After more than a decade since the inception of Acts 20 and 22, now Chapters 2 and 3 of the Puerto Rico Incentives Code, there's been increased traction and scrutiny from the IRS. Act 60 offers various tax benefits to specific industries and activities that secure a grant of tax exemption ("Grant"), including:
- A 4% income tax rate on eligible income.
- A 75% exemption on property taxes.
- A 50% exemption on municipal taxes.
- Benefits extend for 15 years, with the option for a 15-year extension.
Under Chapter 2 of the Incentives Code, individuals with a Grant receive a 100% exemption from income tax on interest, dividends, and certain capital gains accrued after becoming a resident of Puerto Rico until the taxable year 2035.
Despite the allure of Puerto Rico's tax incentives, they aren't suitable for everyone; there's no one-size-fits-all approach. Before committing to Puerto Rico as your permanent domicile, consider these five tax-related questions:
1. Are you and your family committed to relocating permanently to Puerto Rico?
As a US citizen, you're subject to federal income taxes on worldwide income. However, a bona fide resident of Puerto Rico can exclude Puerto Rico-source income for federal income tax purposes.
2. Do you currently own investments that generate interest, dividends, or capital gains?
Certain investment assets owned before moving to Puerto Rico may still be subject to US federal taxation despite the move. Additionally, compliance with Puerto Rico's tax benefits might entail annual contributions and reports.
3. What is your current business structure, and what are the tax implications of modifying it?
US international tax rules, particularly regarding Controlled Foreign Corporations (CFCs), are complex and can impact tax obligations even after relocating to Puerto Rico.
4. Will you continue to conduct business within the United States?
Consider the tax implications of maintaining business ties with the US while relocating to Puerto Rico, particularly regarding the source of income and engaged in trade or business rules.
5. Have you visited the island and validated that the move is a good fit for you and your family?
Moving to a new country entails various considerations beyond tax benefits. Visiting Puerto Rico and assessing its suitability for your business, lifestyle, and family dynamics is crucial before making a permanent move.
Ultimately, navigating Puerto Rico's tax landscape requires careful consideration and expert guidance. At CLB Tax, we're here to assist you in making informed decisions and optimizing your tax strategy for a successful transition to Puerto Rico.
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