DALLAS, TX--(Marketwired - Jul 3, 2014) - Puerto Rico has attracted several wealthy investors as legislation passed in 2012 finally gains traction. 2012 was the year the Puerto Rican government enacted acts 20 and 22, which offer huge tax benefits to new businesses and residents on the island. The Puerto Rican government estimates that at least 250 individuals will apply for the programs during the current year, but experts warn that moving one's life and business to the U.S. commonwealth is a risky choice.
"If you move to Puerto Rico, you may retain more wealth, but you'll sacrifice safety and quality of life," says Joe B. Garza, a prominent tax attorney based in Dallas who serves clients worldwide. Puerto Rico's current murder rate is more than six and a half times higher than the overall rate in the U.S., according to Fortune Magazine. The New York Times reported a total of 983 homicides in 2010. That is largely to do with the island's dismal poverty rate and the fact that Puerto Rico is a major hub for drug trafficking.
With Acts 20 and 22, Puerto Rico's government hopes to change all of that. "We're catching up to Ireland and Singapore -- you can shelter income legally, and legally in a good way," Alberto Bacó Bagué, Puerto Rico's secretary of economic development and commerce, told the New York Times. The island has already attracted several small to mid-sized financial firms owned by millionaire executives from the mainland.
But even if the tax incentives gain the kind of traction that the Puerto Rican government hopes for, relocating could lead to a significant amount of uncertainty. "There's no guarantee that Acts 20 and 22 will remain untouched," warns Garza. Just a few years ago, the federal government did away with Puerto Rico's tax incentives that exempted U.S. manufacturing companies from paying taxes on profits made on the island. Garza explains, "Puerto Rico is going through a time of instability. To make matters worse, Congress has already set a precedent for quashing the island's ambitious tax policies back in 2006."
Acts 20 and 22 are definitely ambitious. Act 20 -- The Export Services Act -- lowers the earnings tax on transplanted businesses to a flat 4% and guarantees a total exemption from tax on dividends and profit distributions. Act 22 -- known as the Individual Investors Act -- exempts new residents from paying Puerto Rico income tax on all dividends, interests, and capital gains accrued after the individual has become a resident of the island. On top of all this new legislation, Puerto Rican residents (with the exception of federal employees) are already exempt from paying federal income tax.
"Hopefully Puerto Rico's economy will begin to pick up because of this new legislation," says Joe Garza. "But for now, the island has a long way to go, especially in reducing its crime rate. If investors are preparing to live in Puerto Rico for at least 183 days of the year, they should understand that the island may not protect their safety as well as it does their assets."
Attorney Joe Garza is the senior partner at Garza & Harris, a firm specializing in tax and estate planning in Dallas, Texas. Garza & Harris provides clients in over 27 countries with expertise in asset protection and business planning. Garza brings over 30 years of legal experience to his firm. Learn more about Garza & Harris at garzaharris.com