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Puerto Rico Seeks to be a Tax Haven — But with Less Tax Than Foreign Havens

Puerto Rico is “catching up to Ireland and Singapore” as a tax “shelter,” according to the territory’s Secretary of Economic Development and Commerce — who seemed to view the Commonwealth becoming more of a tax haven as a positive development.

There’s one big difference between the Puerto Rico tax haven and taxation of Americans in foreign countries, however. The tax exemption that Secretary Alberto Bacó Bagué is marketing to rich residents of the States avoids Federal taxes on gains from selling stocks and bonds — a very valuable benefit that foreign tax havens cannot offer.

The New York Times reported today that, “Since the beginning of the year, the island has gone on a campaign to promote” the tax avoidance in an effort to get wealthy residents of States — particularly major traders of financial securities — to move to the territory.

The primary incentive for moving is a new ability to avoid any taxation of gains from stocks and bonds bought and sold while a Puerto Rico resident and only pay a 10% tax on sales of securities bought while a resident of the States.

In the States, the individuals would be liable for a 23.8% Federal capital gains tax and any State taxes.

The Commonwealth’s effort has gotten about a dozen executives of financial firms to relocate to Puerto Rico. Bacó says that talks are underway for some 40 more to move — about a third managers of hedge funds (private investment funds limited to well-to-do investors).

The Times report said that those who have moved already are “under-the-radar millionaires” but that Bacó’s real objective is billionaires.

The article quoted a small investment company founder as saying that he would save hundreds of thousands of dollars a year in taxes. Billionaires could save hundreds of millions.

Bacó “is planning a road show on the [U.S.] East Coast next month to woo financial and law firms as well as wealthy individuals,” the newspaper reported.

The capital gains loophole became a much bigger issue this year as the Federal capital gains tax increased from 15% to 23.8% for upper-income individuals, and Puerto Rico began using its no or low gains tax policy to attract wealthy residents of the States.

The Times wrote, “Puerto Rico is a super-charged version of Florida, which does not tax individuals on ordinary income.” But residents of Florida pay Federal capital gains taxes whereas new residents of Puerto Rico do not. (Individuals who have lived in the islands during any of the past 15 years, however, have to pay the territory’s 10% gains tax.)

The article recalled that a previous Federal incentive exempting from taxation income attributed to manufacturing in Puerto Rico by companies based in the States “ended after Congress said that the incentive had bilked taxpayers” in the States.

Tax avoidance measures are possible because of Puerto Rico’s territory status often called “commonwealth” after the formal name of the islands’ local government.

Federal and other respected economic analysts found that the tax breaks for companies that manufactured in Puerto Rico which were repealed benefitted companies more than the islands and were abused by come corporations. The Commonwealth intended the new tax loophole for rich sellers of stocks and bonds who move to the territory to benefit them more than Puerto Rico.

Puerto Ricans voted against “commonwealth” status and for U.S. statehood last November.

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