Act 22 of 2012

Act 22 of 2012 —also known as the Act to Promote the Relocation of Investors to Puerto Rico (Spanish: Ley para Incentivar el Traslado de Inversionistas a Puerto Rico)— is an act enacted by the 16th Legislative Assembly of Puerto Rico that fully exempts local taxes on all passive income generated by individuals that reside in Puerto Rico.^[1][2][3]

The act was enacted to promote the immigration of high-net-worth individuals to the island in hope of such individuals investing in the local economy.^[4] The act, however, has come under scrutiny by some detractors, such as Jeffrey Farrow, a former White House official from the Clinton administration, and John Buckley, a former tax counsel for the Democratic Party on the United States House Committee on Ways and Means, who have described the act as a way to make Puerto Rico a tax haven.^[5] Congressmen Chuck Grassley (R-Iowa) and Max Baucus (D-Montana), Chairman of the United States Senate Finance Committee, have also expressed their opinion on the matter.^[6] Others, however, such as José Pérez Riera, former Secretary of Economic Development and Commerce of Puerto Rico, and current Secretary, Alberto Bacó Bagué, see the act favorably and describe it as being a way for Puerto Rico to overcome its economic struggles and its six years long recession.^[6]

As of March 2013 only about a dozen individuals have taken advantage of the act, although many others have expressed their interest after the media reported that billionaire John Paulson was considering to relocate to Puerto Rico.^[6][7][8] The report was later denied by Paulson but media coverage increased inquiries to local accountancy firms by 400% after the story broke.^{[6][9][10][11]}

Act 22 is one of a set of economic incentives that the Government of Puerto Rico has developed for the development of the Island's economy. Additional incentives offer unique benefits to investors for sectors like manufacturing, hospitality and tourism, international insurance and banking, export services, and agriculture.^[10]

Puerto Rico Act 22 Tax Incentives:

Interest and Dividend Income

• Under the Individual Investors Act, Resident Individual Investors will enjoy a 100% tax exemption from Puerto Rico income taxes on interest and dividend income derived during the Tax Exemption Period.
  

• Pursuant to the Section 933 Exclusion^[12], interests and dividends received by Resident Individual Investors that qualify as Puerto Rico source income^[13] will not be subject to federal income taxation under the US Code.
  

• Resident Individual Investors may be able to reduce the tax rate applied on interest and dividend income coming from sources outside of Puerto Rico (including the source country taxation) to 0% or 10%, respectively, by investing through certain Puerto Rico investment vehicles.
  

Tax Exemption on Capital Gains

Capital gains (“CG”) derived by Resident Individual Investors for investment appreciation accruing after becoming a Puerto Rico resident will be 100% exempted from Puerto Rico income taxes, if such gain is recognized prior to January 1, 2036.

On the other hand, CG derived by Resident Individual Investors will be subject to preferential income tax rates in certain circumstances, as follows:

• CG for investment appreciation that accrued prior to becoming a Puerto Rico bona fide resident(the “Non-PR Gain”) will be taxed at: (i) 10%, if such gain is recognized within 10 years after the date residence is established in Puerto Rico and prior to January 1, 2036, and (ii) 5%, if such gain is recognized after said 10-year period but prior to January 1, 2036.
• A similar rule applies under the US Code with respect to United States Investors, regardless of the Section 933 Exclusion, since any Non-PR Gain recognized within said 10-year period by investors formerly subject to the United States taxing jurisdiction (the “United States Investor”) will be taxed in accordance to the applicable provisions of the US Code. The United States Investor may elect to apportion to Puerto Rico any part of the CG related to investment appreciation that accrued after becoming a Puerto Rico resident and, therefore, be entitled to the Section 933 Exclusion for such portion.
• The United State Investor qualifying as a Resident Individual Investor which recognizes a Non-PR Gain after 10 years of becoming a bona fide Puerto Rico resident would not be subject to federal income taxation on any portion of the Non-PR Gain and to a 5% tax in Puerto Rico. As stated before, any part of a CG attributable to the period of Puerto Rico residence would qualify for 0% United States federal income taxation and 0% Puerto Rico income taxation, if recognized prior to January 1, 2036.

In light of the above, Resident Individual Investors may be able to reduce the tax rate applied on CG in their former domicile to 0%, 5% or a maximum 10%.

Rental Income and Royalties

• Rental income that comes from Puerto Rico sources could also qualify as passive income exempt from taxation. Rental income and royalties from other jurisdiction will be exempt in Puerto Rico, but will probably be subject to specific taxation rules at the location of the rental property or the place the intellectual property is being used.

References

1. Act to Promote the Transfer of Investors to Puerto Rico, Act No. 22 of 2012 (in Spanish). Retrieved on March 28, 2013.
2. "The Puerto Rico Advantage—Sun, Sand and Zero Taxes" (PDF). Department of Economic Development and Commerce of Puerto Rico. Retrieved March 28, 2013.
3. "Income tax exemption granted to non- residents who establish domicile within a specified timeframe" (PDF). PricewaterhouseCoopers. December 17, 2012. Retrieved March 28, 2013.
4. "Puerto Rico Export Services and New Resident Tax Incentives" (PDF). Department of Economic Development and Commerce of Puerto Rico. Retrieved March 28, 2013.
5. La Roche, Julia (March 11, 2013). "This New Puerto Rican Law Makes Wealthy People Want To Move There To Avoid Taxes". Business Insider. Retrieved March 28, 2013.
6. Marino, John (March 28, 2013). "Law 22 attracting millionaire investors to Puerto Rico". Caribbean Business. Retrieved March 28, 2013.
7. Burton, Katherine (March 11, 2013). "Paulson Said to Explore Puerto Rico as Home With Low Tax". Bloomberg News. Retrieved March 28, 2013.
8. Gongloff, Mark (March 11, 2013). "John Paulson Mulls Move To Puerto Rico For Sun, No-Tax Fun: Report". The Huffington Post. Retrieved March 28, 2013.
9. "Paulson Says He Has No Plans to Relocate to Puerto Rico". Bloomberg. 2013-03-15.
10. "Puerto Rico Solutions". puertorico-solutions.com. Retrieved 2013-03-28.
11. La Roche, Julia (2013-03-15). "Hedge Fund Billionaire John Paulson Not Defecting To Puerto Rico To Dodge Taxes". Business Insider. Retrieved 2013-03-28.
12. Section 933 Exclusion
13. Puerto Rico source income