Investing for Survival---Offshore tax havens

We’re Watching this Offshore Tax Haven

By Bob Bauman, JD, Offshore and Asset Protection Editor

The Commonwealth of Puerto Rico, a U.S. territory in the northeastern Caribbean, is known in Spanish as the La Isla del Encanto, which means the island of enchantment – and it's not just for its mesmerizing beauty. 

It might also be enchanting for wealthy Americans on the look-out for a safe haven. Puerto Rico is particularly enchanting because it doesn't tax income from interest, dividends and capital gains – and there is no U.S. income tax. 

The island is part of the U.S. for federal tax purposes, but it has a special status (like the U.S. Virgin Islands) as I explain in The Passport Book. 

Nonetheless, a new local governor has been recently installed in Puerto Rico and its safe-haven status may be under threat. My Offshore Confidential and Freedom Alliance subscribers will be among the first to know about any changes.

In the meantime, however, Puerto Rico remains an attractive destination for seekers of low taxes and an income shelter on a sun-soaked Caribbean island. 

No U.S. Income Taxes

Currently, most residents of Puerto Rico, except federal employees, pay no U.S. taxes on island income. And you can qualify as a legal resident by living 183 days a year on the island. Although residents must still file a federal tax return, they are exempt from paying U.S. income taxes. 

Residents also avoid a 15% capital gains tax on assets held before moving there, and sold after 10 years of residence on the island.

Alberto Baco Bague, Puerto Rico’s secretary of economic development and commerce, was recently quoted in The New York Times as saying: “There's nothing wrong with spending 183 days a year on a sailboat or yacht and working from here… We're catching up to Ireland and Singapore – you can shelter income legally and legally in a good way."

The other convenient aspect of establishing a base on Puerto Rico, apart from its proximity to the U.S. mainland, is that you don’t need a second passport, because island residents are U.S. citizens. 

Former governor Luis Fortuno, who narrowly lost the re-election at the end of 2012, is responsible for the attractive tax incentives on the island. He not only slashed property taxes to zero for new homeowners for the first five years, but he also included a 100% tax exemption on all supplemental, passive income. Moreover, international financial institutions that move to Puerto Rico are eligible for full property-tax exemption.

Puerto Rico's tax-free “enchantment” has reportedly attracted a few mainland millionaires in recent years, as well as a number of executives of some smaller U.S. financial firms. Real estate brokers have claimed they are getting between 10 and 15 inquiries a day from Americans interested in moving to the island.

Trouble in Paradise

However, things may be changing in paradise. New Governor Alejandro Garcia Padilla last week submitted his 2014 budget, and he has also hinted at plans to reduce the government's $2.2 billion deficit to $775 million, partly through taxation. He plans to tax those who are “self-employed earning $200,000 or more in revenue and those who purchase homes worth $1million or more.” 

He has yet to provide details of these proposed taxes.

Nonetheless, Michael Pfeifer, an international tax lawyer at the Washington, D.C. law firm Caplin & Drysdale predicts that Puerto Rico’s tax incentives will continue to be used by some wealthy taxpayers as “a new opportunity for income-shifting and tax-deferral.”

President Obama’s demands for new and higher taxes on upper incomes may well spur this “still within the U.S.” offshore movement.

However, Puerto Rico still has much beyond tax incentives and rum to recommend it. 

A 2011 Gallup World Poll that assessed happiness in 132 countries on a scale of zero (worst) to 10 (best) found Puerto Ricans in the Top 10, at number eight.

And Medicare Benefits

Another great incentive for potential residents is that Medicare benefits for U.S. citizens are payable in Puerto Rico, unlike the situation for Americans who live in foreign countries. 

And if you’re looking for top beach destinations, TripAdvisor’s Travelers’ Choice awards placed Culebra in Puerto Rico as one of the three best U.S. beaches.