Complementary Incentive for Business Owners & Investors

Requirements

A qualified individual’s income from dividends and interest are exempt from Puerto Rico income taxes during the exemption period. A qualified individual is also exempt from U.S. federal income taxes if the revenue generated is considered Puerto Rico source income under U.S. IRC §933. Also, a qualified individual’s income from long-term capital gains is exempt from Puerto Rico income taxes during the tax exemption period after the individual becomes a resident of Puerto Rico. A qualified individual’s long-term capital gains before becoming a resident of Puerto Rico are subject to a 10% tax rate if realized within ten years of residency or 5% if realized after ten years of residency. Under U.S. law, long-term capital gains before becoming a bona fide resident of Puerto Rico that is accomplished within ten years are subject to the provisions of U.S. IRC. If the long-term capital gains are realized after ten years, the U.S. tax rate is 0%. Thus, a bona fide resident would only be subject to the 5% Puerto Rico tax rate.

Under the P.R. Internal Revenue Code: Nonresident individuals who become residents of Puerto Rico are considered eligible under Act 22 unless the individual was a resident of Puerto Rico at any time before January 16, 1997, and after January 16, 2012. An individual that becomes domiciled in Puerto Rico is considered a Puerto Rican resident. An individual’s 183-day physical presence in Puerto Rico establishes a presumption of residency under the Puerto Rico Tax Code.

Under the U.S. Internal Revenue Code: Under U.S. IRC §933, income derived from sources within Puerto Rico by individuals qualified as bona fide residents are exempt from federal income taxation. For an individual to be considered a bona fide resident of Puerto Rico under U.S. IRC §937, an individual must be present in Puerto Rico for at least 183 days of the year. Second, the individual must not have a tax home outside of Puerto Rico during the year. A tax home is determined to be located near an individual’s principal place of business. Third, the individual must have a closer connection to Puerto Rico than the U.S. or another country. This is determined by a variety of factors including but not limited to the location of the individual’s home, family, personal belongings, and voting district. The tax exemption period begins on the date an individual becomes a resident of Puerto Rico.