But FEIE only applies to income derived from wages and self-employment services. US investors may have other options to legally reduce their tax liability and some of these options go through Puerto Rico. Under the Section 933 of the U.S. Tax Code, Puerto Rico-source income is exempt from US federal tax.

In accordance with the Puerto Rico’s Acts 22 and 138, the so-called Individual Investors Act, residents may be eligible for a tax exemption on their passive income such as dividends, interests and capital gains.

So, by moving your investments or your company to Puerto Rico, investment income may be exempt from local taxes, and if it is not sourced from the mainland U.S, it may not be subject to US Federal personal income taxes.

To qualify for the exemptions, you must not have resided in Puerto Rico in the previous 6 years and become a bonafide resident of Puerto Rico. This implies residing in the island for more than 183 days per year, filling out IRS forms, such as form 8898 and applying for a tax exemption decree from the Secretary of Economic Development and Commerce of Puerto Rico.

The tax exemption decree will provide details of the tax treatment and shall be considered a contract between you, as Resident Individual Investor, and the Puerto Rico government.

Once granted, the tax-exemption will be valid until 2035.

In addition, if you are an entrepreneur with a service-oriented online business, you may move and incorporate to Puerto Rico.

Puerto Rico’s Act 20, provides a 4% corporate tax rate on qualifying export services income or 3% CIT when more than 90% of the eligible business’s gross income is derived from export services and such services are considered strategic services, according to the criteria established in Act No. 20.

Puerto Rico has recently amended Act 20, waiving the 5 employees requirement for businesses to qualify for this tax regime.

So you can set up your international business in Puerto Rico pay 4% corporate income tax and get the dividends tax-free.

However, Puerto Rico faces its threats. The territory is heavily indebted, owing $123 billion, which represents approximately $34,000 in debt per man, woman and child.

Its tax-exempt bonds have been appetizing for the Wall Street hedge funds and other institutions, where many IRA funds are invested…and since 2016, the island effectively has run out of cash and does not have means to pay its debt.

Recently Puerto Rico filed for a form of bankruptcy under Title III of Promesa, a federal law enacted by the US Congress to deal with Puerto Rico’s debt crisis.

It remains to be seen how much of the debt would be restructured in court and what would be left to negotiate with bondholders.

Despite the clear tax incentives by moving or incorporating in Puerto Rico, its financial instability and government bankruptcy make the territory a risky environment to move assets to.

But, the US total public debt will surpass US$23.4 Trillion at the end of 2017, riding on the same road to a debt collapse, as Puerto Rico…

However, if you are considering moving yourself and your business to Puerto Rico and benefit from the aforementioned tax incentives, at Flag Theory we will assess your personal and business situation to determine the feasibility of this option according to your specific situation, handle all paperwork and guide you through each step of the process to ensure that it is as fast, efficient and pain free as possible.