Relocating to Puerto Rico to Slash Taxes Without Relinquishing Your US Citizenship or Greencard

Many US citizens and green card holders wish to cease paying US income taxes on their investment and business income, but stop short at the idea of giving up their US citizenship or green card to accomplish that. For those, a properly planned relocation of their principal home and business to Puerto Rico could slash their tax rates (to zero on certain investment income and to 4% on certain business income), yet allow them to remain US citizens or lawful permanent residents and spend significant time in the U.S. each year. Operating a global service business from Puerto Rico can also avoid Subpart F, PFIC and GILTI classification of foreign income to achieve permanent deferral from US tax, with proper planning.

After relocation, the business owner or investor must qualify as a “bona fide resident” of Puerto Rico (“PR”) in order to exclude investment income derived from Puerto Rican sources (including dividends from PR corporations) from their US tax return. To so qualify, three tests must be satisfied: (i) a “presence” test (referring to time be spent in PR each year); (ii) a “tax home” test (requiring that your principal place of business (or if you have none, your principal residence) be located in PR; and (iii) a “closer connection” test (which requires demonstration of a closer personal connection to PR than to the US for the years in question).

Income qualifies as excludable “Puerto Rico source income” if it is determined to have its source in Puerto Rico or to be income effectively connected (“ECI”) with a business operated in Puerto Rico. (US rules for sourcing income and determining ECI are applied for this purpose by substituting PR for the US in their application.) Special rules and elections make it possible to operate an international business from Puerto Rico and treat most of the income it earns, including abroad, as having a Puerto Rico source or as ECI with a Puerto Rican business.

You must also obtain a grant of special tax treatment offered under Puerto Rico Act 60 (and possibly other applicable acts), which are designed to incentivize US citizens and green card holders to live, invest and operate businesses in Puerto Rico. Once the grant is obtained, PR source interest and dividend income are fully exempt from Puerto Rican taxes. Exemption of net capital gains accruing after relocation is also possible, but the rules get more complicated. The portion of any net long-term capital gain attributable to appreciation occurring prior to PR residency is subject to a 5% Puerto Rico tax (and may also be subject to US tax). However, post-move appreciation (i.e., that occurring after you no longer have a tax home outside PR) will be exempt from PR income taxes. To qualify for these Puerto Rican tax benefits, the investor or business owner must also: (a) purchase residential property within two years of becoming a PR resident; and (b) contribute $10,000 per year to one or more local PR charities.

If you are a California income tax resident, we will also have to convince the California tax authorities that your residence or domicile has effectively moved to Puerto Rico (see the page of this website entitled “Tax Planning for Departures from California, including Changes of Domicile and/or Tax Residence”).

At Lance Cross-Border Law and Tax, we can assist you to develop a Puerto Rico relocation plan, qualify as bona fide residents of Puerto Rico for US tax purposes, restructure investments and business operations to generate exempt Puerto Rico source income and effectively relinquish California tax residence and domicile to avoid California taxation of your Puerto Rico source income. Feel free to call us at (760) 578-5093, contact us via email at Brent@LanceCrossborder.com or by using our online contact form.