The Individual Investors Act (Act 22) seeks to attract new residents to Puerto Rico by providing a total exemption from Puerto Rico income taxes on all passive income realized or accrued after such individuals become bona fide residents of Puerto Rico. This relocation should result in new local investments in real estate, services, and other consumer products, and in capital injections to the Puerto Rico banking sector, all of which will stimulate the economy of Puerto Rico.
Tax exemption conferred under Act 22 are valid through December 31, 2035:
Passive Income Exemptions
- New Residents will enjoy a 100% tax exemption from Puerto Rico income taxes on all dividend and interest income
- Interest and dividends that qualify as Puerto Rico source income will not be subject to federal income taxation under Section 933 of the IRS Tax Code.
Capital Gain Exemptions
- All capital gains accrued after becoming a New Resident will be 100% exempt from Puerto Rico taxes. These gains will not be subject to federal taxes.
- All capital gains accrued and unrealized prior to becoming a New Resident will be subject to a tax:
- At the prevailing tax rate (currently 10%), if such gain is recognized within 10 years of new residence in Puerto Rico, and,
- 5%, if such gain is recognized after said 10-year period. The U.S. will not tax any prior unrealized gains if recognized after 10 years of residence in Puerto Rico.
- Article 7 of Act 22 protects those trusts created by Act 22 grantees from the forced inheritance provisions of the Puerto Rico Civil Code.
REQUIREMENT FOR NEW RESIDENTS THAT HAVE NOT LIVED IN PUERTO RICO FROM 2006 TO 2012
- Physical presence in Puerto Rico for a period of 183 days during the taxable year will create a presumption of residence in Puerto Rico for tax purposes.
- Section 937 of the U.S. Internal Revenue Service Code provides additional guidance as to what is generally considered a bona fide resident:
- No tax home outside Puerto Rico during the tax year.
- No closer connection to the U.S. or a foreign country.