Stop Letting the Rich Move to Puerto Rico as a Tax Haven

Now that you’ve created the next great app and your investment in your startup is worth a billion dollars, at least on paper, it’s time for a really difficult challenge: how to cash out without paying capital gains taxes anywhere in the world?

With no U.S. or Puerto Rican tax on much investment income of new residents, U.S. citizens now can pay zero tax on capital gains.
For several hundred affluent Americans over the last couple of years (including Toby Neugebauer, a key financier to Ted Cruz) the answer has been to establish a principal residence in Puerto Rico, and spend 183 days a year there.

The commonwealth is an unincorporated part of the United States, and its residents are U.S. citizens. Nonetheless, the United States treats Puerto Rico as a foreign country for tax purposes. And, unlike the case of U.S. citizens residing in genuinely foreign countries, the United States does not impose any federal income tax when U.S. citizens who are residents of the island earn income from Puerto Rican sources.

Puerto Rico can tax its residents, but in a move to attract affluent Americans to take up residence there, the island in 2012 adopted Act 22, which basically exempts most investment income of new residents from Puerto Rican tax.

What all this means is that capital gains arising after relocating to Puerto Rico are exempt from taxes everywhere in the world. A taxpayer’s built-in (unrealized) capital gains at the time of his relocation (like our hypothetical billionaire’s paper gains on his startup company) require a bit more patience, but after 10 years the only tax on sale is a 5 percent Puerto Rican capital gains tax on those pre-relocation accrued gains.

And what billionaire looking to save hundreds of millions of dollars in capital gains taxes will not be able to afford to be patient? He is not required to spend all his time on the island, and he is as free to travel within the United States and around the world on his U.S. passport as much as the next U.S. citizen. For those days his tax lawyers command him to be present in Puerto Rico, well, how hard a lifestyle is it, choosing between beach and poolside?



The law here is clear, and the only risks are political (that Congress or the Puerto Rican legislature amend their respective tax laws to close down this loophole). But the costs of rolling the dice on the politics are minimal for a superaffluent taxpayer with a big potential capital gains tax bill — sell the homes in Atherton and Telluride, and buy an ocean view estate on the island. (You can always rent a ski lodge for a few weeks in the winter anyway.) With great wealth comes great capital gains evasion opportunity.

Edward Kleinbard, a professor of law at the Gould School of Law of the University of Southern California, served as chief of staff of the Congress’ Joint Committee on Taxation.

Stop Letting the Rich Move to Puerto Rico as a Tax Haven

Comments

Post a Comment

Popular posts from this blog

IMF Executive Board Discusses the First Assessment of Eligible Countries under the Multilateral Debt Relief Initiative

On December 21, 2005 the Executive Board of the International Monetary Fund (IMF) established the list of countries that qualify for debt relief from the Fund under the Multilateral Debt Relief Initiative (MDRI). Debt relief delivery, which could start as soon as January 3, 2005, is now conditional on getting the consents of all the contributors to the Subsidy Account of the Poverty Reduction and Growth Facility (PRGF) Trust, whose contributions help finance the Initiative. The MDRI will deliver debt relief from the Fund to qualifying members countries with an annual per capita income at or below US$380, and to countries above the threshold that have reached the completion point under the Heavily Indebted Poor Countries (HIPC) Initiative. The implementation of the MDRI will reduce the external debt burden of a number of the world's poorest countries and will provide additional resources to help them reach the Millennium Development Goals (MDGs). Background The Executive Board appro...
Read more

Oil’s chaotic collapse deepens; stocks drop worldwide

Image
NEW YORK (AP) — Oil prices crumpled even further Tuesday, and U.S. stocks sank to their worst loss in weeks as worries swept markets worldwide about the economic carnage caused by the coronavirus pandemic. The market’s spotlight was again on oil, where prices have plummeted because very few people are flying or driving, and factories have shut amid widespread stay-at-home orders. Global demand is set to drop to levels last seen in the mid 1990s. At the same time, oil producers can’t slow their production fast enough, and all the extra crude means storage tanks are quickly running out of room. The cost for a barrel of U.S. oil to be delivered in June plunged 43% to $11.57. That’s the part of the market that oil traders are focused on and trading most actively. For oil to be delivered next month, which is when storage tanks could top out, the cost of a barrel stood at $10.01. A day earlier, it fell below zero for the first time, meaning traders paid others to take oil off their hand...
Read more

Mapping Extreme Poverty Around the World A new report from the

Image
A new report from the  World Bank  just landed, finding that a record low of 10% of humanity now live in extreme poverty, down from 11% in 2013. But poverty rates aren’t anywhere close to equal between continents or even countries, as our new series of maps clearly demonstrates. The World Bank provides an in-depth explanation for its methodology, which you can find in Appendix A of the full report  here . We focused on the percentage of people in each country living below what the World Bank defines as extreme poverty, or $1.90/day. We’ll let the researchers defend this definition on their own, but there is one caveat to keep in mind. It can be extraordinarily difficult to collect reliable data from so many countries on a regular basis, and in fact we used the latest year in which numbers were available whenever possible. For example, in some of these maps we compare 2011 figures against 2015. In short, our maps provide the clearest possible apples-to-apples compa...
Read more