PUERTO RICO AND UNITED STATES
INCOME TAX BENEFITS
FOR HOLDERS OF EB-5 VISAS THAT BECOME
BONA-FIDE RESIDENTS OF PUERTO RICO

Foreign nationals (the “Foreign Nationals”) that are granted permanent United States (“US”) resident status (i.e., the right to live and work in the US without time limitations), and become bona fide residents of Puerto Rico (“BFR-PR”) pursuant to the fifth employment-based preference classification (the “EB-5 Classification”), may avail themselves of the income tax benefits granted by the interplay of Puerto Rico’s Act to Promote the Transfer of Investors to Puerto Rico”, Act 22 of January 17, 2012 (“Act 22”), and Act to Promote the Exportation of Services to Puerto Rico, Act 20 of January 17, 2012 (“Act 20”) and certain provisions of the US Internal Revenue Code of 1986, as amended (the “US-IRC”).

Specifically, pursuant to the interplay between Act 22 and sections 933 and 937 of the US-IRC, if the Foreign Nationals become BFR-PR and obtain a grant of tax exemption under Act 22, their interest and dividend income and their short and long term capital gains from the sale of securities are exempt from PR and US federal income tax until December 31, 2035; provided that, the interest, dividends or capital gains, as applicable, constitute Puerto Rico source of income pursuant to the source of income rules of the US-IRC.

Generally, interest and dividends of US issuers and foreign issuers do not qualify as PR source income and are subject to US federal tax, but there are PR mutual funds (and special purpose investment vehicles may be created) that allow the Foreign Nationals to invest indirectly in equity and fixed income securities of US and foreign issuers and receive PR source dividends and interest exempt from PR and US federal income tax. 

Generally, capital gains from the sale of securities acquired and sold during a taxable year that the Foreign Nationals are BFR-PR constitute PR source income exempt from PR and US federal income tax.  But, if the short or long term capital gains are derived from securities owned by the Foreign Nationals at the time that they become BFR-PR, the PR and US income tax exemption is limited to the appreciation in value during the period of PR residency; except that, if the securities are sold after 10 years of PR residency, the gain is subject only to a 5% PR income tax.  If the securities are not publicly traded, the appreciation in value is computed based on the holding period of the security during which the Foreign Nationals are BFR-PR and thus does not necessarily reflect actual appreciation in value.

To become a BFR-PR the Foreign Nationals must meet a presence test, a tax home test and a closer connection test during the entire taxable year.

The Presence test is met if the Foreign National meets any of the following requirements:

(a) physical presence in Puerto Rico for at least 183 days during the taxable year;

(b) physical presence in the United States does not exceed 90 days during the taxable year;

(c) physical presence in Puerto Rico a minimum of 549 days during the three year period that includes the current taxable year and the two preceding taxable years, so long as the Foreign National is also present in Puerto Rico for a minimum of 60 days during each year of the three year period;

(d) no “earned income” from sources within the United States (i.e., compensation for labor or personal services rendered by the Foreign National in the United States in excess of $3,000), and physical presence in Puerto Rico for more days than in the United States; or

(e) “no significant connection” to the United States.

The Foreign Nationals does not have a “significant connection” to the United States if he or she has does not have (i) a permanent home in the United States (including any accommodations, house, apartment or a furnished room that is available at all times, continuously and not only for stays of short duration); (ii) a spouse, or a child that has not attained the age of 18, whose principal place of abode is in the United States (unless the spouse is legally separated under a decree of divorce or separate maintenance; the child lives in the United States with a custodial parent, or the child is in the US as a student); or (iii) a current registration to vote in the United States.

To meet the “tax home test”, the Foreign National’s regular or principal (if more than one) place of business must be in PR.  Absent such regular or principal place of business due to the nature of the Foreign National’s business, or because the Foreign National is an employee or is retired, his or her regular abode, “in a real and substantial sense”, is deemed his or her “tax home”. 

Finally, to meet the closer connection test, the Foreign Nationals must have more significant connections with PR than with the US or a foreign country.  The following are some of the factors taken into account in determining whether the “closer connection” test is met:

(a) the location of the Foreign National’s permanent home;

(b) the location of the Foreign National’s family;

(c) the location of the Foreign National’s personal belongings, such as automobiles, furniture, clothing and jewelry owned by the Foreign National and his family;

(d) the location of social, political, cultural or religious organizations with which the Foreign National has a relationship;

(e) the location where the Foreign National conducts routine personal banking activities;

(f) the location where the Foreign National conducts business activities (other than those that constitute the Foreign National’s tax home);

(g) the location of the jurisdiction in which the Foreign National holds a driver’s license;

(h) the location of the jurisdiction in which the Foreign National votes; and

(i) the country of residence designated by the Foreign National on all official government forms, documents and tax returns.

The Foreign Nationals may also avail themselves of Act 20 and enjoy a reduced 4% income tax rate during a 20 year period (which may be extended for 10 additional years) on the income derived from rendering certain “eligible services” that have no nexus with PR to nonresidents of PR.  Specifically, the following types of services qualify for the tax benefits of Act; provided that, the services are rendered to nonresidents and the “no nexus” with Puerto Rico requirement is met:  (i) research and development; (ii) advertising and public relations; (iii) economic, environmental, technological, scientific, management, marketing, human resources, information and audit consulting; (iv) advisory services on matters relating to any trade or business; (v) commercial arts and graphic services; (vi) the production of construction drawings, architectural and engineering services, and project management; (vii) professional services, such as legal, tax and accounting services; (viii) corporate headquarters; (ix) electronic data processing centers; (x) the development of computer programs; (xi) voice and data telecommunications between persons located outside of Puerto Rico; (xii) call centers; (xiii) services provided by shared services centers, including but not limited to, accounting, finance, taxes, auditing, marketing, engineering, quality control, human resources, communications, electronic data processing and other centralized management services; (xiv) storage and distribution centers; (xv) educational and training services; (xvi) hospital and laboratory services; (xvii) investment banking and other financial services; and (xviii) any other service that the government of Puerto Rico determines should be treated as an eligible service.

Moreover, if the services are provided by a corporation organized under the laws of PR or an entity that is treated as a pass-through entity for US income tax purposes that is owned by the Foreign National, the income derived by the entity from the rendering of the services will not be subject to US federal income tax so long as the services are rendered exclusively in PR.

To enjoy the tax benefits of the Export Services Act, a grant of tax exemption must be requested and issued by the Secretary of Economic Development and Commerce of Puerto Rico.  This grant of tax exemption is also a contract with the government of Puerto Rico that should be protected from revocation or amendment by subsequent legislation by the PR Constitution prohibition against the impairment of contracts.

UNIQUE INCOME AND ESTATE TAX BENEFITS
FOR HOLDERS OF EB-5 VISAS THAT BECOME
BONA-FIDE RESIDENTS OF PUERTO RICO

Income Tax Benefits 

A foreign national (the “Foreign National”) that receives permanent United States (“US”) resident status (i.e., the right to live and work in the US without time limitations), and becomes a resident of any state of the US or the District of Columbia pursuant to the fifth employment-based preference classification (the “EB-5 Classification”), will be subject to US federal income taxes of up to a maximum of 39.6% (or up to a maximum of 43.4% in the case of investment income) on his worldwide income, plus the applicable state income tax, if any.  However, if the Foreign National instead becomes a resident of Puerto Rico (“PR”), he will be subject to PR and US federal income tax on his worldwide income (with the availability of foreign tax credits to avoid double taxation), but his income from PR sources will not be subject to US federal income tax.  Moreover, he will be able to obtain a grant of tax exemption under PR’s Act to Promote the Transfer of Investors to Puerto Rico”, Act 22 of January 17, 2012 (“Act 22”), pursuant to which his interest and dividend income and short term and long term capital gains from the sale of securities acquired after becoming a bona-fide resident of PR will be exempt from PR income tax. The PR interest and dividend exemption is meaningless in the case of interest and dividends paid by entities organized in the US or elsewhere outside of PR, because such interest and dividend income generally is not PR source income and thus will be subject to US federal income tax.  However, the short term and long term capital gains from the sale of any securities (regardless of the place of organization of the issuer), and interest and dividends paid by PR entities, generally will enjoy exemption from both PR and US federal income tax.  Additionally, there are certain investment vehicles that would allow the Foreign National to invest indirectly in securities of US and foreign issuers and obtain interest and dividends that qualify as PR source income, and which would thus be exempt from PR and US income tax. Lastly, the Foreign National that becomes a resident of PR may establish certain operations in PR (e.g., operations to provide services from PR to nonresidents of PR, manufacturing, tourism and agricultural operations among others) that would be subject to reduced PR income tax rates (i.e. 4%), would generally not be subject to US federal estate tax and the dividends of which generally would be exempt from PR and US income taxes.

Estate Tax Benefits 

If the Foreign National becomes a resident of any state of the US and at the time of his demise is domiciled in the US, his worldwide estate will be subject to US federal estate taxes of up to 40%, to the extent that his worldwide estate exceeds the $5,000,000 credit (adjusted for inflation).  However, if the Foreign National instead becomes a resident of PR and at the time of his demise is domiciled in PR, only the part of his estate that consists of “property located within the US”, if any, will be subject to US federal estate tax.  The assets of the estate located in PR and elsewhere outside of the US will not be subject to US federal estate tax.  In addition, if the Foreign National becomes a resident of PR and is domiciled in PR at the time of his demise, the “PR located property” that forms part of the estate will be fully exempt from PR estate tax. The estate would be exposed to a 10% PR estate tax on assets that are not “property located within PR”, but careful planning can result in no PR estate taxation on assets located outside both the US and PR.

Finally, if the Foreign National becomes a US citizen upon naturalization in PR (following a period of exclusive residence within PR that equals or exceeds the minimum number of years of US residence required for becoming a US citizen), the Foreign National will continue to be treated as a nonresident alien for US estate tax purposes so long as he is domiciled in PR at the time of his demise. 

The foregoing summary of tax benefits was prepared by Fernando Goyco-Covas and Ricardo Muñiz, tax partners at Adsuar Muñiz Goyco Seda & Pérez-Ochoa, P.S.C.  For more information you may contact Fernando Goyco-Covas at (787) 281-1802 or by e-mail at goyco@amgprlaw.com or Ricardo Muñiz at (787) 281-1818 or by e-mail at muniz@amgprlaw.com.