harina Kapoor, started and runs a solar energy company and a yoga studio in California and understandably doesn’t want to go.

Billionaire investor John Paulson hasn’t moved, either, but is, if anything, even more bullish about what he has called “the Singapore of the Caribbean.” While he declined to be interviewed for this story, island officials say Paulson’s investment will reach $1.5 billion by year’s end, a figure his aides don’t dispute.

So far Paulson has acquired three beachfront hotels, including the luxe five-diamond St. Regis Bahia Beach Resort and the historic Condado Vanderbilt, which was designed by the same architects as New York’s Biltmore Hotel but lay dormant for 15 years until he came along. It reopened in December after a $200 million renovation.

Paulson has also snapped up office space and a parking lot in the financial district, and empty lots on the boutique-lined Ashford Avenue, primed for new high-rise condos.

Nicholas Prouty, who runs Putnam Bridge, a private equity firm that targets distressed assets, did call the moving vans. Putnam picked up two big Puerto Rico projects from bankruptcy court. Then, despite “some sense of guilt” about uprooting his 10-year-old daughter, Prouty moved Putnam Bridge and his family from Greenwich, Conn. to San Juan in 2013.

Putnam is sinking at least $100 million into revitalizing the Puerto del Rey Marina near the town of Fajardo and poured more than $200 million into Ciudadela, a mixed-use development in San Juan’s Santurce district that has now sold all of its 312 condo units, primarily to Puerto Ricans. “Beachfront property located in a country with an American flag in the courtroom and a CVS on the corner is a good bet,” Prouty opines, adding that the current government’s policies are setting the stage for an island comeback.

While he moved for business and tax reasons, Prouty says his weekends are now “utterly epic,” with his family cruising to “pristine beaches with funky beach bars” where they meet up with others from his daughter’s private school.

What about the danger that either Puerto Rican voters or the U.S. Congress will decide the deals being handed out to the rich are so good they shouldn’t be true?

Those already approved for Act 20 and 22 benefits have some protection from shifting island sentiment: contracts with the Puerto Rican government guaranteeing favorable tax treatment for 20 years. Meanwhile, government officials optimistically predict that, by 2017, Act 20 and 22 will together create 82,500 jobs, more than ten times what they’ve generated so far.

As for a change in the U.S. tax code, that seems unlikely for now, particularly if Republicans deem it a tax hike. And Washington presumably wants Puerto Rico to succeed. After all, if the territory can’t pay its $71 billion in government debts (currently rated BB with a negative outlook by Standard & Poor’s), U.S. investors will take part of the hit.

Still, it’s worth remembering this: Some of Puerto Rico’s economic problems can be traced to Congress’ decision to end, as of 2006, a special tax break for drug and other manufacturers who produced in Puerto Rico and exported to the U.S.

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Puerto Rico Investment Summit on February 26-27, 2015 to learn about Act 20, Act 22 at Puerto Rico Convention Center, Condado Vanderbilt Hotel

Registration and payment required to attend.  Cost $1250-$2500 per person.

Day One
February 26, 2015 • Puerto Rico Convention Center

Puerto Rico is Open for Business– Economic Overview & Trends:
Alberto Bacó-Bagué
Secretary of the Department of Economic Development and Commerce

Tax INCENTIVES for Export Services and Individual Investors in Puerto Rico

Keynote Speaker

Investment Vehicles to maximize your Wealth:

• Real Estate Investment Trust (REIT’s)
• Private Equity Funds Act


New Development on International Insurance
Success Stories: Early Adopters share their Experiences
Dinner at Ballajá, Old San Juan


February 27, 2015 • Condado Vanderbilt Hotel

Living in Puerto Rico
• Residential Market
• Commercial Market
• School Systems
• Healthcare

Applying for Act 20 and Act 22

Other Investment Vehicles
• Opportunities for Public-Private Partnerships

Private Tours:
• Puerto Rico from the Air – Helicopter Tours
• Lunch at the St. Regis Bahia Beach Resort

This is a preliminary schedule, subject to change. All optional tours will have an additional cost.

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The Act20/22 Society Forum of Puerto Rico

The Act2022 Society Forum of Puerto Rico can be a useful place to learn more about Act 20 of 2012 and Act 22 of 2012.  Here we post a multitude of articles to learn more.

Posted in Why the wealthy consider moving to Puerto Rico | Leave a comment

As middle class flees, Puerto Rico tries luring rich people to save the Puerto Rican economy

Feb 6, 2:12 PM EST

As middle class flees, Puerto Rico tries luring rich people

PALMAS DEL MAR, Puerto Rico (AP) — Bond trader Ben Eiler swapped life in suburban Georgia for an island in the Caribbean, and he didn’t even have to apply for a visa.

The towering 38-year-old native of Arkansas is one of at least 250 people who’ve accepted Puerto Rico’s invitation to well-heeled U.S. citizens to move to the island and enjoy life without taxes on capital gains, an enticing offer for those whose income is derived from investments.

Eiler lives in a gated community on Puerto Rico’s southeastern shore, making a commute of less than 5 minutes from house to office across manicured greens, with an expansive ocean view.

“Driving to work in your flip-flops and golf cart is not bad,” he says with a quick laugh.

This semi-autonomous U.S. territory sets its own tax policy, and its residents pay no federal tax on income derived locally. Mired in a recession for almost a decade and with an unemployment rate stuck above 13 percent, more than double the U.S. rate overall, it decided in 2012 to try to lure wealthy investors who would be likely to buy expensive real estate, establish businesses and create jobs.

Act 22, the legislation that set up the program, exempts people from taxes on any capital gains accrued after they move and it provides an exemption from local taxes on dividends and interests if they take up permanent residence, among other conditions. A government brochure sums it up as “Sun, Sand and Zero Taxes.”

“Frankly, for Americans, it’s sort of an unprecedented thing,” said Alex Daley, a technology investment strategist who moved from Vermont with his wife in December 2013.

Daley said he felt the U.S. mainland had become a more hostile tax environment under President Barack Obama. “They try to hold the people with the most mobility and the most wealth captive,” Daley said of the U.S. government. “People are getting angry about that.”

The law is sparking some controversy in Puerto Rico, however, particularly among economically beleaguered middle-class workers who pay island taxes on non-investment income. Others say the strategy helps erode the U.S. federal government’s tax base by diverting revenue from the mainland.

Economists also say the new residents won’t do enough to rescue the island from its deep economic woes. A smarter strategy would be to focus on broadening the tax base, said Barry Bosworth, an economist with the Brookings Institution in Washington.

“Instead, Puerto Rico spends a lot of time and effort to attract a sub-population that wants special treatment and is seeking to avoid paying taxes on the mainland,” he said. “It gives the appearance of being for sale.”

A recent report from Standard & Poor’s issued another warning: “If Puerto Rico becomes too successful at marketing itself as a tax haven, the U.S. Congress in our view would likely enact restrictions.”

So far, however, at least 500 people have applied and been approved, half of whom have made the move like Eiler. He had only briefly visited Puerto Rico before settling here with his family, but he finds the environment familiar.

“We have a Walmart and Costco and P.F. Chang’s,” he said.

Such familiarity and the ability to move while staying within U.S. jurisdiction is a draw not offered by the Bahamas and other Caribbean destinations that have created tax incentives to lure investors.

Lawyers and tax experts in Puerto Rico say they get calls daily from people seeking to move, including managers of hedge funds or private equity funds who make most of their money from capital gains. In the U.S., long-term capital gains are taxed at 23.8 percent.

The tax refugees must not have lived in Puerto Rico for six years prior to when the law was approved in order to qualify.

Their arrival bucks a trend in the other direction. From 2010 to 2014, Puerto Rico’s population dropped 5 percent to 3.5 million, according to the U.S. Census Bureau. Many of those who left are middle-class professionals, driven out by the lack of economic opportunity and the high cost of living.

While Puerto Ricans do not pay U.S. income taxes, except for Social Security and Medicare, they do pay the equivalent of state income taxes. The highest bracket, for those with incomes above $62,000, is 33 percent.

Act 22 has generated more than $200 million in local real estate sales, said Juan Carlos Suarez at the Department of Economic Development and Commerce, who added that the program is not much different from the incentives offered to other sectors, including manufacturing. He said the government this year will start tracking how much money and jobs investors are generating overall. “We are thrilled with the growth that Act 22 has had, especially in the past two years,” he said.

But Robb Rill, a Florida hedge fund manager who was among the first to move to Puerto Rico and established The 20/22 Act Society to help others find their feet, cautioned that the free ride could come to an end if the program is abused.

“Right now we’re in the earlier stages, and as long as there are no bad actors and the program does a good job of self-policing, the odds of that are fairly low,” he said.

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