Just imagine for a moment, you are living on a beautiful island with sandy beaches, year-round sun, it’s cheaper than New York, and it’s part of the United States – yet you pay zero US federal income tax, only 4% corporate tax for your business, and zero capital gains and dividends tax.
And this is all 100% legal.
Sounds too good to be true, right?
Wrong.
Welcome to Puerto Rico.
That’s right. Puerto Rico.
Is Puerto Rico still suffering from Hurricane Maria?
As you probably recall, Hurricane Maria totally hammered Puerto Rico in September 2017. The damage was devastating. Puerto Rico estimates that $132 billion is needed to repair infrastructure and services.
Sadly, the US response to support one of its territories was shameful. Thousands of people were left without power and access to running water for too long.
The hurricane drove many of the island’s residents away: About 130,000 people – nearly 4% of the population – have left.
To be honest, even though it is now 2019, the island has not fully recovered. The repercussions are still keenly felt.
Much of San Juan, the capital of Puerto Rico, has recovered, but some parts of the island are still in total disrepair.
The aftermath of the hurricane isn’t the only issue, as Puerto Rico’s problems started well before Hurricane Maria arrived.
How are these Puerto Rico tax incentives possible?
Puerto Rica has been plagued with serious economic and fiscal problems for a long time. Puerto Rico has $74 billion in bond debt and another $49 billion in unfunded pension liabilities. Back in 2010, the unemployment rate was nearly 17%. And the unemployment rate didn’t drop below double-digits until 2018.
To deal with these kinds of issues, most governments in the world would revert to the same ole dusty playbook – raising taxes. They would try to squeeze the remaining residents that didn’t leave by raising their taxes.
But not Puerto Rico. They got creative.
The local leaders responded to the challenges they are facing in a rare, yet incredibly smart way: they’ve created amazing tax incentives to lure productive, business-minded entrepreneurs and their successful businesses to the island.
Puerto Rico is a commonwealth of the US. That means that most things fall under US federal law, like immigration and customs and border enforcement.
But Puerto Rico’s tax system is independent of the US. Puerto Rico has its own tax agency, like the IRS. That’s what makes Puerto Rico unique. It’s a part of the US, but tax-wise, it’s not. This gives US citizens a big advantage.
The US taxes its citizens on their worldwide income. It doesn’t matter if you live abroad in another country. You still have to file federal income taxes each year.
But Puerto Rico, with its independent tax system, grants you an exception.
If Puerto Rico is the only source of your income, the US Government looks the other way. It effectively says, “We won’t touch any income in Puerto Rico. We won’t even look at it.”
Act 20: How to slash your corporate tax rate to only 4%
Act 20, known as the Export Services Act, is available to citizens of any country.
Here is the general idea behind Act 20.
You incorporate a business in Puerto Rico that provides a service. However, the service provided must be sold to people outside of Puerto Rico. The service provided can be any kind of service such as information technology, management consulting, accounting, legal services, etc.
Your business service – provided to clients anywhere in the world outside of Puerto Rico – is considered “qualifying activity” under Act 20. This makes your business eligible for a ridiculously low special corporate tax rate of 4%.
If you have a skill where you can work anywhere – copywriting, digital marketing, investment management, consulting, design, coding, recruiting, etc. – you owe it to yourself to check out Puerto Rico’s Act 20.
Even if your business doesn’t fit within the “services” space, there’s a way to qualify for the 4% corporate tax rate.
For example, if you sell products online using Fulfillment by Amazon (FBA), you can set up a Puerto Rico Act 20 company to provide marketing services for your FBA business. The marketing company in Puerto Rico pays only a 4% corporate tax rate, and your FBA business can write off the marketing expenses.
Act 22: How to reduce your capital gains and dividends tax to zero
Act 22 is known as the Individual Investor Act.
If you’re an investor based in the US, you’re paying a top 20% tax on dividends and capital gains, and a host of state and local taxes.
But if you move to the beautiful island of Puerto Rico, then your capital gains and dividends are considered Puerto Rican-sourced income. And after you become a bona fide Puerto Rican resident you’ll pay… 0% on dividends and capital gains.
That’s right. The IRS won’t touch any of your investment income.
This is an incredible way to lower your taxes!
If you’re expecting big capital gains in the future, you need to seriously consider Act 22 right now in order to reduce your tax liability. (Unfortunately, you can’t avoid tax on your capital gains before you become a Puerto Rican resident, only after.)
Combine Acts 20 and Act 22 for maximum tax savings
If you move to Puerto Rico, you can combine Acts 20 and 22 to receive maximum tax savings.
Here’s how it works: On the corporate side, you’ll pay the 4% corporate tax.
And individually, you’ll pay yourself a small, reasonable salary (not something stupid like $1 per year).
Just pay yourself a wage commensurate with the average salary in the region to escape scrutiny.
But, the great thing is you can take the rest of your compensation as a qualified dividend, taxed at… 0%. You can take all this money that you earned and put in your pocket tax-free!