ACT 22

“The Individuals Investors Tax Act of 2012” or Act No. 22 was created to promote individual investors to relocate to the Island by providing a total exemption from Puerto Rico income taxes on all passive income realized or accrued after such individuals become bona fide residents.

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 consumption products, and in capital injections to the Puerto Rico banking sector, all of which will accelerate the economy of Puerto Rico.

TAX TREAMENT

Tax exemptions 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.
  • New Resident investors may be able to reduce the tax rate applied on interest and dividend income coming from sources outside of Puerto Rico (including the source country taxation) to 0% or 10%, respectively, by investing through certain Puerto Rico investment vehicles

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. Such taxes paid may be used as a credit in another jurisdiction that taxes such gains. The U.S. will not tax any prior unrealized gains if recognized after 10 years of residence in Puerto Rico

REQUIREMENT FOR NEW RESIDENTS THAT HAVE NOT LIVED IN PUERTO RICO FOR THE LAST 15 YEARS:

  • 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: (a) no tax home outside Puerto Rico during the tax year, and (b) no closer connection to the U.S. or a foreign country