Since Puerto Rico enacted the “Individual Investors Act” (Act 22) and the “Export Services Act” (Act 20) in 2012, much press has been devoted to the number of high-net worth U.S. taxpayers (including citizens and green card holders) who have relocated to Puerto Rico and become “bona fide residents” of such U.S. possession. The primary tax benefits available to such persons that have received the most attention are (i) the 100-percent exclusion of Puerto Rican-source interest and dividends from both U.S. and Puerto Rican income tax; and (ii) the 100 percent exclusion of worldwide capital gains, to the extent such gains accrue after the person becomes a resident of Puerto Rico, from both U.S. and Puerto Rican income tax. In addition, Puerto Rico corporations providing “export services” to non-Puerto Rican persons are only subject to a 4 percent corporate income tax in Puerto Rico. It should be noted that these benefits are available to bona fide residents of Puerto Rico even though they remain U.S. taxpayers and therefore are not subject to the expatriation rules.
What has not received as much attention, however, and possibly just as significant as the benefits described above, are the provisions of the U.S. Internal Revenue Code and relevant Treasury Regulations that specifically do not apply to bona fide residents of Puerto Rico who own shares of corporations organized in Puerto Rico. For example, bona fide residents of Puerto Rico may be exempt from the U.S. controlled foreign corporation (CFC) rules, and the passive foreign investment company (PFIC) rules with respect to their ownership of Puerto Rican corporations. Furthermore, as a result of the “check the box” rules and proper planning, these exemptions may be extended to income derived in foreign jurisdictions other than Puerto Rico (including U.S.-source treaty benefitted income), without that income being subject to tax in the United States or Puerto Rico. Continue Reading