Fund Manager Seeks Sun, Fun and Low Taxes: Expatriation with a New Twist

Have you ever been so disgruntled about paying taxes that you start daydreaming about renouncing your U.S. citizenship and moving to a low tax jurisdiction?  Normally, the concept is not as rewarding as it seems.  Expatriating from the U.S. actually causes a U.S. tax.  Not to mention, you need to give up your U.S. passport and stay out of the U.S. for the majority of the year.


Recently, the tropical island of Puerto Rico began a promotion to facilitate your expatriation dreams.  The island has instituted some very generous tax breaks to seduce the world’s wealthy to relocate.  For U.S. asset managers the numbers can be compelling and it may be worth considering.

Technically, you would not be an expatriate by moving to Puerto Rico.  The island is actually a commonwealth of the U.S. and its residents are citizens of the U.S.  However, unlike other U.S. territories, Puerto Rico has its own tax system. In order to achieve Puerto Rico residence you must, among other requirements, be physically present in Puerto Rico for at least 183 days during the taxable year (even a minute on the island counts as a full day for this purpose).  But unlike the more traditional expatriations there is no need to surrender your U.S. passport or renounce your U.S. citizenship.

Puerto Rico’s promotion provides that new residents are exempt from tax on certain investment income until December 31, 2035.  The primary benefit for U.S. citizens is the exemption for capital gains (most dividends and interest would still be taxable by the U.S.).  Any capital gain that accrues after Puerto Rico domicile is established is exempt from both U.S. and Puerto Rico taxation until 2036.  Any capital gain accrued prior to relocation to the island will remain subject to U.S. tax for a period of ten years.  After that period any pre-domicile gain amount would be subject to only a 5% Puerto Rico tax until 2036, when the tax holiday ends.

Additionally, the law supplements the exemption for investment income with a 4% income tax rate for firms offering financial services.  If these perks were not enough to get you on that four hour plane ride from New York, there’s more!  You also have the ability to avoid state tax on all your income.

If you are a high income individual living in New York City, your combined federal, state and local tax burden on ordinary income is more than 50% and on long-term capital gains, more than 30%.  Now, imagine earning ordinary income at tax rate of just 4% and a capital gains tax rate of 0%.  You don’t have to be a hedge fund guru to do that math.

There are both risks and rewards to relocating to Puerto Rico.  There are also some complicated interactions between U.S. tax law and the law of Puerto Rico.  The partners at WithumSmith+Brown are experienced in these matters as well as other expatriation options and would be happy to explain them to you in more detail.

Tony Tuths


Categories: Uncategorized

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