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Nick Prouty, an act 22 Puerto Rico resident , and owner of Puerto del Rey Marina , just commented this:

"Puerto Rican's are Americans and Americans ought to be very proud of their Puerto Rican brothers and sisters who in the aftermath of Hurricane Irma have literally taken the shirts off their back and given them to their neighbors in the Virgin Islands ... all this occurring despite the worst economic meltdown in the island's history. Thousands of missions of mercy have gone out of my marina, Puerto del Rey  ... boats of all shapes and sizes laden down with water, food and medical supplies ... destined to outer islands cut off from the world. It is literally a scene out of Dunkirk that replays itself everyday. If there is any silver lining to Irma, it is that the world now sees what I have witnessed first hand for the past five years... Puerto Rico is an island comprised of some of the kindest people in the world.  So consider that when you read all the negative stories of Puerto Rico ... I thank god that there are still places where human decency and kindness define ones daily conduct. With tears in my eyes, I say to my fellow Puerto Rican's ...Take a well deserved bow"


Debunking the Claim That Puerto Rico’s Tax Benefits Are “Hype” or “Too Good to Be True”

International Man
by Nick Giambruno, Senior Editor | October 31, 2014

It was only a matter of time before it happened.

After releasing our groundbreaking free documentary America’s Tax-Free Zone, new and old misconceptions about Puerto Rico’s tax benefits have surfaced. Many of them had previously been debunked.

The purpose of today’s article is to drive a stake through the heart of these misconceptions and forever put them to rest.

And there is really no better person on the planet to do that than David Nissman, a true authority on this topic.

David Nissman was appointed by former US President George W. Bush to be the United States Attorney for the US Virgin Islands. He regulated the tax incentive programs there—which have many similarities to the Puerto Rico incentives—for the US federal government during his tenure. He also has written a number of the economic development statutes in place today.

David has since left the dark side and now represents US taxpayers in IRS audits concerning tax incentive programs in the US Territories—like the Virgin Islands and Puerto Rico. His current and former experiences gives him unparalleled insight into the US government’s thinking behind Puerto Rico’s tax incentives.

After reading this article, you should have no doubt that Puerto Rico’s tax incentives are not “hype” and not “too good to be true.” The fact is, they are 100% real and legal. And for those who obtain them, they are here to stay.

Puerto Rico’s tax incentives may allow you to totally eliminate all forms of taxation on capital gains, interest, and dividends and reduce your corporate income tax rate to just 4%. Americans can find similar benefits nowhere else in the world short of renouncing their citizenship. Much ink has been spilled on this already, so if you are new to Puerto Rico’s tax incentives see here to get all caught up.

David will also show that:

  • Puerto Rico’s tax incentives are not some fly-by-night thing. They fit into the economic development policy that has been supported by the US federal government and both political parties for many decades.

  • It’s nearly impossible for either the US or Puerto Rican governments to end the tax incentives for those who already have obtained them.

Now, we aren’t saying it is impossible that these tax incentives could go away for new participants. That is a possibility, but also not a very likely one. It is also an incentive to obtain your tax benefits from the Puerto Rican government (which come in the form of a legally binding contract) as soon as possible—because once you’ve received your contract giving you your tax benefits, it will be almost impossible for anyone to take them away from you prospectively or retroactively, no matter how hard some politicians will stomp their feet.

Even if the benefits were to somehow magically disappear after a couple of years, you could still reap enormous benefits from participating in them. My colleague Louis James remarked that even if the tax incentives last only for five years, he’d be able to pay for his condo with his tax savings.

And now without further ado, I’ll turn things over to David Nissman, who will put these misconceptions to bed for good.

Until next time,

Nick Giambruno
Senior Editor,
INTERNATIONALMAN.com

THE BILLIONAIRE TAX MOVE THAT COULD BE FOR YOU: PUERTO RICO

Law 22:

Tax incentives for economic development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

About a dozen individuals have taken advantage of the incentives offered by Law 22, and an additional 60 applications for Law 22 benefits are in process, Economic Development & Commerce Department (DDEC by its Spanish initials) Secretary Alberto Bacó Bagué told CARIBBEAN BUSINESS.

A POWERFUL LURE

On Jan. 17, 2012, Puerto Rico enacted Law No. 22 of 2012, also known as the "Individual Investors Incentives Act" (Law 22). The law provides tax exemptions to eligible individuals residing in Puerto Rico, and may have profound implications for the continued economic recovery of the island. To avail themselves of such benefits, individual investors need to become residents of Puerto Rico and apply for a tax-exemption decree, which has generated interest from many investors as well as criticism from detractors.

Law 22 is designed to primarily attract to Puerto Rico high-net-worth individuals, empty nesters, retirees who currently relocate to other states and individual investors from the U.S. and other countries, by eliminating all taxes on passive income that accrues after they relocate to the island. While dividends and interest income earned by Puerto Rico residents on U.S. securities are generally taxed by the federal government, capital gains taxes on their sales are based on residence.

"Although Puerto Rico is a U.S. territory, pursuant to Section 933 of the U.S. Internal Revenue Code of 1986, bona-fide residents of Puerto Rico aren't subject to federal taxes on income derived from sources within Puerto Rico. Therefore, U.S. citizens that are bona-fide residents of Puerto Rico benefiting from Law 22will only be subject to federal taxation on income derived from sources outside of Puerto Rico. The law provide the following benefits to new Puerto Rico bona-fide residents on qualified investments: (i) 100% tax exemption from Puerto Rico income taxes on all dividends; (ii) 100% tax exemption from Puerto Rico income taxes on all interest; and (iii) 100%tax exemption from Puerto Rico income taxes on all short-term and long-term capital gains accrued after the individual becomes a bona-fide resident of Puerto Rico," said José R.Pérez-Riera, former DDEC secretary under the administration of former-Gov. Luis Fortuño. Pérez-Riera is widely credited as the intellectual father of Laws 20 and 22 of 2012.

Both of these laws were signed by Fortuño in early 2012, but hadn't yet been aggressively marketed and promoted until the new administration of Gov. Alejandro García Padilla and DDEC Secretary Bacó started doing so after taking office in January. This is a refreshing thing to see in Puerto Rico politics and a sign that both main political parties recognize the great potential that these two laws have for the island's economic development.

Puerto Rico's unique political status—under the jurisdiction of the U.S. but with a separate tax system— makes this pitch particularly attractive to wealthy investors residing stateside. U.S.-based millionaires and billionaires who move to the island would avoid taxation on the sale of securities, which are normally taxed federally at a 23.8% rate.

The Puerto Rico program has an advantage over foreign jurisdictions because investors don't have to renounce their citizenship to take advantage of the tax-shelter offer. Wealthy taxpayers who opt to re-establish overseas to a foreign country have to surrender their U.S. passports and pay an exit tax of 23.8% on unrealized capital gains.

Pérez-Riera said one of the benefits of Law 22 is that besides being able to retain their U.S. citizenship, new residents of Puerto Rico under Law 22 wouldn't be obligated to pay the 23.8% existing tax on unrealized capital gains when moving to the island. "If you consider recent trends showing that high-profile individuals, such as Facebook co-founder Eduardo Saverin, are moving to foreign jurisdictions and renouncing their citizenship, some would argue that it is in the best interest of the U.S. to keep these individuals in a U.S. jurisdiction such as Puerto Rico rather than losing them to a foreign country," Pérez-Riera said.

While these attributes make the deal particularly appealing to U.S. residents, Puerto Rico's laws have resonance with worldwide investors as well. One particular appealing aspect of the law is not only the tax breaks it provides, but also that it includes a Puerto Rico tax decree to protect investors who move here, guaranteeing the incentives through 2035 from any subsequent changes in local legislation.

"When I tell my clients they will get a contract guaranteeing their tax benefits for more than 20 years, it is very attractive," said Gabriel Hernández, who heads the tax division of BDO Puerto Rico. He said this rock-solid guarantee is very important given the increased tax levied on the wealthy by nations going through economic challenges, including the U.S. and several others in Europe and Asia.

"Another attribute that makes Law 22 particularly appealing to worldwide investors is that non-U.S. residents who become new residents of Puerto Rico and become naturalized U.S. citizens in Puerto Rico, are exempt from federal estate taxes that would be applicable if they became naturalized U.S. citizens in any of the 50 states," Pérez-Riera said.

"Clients can't believe the benefits. There is a tremendous amount of interest," added attorney Fernando Goyco-Covas, of the law firm Adsuar Muñiz Goyco Seda & Pérez-Ochoa, who said he is being invited to give seminars on the subject stateside.

The unique interplay between the U.S. and Puerto Rico tax systems is creating this powerful tax lure, offering a way to avoid federal taxes on unrealized capital gains that even foreign jurisdictions don't offer investors. However, it is the interaction between those two systems that have many predicting a backlash will occur.

BRACING FOR THE BACKLASH

"If you have billionaires who go to Puerto Rico and sell a lot of stock, they will avoid paying millions or billions of dollars in federal taxes. There would be some benefit in Puerto Rico and some local economic activity would be generated, but the federal treasury would lose a lot more than what Puerto Rico would gain," said former Clinton administration official Jeffrey Farrow, a veteran observer of the relationship between Washington, D.C., and U.S. territories. "It sounds like some people are exploiting a loophole to avoid a lot of federal taxes. When these things occur, Congress closes the loophole."

Farrow isn't alone. John Buckley, a former tax counsel for Democrats on the House Ways & Means Committee, told Bloomberg News that Puerto Rico is "walking a fine line. This would be the first time that Puerto Rico would kind of deliberately erode the U.S. tax base for individuals."

Buckley said a Congressional attempt to curtail the Puerto Rico program could generate cash for the U.S. Treasury and there would be little public opposition to shutting the program down. "You could get a score here," Buckley told the news outlet.

Meanwhile, one member of the Joint Committee on Taxation, Sen. Chuck Grassley (R., Iowa), told Fortune magazine that the new Puerto Rico tax break will prompt Congress to look at how territories are treated under U.S. tax laws, and an effort may be made to "harmonize" the treatment or ensure the territories accept "certain rules to prevent tax evasion."

U.S. Senate Finance Committee Chairman Max Baucus (D., Mont) will reportedly look at the issue as part of his efforts toward comprehensive tax reform.

Toby Roth, a former Republican congressman and lobbyist who has worked for decades on Puerto Rico issues, also said the Law 22 program is being questioned in Congress. "One of the congressmen said to me, 'why are they bringing the hedge fund managers down there? They have to keep the bright young Puerto Ricans on the island. That's where their future lies,'" Roth told CARIBBEAN BUSINESS. "If Puerto Rico doesn't create the jobs to keep their talented young people on the island, the hedge fund managers won't mean a thing."

Puerto Rico officials have been wary of fallout over the program since it was first conceived. However, supporters of Law 22 insist that the law is fair and doesn't affect the amount of taxes Puerto Rico residents pay the federal government. "Law 22 simply reduces the amount of money that the Puerto Rico Treasury will receive on certain passive investments to make Puerto Rico a more attractive jurisdiction to live in, much in the same way all 50 states use whatever assets they have to attract people to come visit, work or live in their state," Pérez-Riera said. "The amount of money that the federal government receives on qualified investments under Law 22 remains the same as it was before, as has been the case for decades. It is the amount paid in Puerto Rico taxes that has been modified under the law."

THE LAW IS MISUNDERSTOOD

"An individual can't simply move to Puerto Rico to avoid carried interest on capital gains that were accrued while he was a resident of any state in the U.S. If he moves to [the island] and sells his assets after becoming a Puerto Rico resident, he will still have his fair share of federal taxes on the capital gains accrued while prior to becoming a resident of [the island]. It is on gains accrued while he is a Puerto Rico resident that he would benefit under Law 22, and for those gains, Puerto Rico residents haven't paid federal taxes for generations, so nothing has changed in that regard under Law 22," Pérez- Riera said.

"Congressional backlash was extensively considered prior to the filing of Law 22. In fact, the bill wasn't filed for many months after it was ready to minimize any connection or adverse effect on the IRS [Internal Revenue Service] opinion regarding Law 154 [on excise taxes for manufacturers]," said Edward Calvesbert, former deputy DDEC secretary under the Fortuño administration.

"Marketing efforts were initially targeted through service providers—financial advisers, accountants, tax attorneys, etc.—to offer their high-net-worth clients the means and confidence to make the move to the island," he added. "Once we had dozens or hundreds of success stories, the marketing efforts would be taken more mainstream, directly to individuals."

Congress can and has reacted against programs that some believe are similar to Law 22. In the 1980s, Congress acted against a similar program in the Northern Mariana Islands, where a number of wealthy businessmen sought to avoid taxes on profits from the sale of successful businesses, which included Computerland and DHL, according to Farrow.

More recently, the federal government placed restrictions on a similar program in the U.S. Virgin Islands to cut down on abuse by requiring that residents of that territory are physically present for at least 183 days a year. The Puerto Rico law carries this requirement and additional tests to prove residency and that the investor is a member of the island community, precisely to ensure that individuals taking advantage of the law are people who have legitimately moved here and have committed to becoming a part of the local community.

However, not everyone agrees that a backlash is inevitable. Hernández of BDO Puerto Rico said while particular Congressmen may criticize the program, he noted that the official policy of the federal government has been to support Puerto Rico's efforts through taxation aimed at the island's economic development and ensure that federal tax laws don't blunt their effectiveness. This position was reiterated in a white paper last May by the Congressional Joint Committee on Taxation, he said.

Hernández said Law 22 is just the latest in a long line of economic development initiatives launched by the commonwealth. "If you look at the history of Puerto Rico tax incentives, it is full of backlash, both locally and in the federal government," he said, saying much of it is fueled by politics.

The tax expert also said the federal government couldn't suddenly treat the capital gains of Puerto Rico residents differently than those of residents elsewhere in the U.S. without running into problems of discriminatory treatment.

In the end, it will be a matter of public policy to decide if Congress takes action to eliminate Law 22, most likely by changing U.S. tax law or regulations, Goyco-Covas said. "This is a public policy issue for Congress. We have had our bond ratings degraded. Whether Congress will see it as a loophole or as what it really is, a tool for economic development, remains to be seen."

TOOLS FOR A GLOBAL ECONOMIC FIGHT

DDEC chief Bacó affirmed that Law 22 is an economic development tool that will bring "social and economic justice" to Puerto Rico residents brutalized by a six-year recession. He attributed much of the criticism of the program to "politics" and "envy."

Noting that Law 22 was passed under the Fortuño administration, he said it was a bipartisan effort and he has committed to promoting it because he sees its job-creating potential. The fact that the García Padilla administration considers Law 22 one of the cornerstones of its economic development strategy presents a change in policy by the leadership of the Popular Democratic Party— including the governor, San Juan Mayor Carmen Yulín Cruz, Senate President Eduardo Bhatia, House Speaker Jaime Perelló, Rep. Luis Vega Ramos and La Fortaleza Chief of Staff Jorge Colberg Toro—all of whom voted against the bill when it was approved by the Legislature during the previous administration.

"This isn't a tax loophole. This is the reality of our relationship with the U.S., and this relationship has aspects that restrict us and aspects which help us develop ourselves," Bacó said. "Puerto Rico has been losing many of its important economic development tools such as Section 936. If every time we try to develop ourselves they are going to restrict us and leave us 100% with the aspects of our relationship that restrict us, this is akin to taking a boxer, tying up his arms and his legs, and then throwing him in the ring to compete against the global economy."

Bacó said Law 22 should be looked at in tandem with Law 20, which aims to promote the export of services from the island, while also attracting professionals to Puerto Rico, by reducing the corporate tax rate to 4% on service export revenue.

"Laws 20 and 22 are the spearhead of a social and economic justice program for U.S. citizens living in Puerto Rico," Bacó said, who spoke to CARIBBEAN BUSINESS during a job fair in San Juan last week that drew some 10,000 applicants for 300 available posts. "Look at these young people waiting hours in line for a chance to work. This is a clear example of the sad state that Puerto Rico is living [now]."

Indeed, it now seems that almost everyone in Puerto Rico agrees about the potential that these new laws have for Puerto Rico's economic development, which is a rare occurrence in recent history.

"If Laws 20 and 22 are to fulfill their transformative potential, we need to look at their implementation as a long-distance relay rather than a sprint. I give much credit to Puerto Rico's DDEC Secretary Alberto Bacó, for picking up the baton in this relay and becoming Puerto Rico's champion for Laws 20 and 22 by aggressively promoting them as he has been doing, which is exactly what Puerto Rico needs at this time," Pérez-Riera said.

Bacó said the purpose of the program is for wealthy investors not just to come live in Puerto Rico, but also to bring a portion of their professional services businesses to the island, which would then provide services to the exterior. He said the success of the program wouldn't be measured by whether the John Paulson billionaires of the world come here to live, but whether those who do come here establish businesses on the island.

"Law 22 will bring people who will buy properties, which will help construction. They will also buy cars and spend money in stores and restaurants, and Law 20 will bring economic development. It will create jobs and, slowly but surely, a new source of revenue for the government," Bacó said.

Legendary hedge fund manager John Paulson, who thought of taking advantage of Law 22, isn't moving to Puerto Rico after all, but dozens of other high-net-worth individuals are still considering making the island their home to take advantage of the powerful tax incentives.

Hato Rey attorneys and accountants interviewed by CARIBBEAN BUSINESS are reporting fielding six calls daily from rich investors inquiring about the incentives, while another cites a 400% increase in inquiries since the Paulson stories broke.

Proponents said that bodes well for the success of the program, which aims to turn Puerto Rico into the Singapore of the Americas, a center of high finance and trade, and a magnet for expert professional services such as legal advice and accounting.

Critics, however, fear such success may be short-lived. Many are bracing for a Congressional backlash that would shut the program down and provoke other actions that could have a bigger detrimental impact on Puerto Rico's economy. They also said this is just another example of the Puerto Rico government relying on "gimmicks" for its economic development program, which can be taken away by Congress.

"You have a good product. The issue is if you have a product that is too good for your own good," said economist Vicente Feliciano, president of Advantage Business Consulting. "The concern is: Would this create a backlash from Congress?"

There are billions of reasons to worry about a Congressional backlash, according to critics, who point to the roughly $20 billion net annually Puerto Rico gets from the U.S. government, and the relative ease that Congress would have in curtailing transfer payments.

Other sectors of the federal government could also become involved. One major concern is that the IRS has yet to render a final determination on the creditability of excise taxes collected under Law 154. In April 2011, the IRS issued a preliminary ruling that allowed U.S.-based parent companies of Puerto Rico manufacturers subject to Law 154's excise tax to claim a federal tax credit against the levy (CB April 7, 2011). The decision, issued as IRS Notice 2011-29, said the IRS and the U.S. Treasury Department were still "evaluating" the temporary excise tax.

With growing concerns in the U.S. regarding runaway federal deficits and ballooning levels of long-term debt, as well as growing inequality between the wealthy and the middle class, a program allowing millionaires and billionaires to skirt federal tax obligations isn't likely to find much public support.

"It is creating an image problem for Puerto Rico," said economist Joaquín Villamil. "If it isn't handled correctly, it will appear as if we are inviting people to evade federal taxes by coming to Puerto Rico. At this moment, that isn't a good idea."

The program may also impact Puerto Rico's future lobbying efforts in other areas, such as its pursuit of the Section 933-A tax break, which is being billed as a way to attract business to the island while at the same time serving as conduit for untaxed overseas profits to come back home to the U.S. Treasury.

Puerto Rico government officials, and a broad section of the business community, believe that upcoming talks on federal tax reform slated for this year provides a unique opportunity to win approval for the proposals.

Law 22 could become the focus of Congress during federal tax reform talks while there are other things that Puerto Rico wants from the committees with jurisdiction over taxes and major social programs, according to critics.

Bacó said Paulson's decision not to come to Puerto Rico has just given him more enthusiasm to continue marketing the program. He said while a backlash in Washington, D.C., is possible, he believes reason will prevail and he can make the case that Law 22 isn't only legitimate, but also necessary.

"I am not going to sleep in Washington. I will be talking about how you can't leave Puerto Rico without tools to combat a labor participation rate of 40%, unemployment at 14.6% and a per-capita income level that is less than half of the poorest state, Mississippi," Bacó said. "If they want to restrict us, they should do it after we have achieved the per capita level of the poorest state in the Union. I will tell that to every member of Congress."

CHARTING A RETURN TO GROWTH

Law 22 proponents are euphoric about the interest being shown in the tax break by offshore investors. While a solid portion of those who have expressed interest are in the financial services industry, Hato Rey tax experts said interest has also been shown by individuals in the technology, legal, tourism and other sectors.

While 40% of those who have already established here are hedge fund managers, there are also legal and accounting firms and technology executives, Bacó said.

In most cases, individuals are moving here with their families and businesses, according to "Golden Mile" executives. The incentives could also be attractive for upper-middle-class retirees wanting to live in a place with good weather, modern amenities and great tax breaks, while retaining the security of remaining under the U.S. flag.

Law 22 rules require the investors to move here and become a part of the local community, proponents said. People have to live here at least 183 days a year, and they must pass a series of "closer connection" tests to prove they are bona-fide members of the Puerto Rico community, Goyco- Covas said. That means an investor's spouse must live here as well, and minor children must go to school on the island, among other tests.

"It's not so easy to comply with this. You really have to live here and be a member of the community," he added.

As word of the tax break spreads, it will likely appeal to a growing number of businesspeople, proponents said. The incentives could attract high-net-worth Puerto Ricans who haven't lived on the island for many years, including celebrities, and they could also appeal to the growing legions of tech entrepreneurs who have suddenly become rich.

Puerto Rico is actively pursuing designation as a regional center for the EB-5 (Employment-Based, Fifth-Preference Category) Immigrant Investor Pilot Program, which grants U.S. residency to foreigners who invest at least $1 million and create jobs. If it succeeds, the combination of this program with Law 22 could make it even more attractive for non-U.S. investors to move to Puerto Rico and invest, especially given the estate tax differences between Puerto Rico and the U.S., referenced by Pérez-Riera.

"In the end, what we are looking for is a very diversified group of individuals and businesses that will form a professional services hub in Puerto Rico," Hernández said.

Others, however, question the economic punch the Law 22 incentives have, and wonder if it is worth promoting a measure that could be killed by Congress. That is especially the case when other tools, such as Law 20, will spur economic development without carrying much controversy.

"The export of services is more in line with traditional incentives to attract businesses here, and therefore, the reaction by the U.S. Congress to them wouldn't be as strong," Feliciano said. "The combination of Law 20 and Law 22 makes the incentives more powerful, but that doesn't mean that one can't be effective without the other."

"My concern with the measure is that what we are trying to get in Puerto Rico is strong production-based and knowledge-based economic development. This thing isn't really that important in terms of economic development," Villamil added. "We want to strengthen tourism, manufacturing and other productive sectors of the economy."

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Puerto Rico Pours On Tax Incentives For Investors

Robert A. Green, CPARobert A. Green, CPA , Contributor

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Enacted in 2012, Puerto Rico’s Act 22 allows investors and traders with bona fide residence in Puerto Rico to exclude 100% of all short-term and long-term capital gains from the sale of personal property accrued after moving to PR. Act 22 exclusions include day trading and it does not require investment in Puerto Rican stocks and bonds; trades can be made with a U.S. broker or on any exchange around the world.

Americans with residence in PR report “non-PR source” income on U.S. Form 1040, and PR-source income on a PR income tax return filed with Hacienda (PR’s tax authority).

IRS Pub 1321 shows how to treat different types of income (see “Source of Income Rules”). Other than the “sale of personal property” (stocks, bonds, futures) which is sourced in the “seller’s tax home” (presumably in Puerto Rico), other types of income are sourced from to location of the real property (home or office building) or payer (interest and dividends), or where the services or pension were earned. Special rules provide for capital gains on the sale of personal property purchased before moving to PR to be treated as U.S. source income.

Traders will go from paying U.S. federal and state income taxes on capital gains to paying zero taxes on capital gains as a bona-fide resident of PR. That’s a huge savings!

Act 20 for investment managers

The Act 20 tax incentive is a 4% flat tax rate on export service net income. The owner receives Act 22 100% exclusion on PR-source dividends received from the PR export service entity. Companies retaining some operations in the U.S. will have “effectively connected” trade or business income subject to U.S. tax.

Many owners and employees of investment management operations have significant capital gains income generated from their investment portfolios, including investments in their own funds and profit allocations of capital gains in their managed hedge funds. These capital gains can be excluded under Act 22.

Bona fide residence tests

You must pass all three different tests – the presence test, tax home test and closer connection test – for individual bona fide residence. Plan to live more than half the year in PR and move your family, domicile, connections and legal matters to PR.

If you’re young and single or an empty nester, this type of move may work well for you. If you trade for your own account with no investors or employees, it’s easier to move. But, for some investment managers it may be difficult to move an investment management business to PR. You have to change documents with investors, hedge funds and counterparties to reflect the PR company name and address and carry on your business from PR.

 

Puerto Rico’s Stunning New Tax Advantages

http://www.equities.com/editors-desk/personal-finance/taxes/puerto-rico-s-stunning-new-tax-advantages

Chances are that you have heard something about the stunning new laws in Puerto Rico that give unbelievable tax benefits for mainland Americans who move to the island. Benefits that are so incredible that many at first thought they were simply too good to be true… but they most certainly are not.

With strategies that purport to legally allow US citizens to avoid having to pay taxes, the first thing that usually comes to mind is some sort of cockamamie scheme. This is because the US government is no slouch when it comes to shaking down its citizens. It’s mind-boggling expenditures necessitate this. It would be dangerously foolish in the extreme to think you could slip one past them.

However, the tax benefits of becoming a resident of Puerto Rico are not an illusion, nor some type of scam. They are very real, 100% legal, and could change your life. That is not hyperbole. They have already changed the lives of many.

These benefits are why scores of mainland Americans have already made the move—including two members of Casey Research. Many more have seriously considered it.

To spur job growth and economic activity in general, the Commonwealth of Puerto Rico introduced extraordinary tax incentives for incoming residents and service businesses.

Specifically, for Puerto Rican residents and businesses that qualify—mostly expatriates from the US mainland or their enterprises—the recently enacted Act 22 and Act 20 provide for a zero tax rate on capital gains and certain interest and dividends earned by individuals, and for low single-digit tax rates on qualifying service income earned by corporations operating in Puerto Rico.

Puerto Rico is no novice at sculpting tax rules to attract foreign investors and expatriates. For decades the country has offered tax incentives to many types of businesses, especially manufacturers, which is why today you’ll find plants belonging to Praxair, Merck, Pfizer, and other big names dotting the island’s lush interior.

Due to the ever-increasing extra-territorial regulations they are forced to comply with, many countries and foreign financial institutions are showing American citizens the “unwelcome mat.” Puerto Rico, on the other hand, is a newly tax-friendly jurisdiction that is—and will continue to be—open to Americans.

One accountant who specializes in offshore structures remarked, “This is the biggest opportunity I’ve seen in 25 years.”

He’s right: this is truly an astounding and unique opportunity for individual Americans; there is no other way to legally escape the suffocating grip of these taxes besides death or renunciation of US citizenship.

This is because the US is the only country in the world that taxes its nonresident citizens on all of their income regardless of where they live and earn their money.

For this reason, an American who moves to a zero-tax jurisdiction like Dubai, for example, still pays a full US tax bill. A Canadian expat working in Dubai would have no income tax bill at all.

(Note: The US does exclude up to $99,200 of foreign earned income (salary, wages, etc.) from taxation if certain conditions are met, but there is no break for an overseas American’s investment income.)

American are in the uniquely unfavorable position of having arguably the worst tax policies and a government that can effectively enforce them. For many, it is a tight and suffocating tax leash. It is no wonder, then, why record numbers of Americans are giving up their citizenship to escape these onerous requirements.

Even if you do decide to take the plunge and renounce your US citizenship, there’s a good chance you’ll get stung with the costly exit tax and also may have trouble reentering the US.

There is, however, another way, thanks to the new options in Puerto Rico. American citizens can effectively gain many of the tax benefits of renunciation without actually having to do so.

Due to Puerto Rico’s situation as a commonwealth of the US, its residents are not subject to US federal income taxes from income generated in Puerto Rico.

Previously this did not make any practical difference, because although Puerto Rican residents are not subject to US federal taxes, they are subject to Puerto Rican taxes, which are often at similar levels to those on the US mainland.

However the situation has changed immensely, with the two powerful, new laws that exempt new Puerto Rican residents from certain key taxes from the Puerto Rican government.

Anyone who relocates to Puerto Rico can apply for these tax incentives—including mainland US citizens, who can find similar benefits nowhere else in the world, thanks to the island’s unique legal situation.

Casey Research has done a thorough boots-on-the-ground investigation and found that the tax advantages are real and that for many Americans, including individuals operating on a modest scale, they are a huge opportunity that could truly be life-changing. The findings were recently published in a comprehensive A-Z guide on the Puerto Rico option.

By Nick Giambruno

Senior Editor of International Man

 

- See more at: http://www.equities.com/editors-desk/personal-finance/taxes/puerto-rico-s-stunning-new-tax-advantages#sthash.B2pRSptc.dpuf

 

Wealthy Individuals Focused on Puerto Rico

http://www.caribbeanbusinesspr.com/prnt_ed/eyes-of-the-mega-wealthy-firmly-focused-on-puerto-rico-9677.html

Eyes of the mega-wealthy firmly focused on Puerto Rico

By : XAVIRA NEGGERS CRESCIONI & DENNIS COSTA
Edition: March 27, 2014 | Volume: 42 | No: 11

 

Dozens more wealthy investors also looking at the island for opportunities

Eyes of the ultra-wealthy firmly focused on Puerto Rico

Latest moves by offshore investors are only the tip of the iceberg, could represent huge economic driver for the island

A string of significant investments in Puerto Rico by hedge-fund and private-equity investors who are mostly based in the tri-state area has intensified in recent weeks, signaling a definite, long-term interest by big-time investment titans on the island.

Total investments carried out by offshore investors so far tally around $1.5 billion. These investors are buying at bargain prices because of the present recession in Puerto Rico and will be creating close to 1,000 permanent jobs as they develop their projects in the near future.

Recent developments in this regard include the acquisition in early March of the Condado Vanderbilt Hotel, La Concha-A Renaissance Resort and the accompanying Vanderbilt towers in San Juan, by Paulson & Co., a New York-based investment firm.

The acquisition—spearheaded by billionaire hedge-fund investor John Paulson, founder & president of Paulson & Co.—will entail some $260 million in overall investment, including costs to complete construction of and furnish the Vanderbilt's guest-room areas. The cost of the acquisition itself, as in all other recent instances, remains undisclosed.

"These two properties are the epicenter of luxury in San Juan. Once the five-star, oceanfront Vanderbilt hotel is completed, it will be the most luxurious hotel in the capital. We believe Puerto Rico is on the cusp of economic recovery and that both hotels will benefit from the island's future growth," Paulson stated.

He is also already a significant stockholder in Popular Inc., parent company of Banco Popular, owning about 9% of the outstanding shares.

Another recent noteworthy acquisition was made by investment fund Encanto Group, a recently incorporated firm based in San Juan and comprising New York investors, which bought the Punta Candelero Beach Resort and the Palmas del Mar Yacht Club & Marina in Humacao, on Puerto Rico's east coast. Encanto Group announced plans to invest $200 million to renovate the properties.

The deal—which includes the Solarea Beach Resort luxury condominiums, the Yacht Club Marina and about 24 acres of oceanfront land—consists of plans to build a beachfront hotel and residences, expected to generate about 400 jobs during the construction phase, and the goal of creating a world-class beach destination and water-sports center.

Then there is Nicholas Prouty, a billionaire investor who is founder & CEO of Putnam Bridge Funding, based in Greenwich, Conn. The firm, which specializes in acquiring real-estate assets mired within the initial stages of the U.S. bankruptcy court system, first came onto the Puerto Rico landscape in September 2012, when it acquired La Ciudadela, a housing and commercial complex in the Santurce sector of San Juan.

Another of Putnam Bridge's high-profile acquisitions has been the Puerto del Rey Marina in the eastern municipality of Fajardo, formerly owned by Dan Shelley. Putnam Bridge paid $47.5 million for the property in June under similar financial terms, with the former owners of the marina, the largest on the island, having filed for bankruptcy in early 2013.

In all, Prouty is betting at least $750 million on Puerto Rico and remains bullish on the island's potential despite credit downgrades and a marathon economic recession. "When both investments are fully completed, we estimate the creation of 1,000 jobs—jobs up and down the value chain," Prouty told CARIBBEAN BUSINESS.

CHAMPIONS FOR PUERTO RICO

Such developments are only the tip of the iceberg when it comes to offshore investments, several sources have told CARIBBEAN BUSINESS, with the main lure being Acts 20 (Law to Promote the Export of Services) and 22 (Law to Encourage the Transfer of Investors to Puerto Rico) of 2012, essentially the island's main calling cards in its bid to attract offshore investment.

Law 22 establishes incentives in which outside investors who turn Puerto Rico into their primary place of residence pay only 4% of taxes on earned income, no taxes on profit distributions and dividends, and zero taxes on commercial property for the first five years, with the incentives guaranteed for at least 20 years.

To become eligible for the tax breaks, a person must live in Puerto Rico for at least 183 days a year and prove that a preponderance of his or her social and family connections is here. Any person who moves to the island signs a contract with the government that guarantees the tax breaks through Dec. 31, 2035. The investment tax breaks are guaranteed until 2036. Only congressional action—or granting Puerto Rico statehood—would put a stop to the tax breaks.

Another piece of legislation, Law 273 of 2012, also known as the International Financial Center Regulatory Act, seeks to broaden the scope of banking activities for international financial entities organized in Puerto Rico and establishes additional tax incentives for this sector.

The Puerto Rico government primarily through Economic Development & Commerce Department (DDEC by its Spanish initials) Secretary Alberto Bacó, has aggressively pushed these incentives and has a list of some 300 offshore investors interested and ready to move to the island, sources close to the matter said, with the number of investors growing on a daily basis.

"Get on a plane now and business class is filled with representatives from Blackstone, Goldman, D.E. Shaw and every private-equity firm I know," said Prouty during a keynote speech at the Puerto Rico CIO & IT Leadership Conference in early February.

"The movement is pretty impressive. We get three to five new entrants every week, and I think it's accelerating," said the head of the 20/22 Act Society—a support group for those who have the tax decrees—who wished to remain anonymous. "There are about three or four billionaires [besides Prouty] among the group of those moving to the island."

Under the provisions of Law 20, hedge funds have to move a significant part of their operations to Puerto Rico as well as channel assets through local banks to qualify for 0% tax on all investment income and 4% tax on service income, such as management fees.

"Currently, there are many hundreds of millions on deposit at local banks and in the future, this will become billions," the 20/22 Act Society head said. "This is money that is legitimately coming here and staying here. For sourcing purposes, you have to have your assets here."

In addition to funds on deposit at local banks and investments by Paulson and Prouty, others among the group are investing "around $400 million to $550 million" directly in Puerto Rico, he said.

Other sources pointed to Paulson and Prouty as not only the most high-profile representatives in this latest wave of investments, but also the most outspoken champions of Puerto Rico's potential as a place in which to invest.

While Prouty has arguably been the public face of the investment wave, with frequent appearances in media outlets and events, Paulson has taken a more low-key approach, inviting several interested investors and showcasing some of the island's assets. In fact, sources have reported that Paulson was planning to hold a private investment summit this past weekend at St. Regis Bahía Beach Resort, in the northeastern town of Río Grande, for that exact purpose.

Meanwhile, Prouty has turned his lobbying for a Puerto Rico resurgence into almost a full-time job in itself. "Did you know that several times a week my phone rings and on the other end are potential Law 20/22 candidates wanting to learn more about moving to Puerto Rico? In those calls, I speak of the virtues of life here in Puerto Rico, the quality of the educational system, the kindness of people and the cultural richness," Prouty said. "I tell them that there is a lot of misinformation about Puerto Rico particularly when it comes to crime—that no, there are no shootouts on [Condado's] Ashford Avenue—that they need to stop watching reruns of 'Scarface.'"

BIG PLANS

When it comes to Paulson's Condado Trio acquisition, it is but the latest big-time Puerto Rico investment by the Wall Street investor, who first achieved fame in 2007 when he successfully bet that subprime mortgages would tumble. Such a wager netted about $15 billion in profits for his hedge fund and turned him into one of the 100-richest people in the world, with an estimated wealth topping $11 billion.

In 2010, Paulson made his first incursion into the Puerto Rico business landscape when he bought about 6.7 million shares of Popular Inc., right before a consolidation process mandated by federal bank regulators prompted Banco Popular to acquire Westernbank, another financial institution. Since then, Paulson's firm has steadily bought additional stock, eventually owning 8.8 million shares, or 9% of the company, with an overall stake valued at about $230 million.

Then in September 2013, Paulson acquired a majority stake in St. Regis Bahía Beach Resort for an undisclosed amount. Through the deal, Paulson & Co. obtained an 80% stake in the resort & luxury residential complex, while local developers Interlink Group and Muñoz Holdings share a 20% ownership.

Paulson's investments in the Condado Trio are by no means slated to be his last on the island, with total investment by Paulson & Co. alone expected to total as much as $2 billion by the end of 2015, DDEC's Bacó said. "We expect to have more good news to announce soon," he added.

Encanto Group includes the owners of the Punta Candelero Beach Resort and the Palmas del Mar Yacht Club & Marina. It is part of Encanto International LLC, a company being set up in Puerto Rico to provide asset-management, investment- banking and merchant-banking services from its headquarters in San Juan.

Very few details have been officially released about Encanto International, save for the name of a spokesperson, Alexander Lemond. CARIBBEAN BUSINESS learned that Lemond is a managing member of Grove Capital LLC, an investment firm based in the United Kingdom and launched in 2010.

Lemond has also served as a director of Encore Capital Group—a publicly traded, specialty finance company with operations spanning seven countries and based in San Diego— since March 2002. In February of this year, Encore announced it acquired a controlling stake in Grove Capital. The transaction, which is subject to regulatory approval, is expected to close early in the second quarter of 2014, at the latest.

Sources have also pointed to another name behind Encanto, that of Steven Stuart, a former vice president at Goldman Sachs who co-founded Garrison Investment Group LP, a self-billed "alternative investment and asset management firm," back in March 2007.

When asked by CARIBBEAN BUSINESS about the investors who comprise Encanto Group, Lemond only said, "the identities of our investors are confidential."

However, Lemond was more forthcoming about the reasons for the group's investment. "We are excited about the opportunity to develop a world-class beach and marina community. The Yacht Club is the only 5-star resort marina on the island and one of the few in the Caribbean, while Solarea offers a luxury beach-living experience unique to Puerto Rico's eastern coast. In addition, we have plans to develop a beach resort adjacent to Solarea in the short term."

The Encanto Group spokesman also confirmed they are looking at other potential acquisitions on the island. "Yes, we are actively evaluating multiple opportunities in Puerto Rico. As our investment indicates, we are positive about the island's future, and we believe Law 20/22 will spur growth in Puerto Rico's investment community."

With regard to Prouty, the investor has spent millions of dollars in renovations at La Ciudadela since its acquisition, which previously had faced a difficult road for years and saw one of its main developers, Miramar Realty Management, file for Chapter 11 bankruptcy in March 2011, as well as a lawsuit by Banco Popular some months afterward.

Nowadays, practically all of Ciudadela's housing units have been sold. Although no official announcements have yet been made regarding additional investments in the area, Prouty has made no secret of the fact he wants to expand development beyond the Ciudadela grounds, with about $100 million to be spent on the project's third phase, as well as the creation of around 3,300 construction jobs and 100 permanent jobs.

The development will include five buildings, with a total 251 apartments, 61,000 square feet of commercial space, 13,000 square feet of recreational space, 15,000 square feet of new outdoor areas, including a park area that would reportedly connect the Ciudadela complex with the art museum nearby, and 408 new parking spaces.

Plans for the Puerto del Rey Marina are no less ambitious, with Putnam Bridge planning to invest about $450 million in improvement work at the marina. The project is slated to create 200 to 400 jobs during its construction phase, and 300 to 500 permanent jobs once renovations are completed.

"There has never been a better time to acquire irreplaceable, landmark assets at these types of prices," Prouty said. "My fellow investors share a strong conviction that beachfront property located in a country with an U.S. American fl ag in the courtroom and a Walgreens on the corner is a good bet. Couple that with a government bending over backward to attract business while enacting generational reforms and you have the recipe for a comeback. New York had its economic challenges in the 1970s, but how many of us wouldn't kill to go back in time and buy some of those apartments that are now trading at double-digit multiples?"

FANTASY ISLAND

With Paulson and Prouty's investments making news, scores of affluent financiers and retirees are now flocking to Puerto Rico in search of big tax savings that will enable them to substantially grow their investments.

"The interest is really brewing. There are about 5,000 people interested in taking advantage of these tax breaks," said one person with a Law 22 tax decree.

"Before, there was no movement, but when Bloomberg published a story last year on the tax breaks, interest in Laws 20 and 22 really exploded," said tax attorney Fernando Goyco, partner at Adsuar Muñiz Goyco Seda & Pérez-Ochoa PSC, who has 34 clients seeking tax-exempt status. "Every week, I get about four or five calls from people interested in learning more about Laws 20 or 22."

For example, a trader in New York would have to pay 39.6% on short-term capital gains because this, in the trader's case, would be considered regular income; a 3.8% special tax enacted by President Barack Obama and a 12% state tax on any earnings from investments bought and sold in less than six months. Under Law 22, this person wouldn't pay any tax on this investment, Goyco said.

"That's 60% tax on the dollar versus no tax. That's a powerful lure," he stated, adding that this person, as a Puerto Rico resident, would be free from federal income taxes.

People moving to Puerto Rico are wealthy, but not all are jet-setters. Some jumping the pond hark from places such as Gainesville, Fla., and Georgia, sources said.

Contrary to popular belief, there is no net worth requirement to qualify for these tax breaks and anyone who hasn't been a resident of Puerto Rico for the past 15 years can apply so long as they are willing to move to the island. The process is relatively quick, simple and inexpensive. It costs about $1,000 to file paperwork to receive a Law 22 tax decree; the DDEC is taking about 30 to 45 days to grant its approval and a tad longer for Law 20 tax breaks for companies, Goyco said.

While this might not be fair to local investors and financiers, the tax breaks are good "because otherwise these people wouldn't be coming to Puerto Rico," Goyco said. "Some of these people are going to get interested in making other investments in Puerto Rico."

Many of the people picking up their bags and starting a new life here are traders, hedge-fund managers and other financiers in their mid-30s to early 50s—who can make the most of the elimination of taxes on dividends and capital gains—as well as affluent retirees. Most of these are opting for homes in Condado, Dorado, St. Regis Bahía Beach Resort and Palmas del Mar, Goyco said.

"I've also got two guys with decrees who are surfers and moved to Rincón," the attorney said.

Among those who have changed residences is Damon Vickers, founder of Nine Points Management & Research, who moved his hedge fund and family from Seattle last year, National Public Radio (NPR) reported.

"I like making money. We want to go to a place where our money is treated the best, so we might benefit ourselves, and we might also benefit our investors," Vickers told NPR.

If anyone is smart money, it is Vickers, based on his curriculum vitae. He was an early investor in Cisco, Applied Materials, Starbucks, Amazon.com, Outback Steakhouse, Whole Foods and Timberland. Vickers was one of the very few to call the top of the bull market in March 2000. He predicted the dot-com collapse, warned investors about Enron and went on to call the second market top in 2008.

Like Prouty, Vickers' friends in the investment realm are watching closely to see how he fares.

"These people will spend about $500,000 a year here, and that's before we're talking about the purchase of real estate, etc.," said Paco Díaz, a broker with Trillion Realty Group, the local affiliate of Christie's. "Basically, people are renting for a year to see how it goes, and then decide if they want to buy something to set up a long-term residence here."

Based on this rate of spending alone, the "20/22ers" will spend about $150 million or more a year in goods and services in Puerto Rico.

Trillion Realty has a portfolio of 50 individuals who have moved or are considering moving to Puerto Rico.

If all goes well, this influx of new money will push up luxury-property prices in Puerto Rico as well as the overall quality of the neighborhoods where these people move, Díaz said, adding there soon will be a shortage of top-caliber luxury properties and private schools to go around. In anticipation of this, it has been reported that Paulson has bought some Condado property to construct a luxury condominium.

"We need to create a consciousness as a country that we can do something extraordinary here. That we could have an airport full of Learjets and we could all get ahead," Díaz said. "I want to see Puerto Rico become an exclusive island—rather than an all-inclusive island where anything goes—because then things are going to be better for all of us."

Miguel A. Ferrer, CEO of UBS Financial Services Inc. of Puerto Rico, and Gabriel Hernández, a founding partner of Scherrer Hernández & Co., are also touting these tax breaks and Puerto Rico's other benefits to potential new residents through a website called "Puerto Rico is the Answer"—www.puertoricoistheanswer. com.

"We are promoting the island as a result of our deep-seated belief in Puerto Rico's economic potential. With Puerto Rico is the Answer, we hope to contribute in any way possible to an economic rebirth," states the webpage.

Economist Elías Gutiérrez said, "It's a positive move in the right direction," but according to his projections, it would take an investment of $10 billion a year during the next 12 years to get Puerto Rico out of the economic doldrums it has experienced for the past decade.

Puerto Rico Pours on Tax Incentives for Investors

 

http://www.forbes.com/sites/greatspeculations/2014/05/14/puerto-rico-pours-on-tax-incentives-for-investors/


Puerto Rico’s tax incentive acts are tailor-made for traders, investors, investment managers and financial institutions.

Enacted in 2012, Puerto Rico’s Act 22 allows investors and traders with bona fide residence in Puerto Rico to exclude 100% of all short-term and long-term capital gains from the sale of personal property accrued after moving to PR. Act 22 exclusions include day trading and it does not require investment in Puerto Rican stocks and bonds; trades can be made with a U.S. broker or on any exchange around the world.

Americans with residence in PR report “non-PR source” income on U.S. Form 1040, and PR-source income on a PR income tax return filed with Hacienda (PR’s tax authority).

IRS Pub 1321 shows how to treat different types of income (see “Source of Income Rules”). Other than the “sale of personal property” (stocks, bonds, futures) which is sourced in the “seller’s tax home” (presumably in Puerto Rico), other types of income are sourced from to location of the real property (home or office building) or payer (interest and dividends), or where the services or pension were earned. Special rules provide for capital gains on the sale of personal property purchased before moving to PR to be treated as U.S. source income.

Traders will go from paying U.S. federal and state income taxes on capital gains to paying zero taxes on capital gains as a bona-fide resident of PR. That’s a huge savings!

Act 20 for investment managers

Investment managers charge advisory fees to investors. They export their services to investors outside of PR and can qualify for Act 20 tax incentives for “export service businesses.”

The Act 20 tax incentive is a 4% flat tax rate on export service net income. The owner receives Act 22 100% exclusion on PR-source dividends received from the PR export service entity. Companies retaining some operations in the U.S. will have “effectively connected” trade or business income subject to U.S. tax.

Many owners and employees of investment management operations have significant capital gains income generated from their investment portfolios, including investments in their own funds and profit allocations of capital gains in their managed hedge funds. These capital gains can be excluded under Act 22.

You must pass all three different tests – the presence test, tax home test and closer connection test – for individual bona fide residence. Plan to live more than half the year in PR and move your family, domicile, connections and legal matters to PR.

If you’re young and single or an empty nester, this type of move may work well for you. If you trade for your own account with no investors or employees, it’s easier to move. But, for some investment managers it may be difficult to move an investment management business to PR. You have to change documents with investors, hedge funds and counterparties to reflect the PR company name and address and carry on your business from PR.

 

  • A Billionaire Hedge Fund Guru Is Investing In This Island Paradise -- Should You?

http://www.nasdaq.com/article/a-billionaire-hedge-fund-guru-is-investing-in-this-island-paradise-should-you-cm352235#ixzz32BeyFDfp

It's something that hasn't been done in almost two decades.

#-ad_banner-#In an attempt to ease the economic hemorrhaging from a recession that's lasted nearly eight years, Puerto Rico passed a balanced budget earlier this month. The rare feat was a sign of hope for the U.S. protectorate as it attempts to whittle down its $70 billion in public debt, lower an unemployment rate hovering near 15% and stave off a "brain drain" that's seen over 450,000 people flee the tiny Caribbean island.

What does this all mean?

Simply put, it means Puerto Rico is setting up to be an incredible investment opportunity and tax haven for U.S. citizens.

Let me explain...

Hedge fund billionaire John Paulson -- known for his $15 billion bet against subprime mortgages as the financial crisis hit -- says Puerto Rico could be the next "Singapore of the Caribbean." His firm, Paulson & Co., is investing $260 million this year in two upscale beachfront hotels in San Juan, the commonwealth's capital. All told, Paulson is expected to invest up to $1 billion in Puerto Rico by the end of 2015.

Puerto Rico is making all the right moves to spur economic growth by attracting wealthy investors and businesses. Two recent moves in particular are meant to entice outside investors -- namely, wealthy U.S. investors.

The first, known as the Individual Investors Act (Act 22), states that new residents of Puerto Rico are completely exempt from taxation on their capital gains, dividends and interest income.

The second, known as the Export Services Act (Act 20), levies a top 4% tax rate on earnings from businesses that perform services like consulting, asset management, computer programming, research and development for clients outside of the island -- as long as the company is based in Puerto Rico.

YouTube/Bloomberg News
Hedge fund billionaire John Paulson says Puerto Rico could be the next "Singapore of the Caribbean."

Now to get an understanding of why these two tax laws are so attractive to U.S. investors, one must understand that Americans couldn't typically take advantage of these sorts of situations. If a U.S. citizen moves abroad, they are still taxed on their income -- no matter where they earn it and no matter how long they plan to live abroad.

So unless you were willing to go through the lengthy, expensive and arduous process of setting up a foreign trust or renouncing your U.S. citizenship, the rule of thumb has always been that no matter where you live or where you earn your money, you still have to pay taxes on that income... until now.

Because Puerto Rico is not quite a state and not quite a foreign country, citizens of Puerto Rico pay taxes to the Puerto Rican government, not the U.S. government -- yet they are still considered U.S. citizens. Combine this with the new tax incentives, and you have yourself a unique situation to legally lower some of the U.S. tax burdens -- while still retaining your American passport.

It's clear that these incredible tax incentives should invite a flood of capital and economic growth as wealthy U.S.-based investors catch on -- and when you can get in on the ground floor with some of America's wealthiest investors, you have the potential to make enormous gains. So what's the best way to invest in Puerto Rico?

One way I'll be looking to invest is in companies that relocate to Puerto Rico to take advantage of the huge tax incentives. Paying less tax means businesses can hang onto more of their revenue -- which means more money to pass along to their shareholders.

One company that's looking to invest more in its operations in Puerto Rico is Arizona-based Honeywell Aerospace (NYSE: HON ) , a diversified technology and manufacturing company. Puerto Rico is already home to Honeywell's aerospace unit, which produces a wide variety of aviation products like turbine propulsion engines, navigation, radar and surveillance systems and aircraft lighting.

A different investment that's more of a "pure play" as Puerto Rico gets its feet back under it is Banco Popular (Nasdaq: BPOP ) , which provides a range of retail and commercial banking products and services primarily to customers in Puerto Rico and the United States.

The company is looking to divest a majority of its U.S. branches to boost profitability and strengthen its ability to repay a government bailout of $935 million. To help reduce operating expenses, the bank will be focusing its U.S. retail footprint in New York, New Jersey and Florida. It will also be consolidating its operation centers, bringing about 200 jobs back to Puerto Rico.

The effects of management's adjustments to cut costs and increase revenue can be seen in the bank's most recent quarter: Banco Popular posted net income of $86.4 million, up from a loss of $120 million a year ago.

BPOP sports dirt-cheap valuation metrics, too. Its price-to-book ratio is currently 0.7, meaning the stock is trading for less than the value of the assets on its balance sheet. Banco Popular's price-to-earnings (P/E) ratio is a ridiculously low 3.9, with a forward P/E of 10.6.

Risks to Consider: While Puerto Rico is making the right steps to recovery, concerns about its economy remain. After all, eight years of turmoil can't be resolved in a few months. Banco Popular is definitely not for those who are risk-averse. While it is showing improvements, it is wise to tread carefully.

  • Action to Take --> Investing in Puerto Rico isn't for faint-hearted investors -- but once the ball gets rolling and the "Singapore of the Caribbean" begins to emerge, Banco Popular will likely be at the forefront, serving as an engine of growth. As businesses, entrepreneurs and capital flock to Puerto Rico, Banco Popular, the dominant player, will likely be able to profit from the substantial increase in banking activity and investments that come along with them.

For more Information: 305-428-2435