The offshore tax landscape is riddled with complex strategies and regulatory nuances. It is often seen as a cryptic domain that serves the wealthy and well-connected. One jurisdiction that has stirred interest in the tax planning community is Puerto Rico, a Caribbean Island officially known as ‘The Commonwealth of Puerto Rico.’ In this article, we delve into the question, “Is Puerto Rico truly a tax haven?” Puerto Rico’s Attractive Tax Landscape Being a U.S. territory, Puerto Rico benefits from a significant degree of autonomy in corporate and tax legislation. The island has formulated a range of attractive tax and corporate policies over the years, resulting in an upsurge of foreign capital and businesses eager to leverage these benefits. Two landmark Acts—Act 20 and Act 22—have been instrumental in drawing attention to Puerto Rico’s potential as an offshore tax haven. Act 20 and Act 22: Tax Slashing Mechanisms These two acts have made significant waves in the offshore community by drastically reducing corporate tax rates to 4%. Additionally, they provide incentives to those who choose Puerto Rican residency. Governed by the General Corporations Act of 2009, these non-resident corporations have stirred much interest. For U.S. citizens spending at least 183 days a year in Puerto Rico, there is no requirement to pay U.S. federal tax on income and capital gains. This tax advantage, coupled with a thriving corporate environment, robust financial privacy, and secure financial vehicles, positions Puerto Rico as an attractive tax haven that is conveniently ‘close to home.’ Puerto Rico’s Corporate Climate: A Deep Dive Setting up an offshore business in Puerto Rico presents several advantages, including low corporate tax rates, U.S. tax exemptions, and high levels of privacy. Let’s explore these benefits in detail. Low Corporate Tax Rates and U.S. Tax Exemptions The Export Services Act (Act 20) caps the corporate tax rate for corporations exporting services from Puerto Rico at a low 4%. Special types of corporations deemed strategically important for Puerto Rico can even see this rate reduced to 3%. The Controlled Foreign Corporation (CFC) system in Puerto Rico also means that income generated from selling products to the U.S. is exempt from U.S. taxes. Furthermore, products imported from the U.S. are exempt from duty taxes. These exemptions, along with the fact that all income generated in Puerto Rico is free from additional U.S. federal tax, make the island highly attractive for tax strategists. High Levels of Privacy and a Strong Economy The island assures considerable privacy to corporations, with no public disclosure of shareholders’ and directors’ identities. Nominee shareholders and directors can be appointed for even greater privacy. Puerto Rico’s strong economy, sound business practices, and convenient offshore banking make it an attractive jurisdiction for businesses and investors. For U.S. citizens, the added advantages include a shared currency (the U.S. dollar), geographical proximity, and the ease of taking up residence. Puerto Rico: A Brief Overview Located in the North East Caribbean Sea, Puerto Rico, a U.S. territory, is inhabited by people considered U.S. citizens. The island’s political structure, while similar to the U.S., retains some autonomy, including its own executive political branch. Despite a history of substantial government debt, the island boasts an excellent infrastructure that makes it an ideal location for offshore company incorporation and residence. Puerto Rico’s legal system reflects its historical influences and is based on a mix of Spanish Civil Law and Common Law. Its corporate legislation, the Puerto Rico General Corporations Act of 2009, along with regulations from the Internal Revenue Code of 2011, make it an attractive destination for offshore corporations. Act 20 and Act 22: The Cornerstones of Puerto Rico’s Tax Attraction Act 20 and Act 22 constitute the bedrock of Puerto Rico’s tax strategy. Act 20 provides significant tax reductions to qualifying businesses, encouraging service exports from the island. Qualifying corporations can leverage the low corporate tax rate of 4%, and even a 0 – 3% rate under certain conditions. Act 22, on the other hand, lures wealthy investors and traders with the allure of eliminating capital gains tax completely. Combined, these Acts uniquely position Puerto Rico as an enticing tax haven, particularly for U.S. citizens. Given these benefits and Puerto Rico’s status as a U.S. territory, the island indeed qualifies as a tax haven, at least for U.S. citizens. However, the benefits and implications can vary for non-U.S. residents.
