The island of Puerto Rico is battling one of the most severe economic crises in recent times. With an unemployment rate of more than 11 percent, the island is in dire financial straits. Forty-five percent of Puerto Rican residents live below the poverty line.
Things have gotten so bad in Puerto Rico that the government has had to start rationing water, and schools and hospitals are in bad shape, financially.
Earlier this year, Puerto entered a bankruptcy of sorts to try to resolve the crisis. In spite of these serious financial issues, a growing number of wealthy mainland United States residents are leaving the mainland U.S. behind and making the island home.
Why are billionaires, digital nomads and other wealthy Americans fleeing to Puerto Rico if the island has such severe financial problems? The answer lies in Puerto Rico’s generous tax cuts. The small island nation is trying to lure wealthy mainland residents with generous tax cuts on capital gains, business profits and personal income.
With the exception of one place in the world, United States citizens must pay U.S. income taxes no matter where they live. Puerto Rico, however, is very unique. The U.S territory gets to set its own tax policy. Section 933 of the U.S. tax code allows the Commonwealth of Puerto Rico to tax residents income as its sees fit. As a result of this rule, Puerto Rican residents pay no federal income tax on all income that is earned locally.
In addition to the tax benefits that residents already enjoy, Puerto Rico introduced a new tax law in 2012 to try to lure wealthy American investors to establish businesses, create jobs and buy expensive real estate on the island — which will all help the local economy and ease financial woes.
Puerto Rico’s approach seems to be working. Wealthy individuals are fleeing the mainland U.S. in favor of Puerto Rico’s tax haven. Nearly 250 individuals with a net worth of $1 million or more have moved to the island since 2012.
Hedge fund billionaire John Paulson left Wall Street behind for the laid back island life. He’s already put $1.5 billion into buying a resort, office buildings and hotels on the island.
Another mega rich resident, Peter Schiff, moved his business from California to San Juan, Puerto Rico in 2013. He bought an expensive house just outside San Juan. His company is already reaping the tax benefits of being established in Puerto Rico. They pay a low corporate tax of just 4 percent in contrast to the tax rate of 35% in California. Schiff told CNN Money that these tax breaks help him create more jobs, which Puerto Rico desperately needs.
In order to qualify for the tax cuts, you must be a “bona fide” resident of Puerto Rico. This means that anyone seeking the tax breaks must be physically present on the island for at least 6 months, or 183 days to be exact out of every year.
So, what does Puerto Rico offer these folks — other than a tax shelter? Puerto Rico has some of the most breathtaking sights in the United States, including pristine white sand beaches, lush rainforest, glowing bioluminescent waters, important historic sites and unique pastel-colored architecture. As if this is not enough, residents still enjoy all of the benefits of being U.S. citizens. Plus, there is plenty of sun year round and cool ocean breezes. Temperatures stay warm, even in the winter. Also, there is little sign of the economic problems that plague the rest of the island in the richest areas of Puerto Rico, such as West Condado and Bahia Beach neighborhoods. These areas are luxurious. It is not uncommon to see Cartier, Gucci and other high-end stores.
So, what are the disadvantages of moving to Puerto Rico? In spite of the fact that certain areas of Puerto Rico can be quite nice, the Caribbean island still suffers from severe poverty. Also, the Zika virus is a major concern in Puerto Rico as it is in many tropical areas. Another negative is that Congress can override the tax cuts and it will probably eventually do so. So, the tax utopia will likely end at some point.
Regards,
Ethan Warrick
Editor
Wealth Authority
