By: Nick Giambruno
Whenever I see the words “life-changing opportunity” or something like that, I immediately dismiss it as a lame gimmick or hyperbole.
And while I am truly reluctant to use those often misused words, I can honestly think of no better way to describe Puerto Rico’s tax incentives for traders, hedge funds, private equity firms, and asset managers of all stripes.
This is truly a life-changing opportunity for them, and that’s not BS.
By the end of this article, you’ll see why.
It’s not for no reason that investment legends like hedge fund manager John Paulson and Nick Prouty have planted their flags there. But you don’t have to be a big name to benefit too. As you’ll see, obtaining Puerto Rico’s tax incentives is really a no-brainer for anyone who makes their living off of capital gains.
But first, you need to understand a few things about the uniquely burdensome American tax code to see why this is such an unparalleled opportunity.
No Escape… Until Now
Americans are in the uniquely unfavorable position of having arguably the worst tax policies and a government that relentlessly enforces them everywhere in the world.
For many, the US tax system is a tight and suffocating leash. It’s no wonder then that a record number of Americans are giving up their citizenship to escape these punishing requirements. Besides death, renouncing your citizenship was really the only way to get out of the US tax system… until recently.
Puerto Rico has long promoted itself as a tax-friendly jurisdiction open to Americans in order to compete with its better-known Caribbean neighbors, like the Cayman Islands.
Puerto Rico is a commonwealth of the US. It’s not quite a state, and it’s not quite a foreign country. This allows it to have a special tax arrangement with the US federal government: Namely, residents of Puerto Rico who earn their income in Puerto Rico do not pay US federal taxes—they pay Puerto Rican taxes.
Previously this mattered little, since Puerto Rican tax rates were comparable to US federal tax rates. However, with the new tax incentives, the situation has changed immensely—particularly for traders, hedge funds, private equity firms, and other asset managers.
A Tax-Free Existence for Traders
Perhaps the most obvious beneficiaries of Puerto Rico’s Act 22 law (Individual Investors Act) are traders.
Act 22 completely eliminates all taxation on capital gains for securities—a broad definition that includes stocks, bonds, derivatives, private equity, and more.
Also, traders taking advantage of Act 22 don’t need to worry about higher tax rates on short-term capital gains, either. That’s because there is no distinction; it’s all taxed at zero, zip, zilch.
It doesn’t matter if you’re trading US stocks on the NYSE, options on the CBOE, futures contracts on the NYMEX, or Chinese stocks on the Hong Kong Stock Exchange. It could be any security anywhere in the world, and all capital gains would be tax-free.
With marginal combined tax rates near a whopping 50% in some parts of the US, taking advantage of Puerto Rico’s Act 22 would be like doubling your effective income. That’s quite a raise.
If you ask me, this is really a no-brainer for traders.
Asset Managers of All Stripes
With Act 20 (the Export Services Act), Puerto Rico gives enormous benefits for service-related businesses in the form of a top 4% withholding tax on distribution to owners. There’s no corporate income tax or any other taxes on Act 20 companies, just this 4% withholding.
Compare 4% in Puerto Rico to the 39.1% corporate income tax in the US mainland (combined state and federal)—which is the highest in the developed world. If your business qualifies, this benefit is also a no-brainer.
In order to qualify, the service must be performed in Puerto Rico for clients outside of Puerto Rico.
Hedge funds, private equity managers, and all types of asset managers who are based in Puerto Rico and manage assets of non-Puerto Rican clients would clearly qualify. This is an incredible opportunity for hedge funds, private equity firms, and all asset managers in New York and Connecticut (and anywhere, really) to reduce their tax burden to a pittance.
It is precisely for this reason that Peter Schiff moved his asset management business from the heavily taxed state of California—where his combined tax rate was in excess of 50%—to just 4% in San Juan, Puerto Rico.
You Can Do It Too
I know this all sounds too good to be true, but I can assure you that Puerto Rico’s tax benefits are 100% real and absolutely legal. And if you’re a trader or asset manager, they are easily within your reach.
For Americans, Puerto Rico offers about the only way—short of death and renunciation—to obtain a tax-free existence (or close to it). I don’t think it’s hyperbole to say obtaining that is “life changing,” especially when you consider the compounding effects of having considerably more money left in your pocket over the years.
If you want to find out more about taking advantage of Puerto Rico’s tax benefits, I’d suggest you check out this free video that we put together with Peter Schiff. It’s information you won’t find anywhere else and is really a must-see—especially if you’re a trader or asset manager. It features hedge fund legend John Paulson and all-star investor Nick Prouty, as well as a handful of others who have taken advantage of these incentives. You can see the free video by clicking here.