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Puerto Rico: The New Tax Haven?

2 min readBy: Scott Drenkard

There has been a fair amount of press recently on taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reform in Puerto Rico that has the potential to make the U.S. territory a new favorite place to retire and move assets. Puerto Rico is a U.S. territory, but its residents do not pay the federal income tax, except on income from sources outside of Puerto Rico. The New York Times reports that taxpayers need only live in Puerto Rico for 183 days out of the year on the island to be a resident.

The island has its own tax system outside of the federal code, but the territory has recently eliminated its taxes on interest and dividend income that used to stand at 33 percent, and has also cut its capital gains taxA capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. These taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment. rate to zero.

Still, some are wary. CNN Money recently reported that millionaires should think twice before parking their assets in Puerto Rico:

The U.S. territory has a bevy of social and economic problems that appear to be getting worse by the day, making it an inhospitable place for a wealthy individual seeking safety and stability. Crime broke through record highs in the last few years and has started to spill into the wealthy neighborhoods of San Juan, the capital. The violence and economic malaise show little sign of abating. It's a long way from the financial paradise the Puerto Rican government is trying so hard to portray it as.

We study taxes for a living, but we’re the first to point out that taxes aren’t the only thing that businesses and individuals consider when considering relocating. Still, Puerto Rico still has great weather, one of things that California is constantly trumpeting as a reason people are willing to pay higher taxes to live there.

Puerto Rico’s recent shifts aimed at luring high income residents seem to have some effect though, with the New York Times reporting that billionaire John Paulson was considering moving to the island, and one local real estate agent says that multiple individuals have scheduled visits to consider homes selling for $5 million in downtown San Juan.

Check out our coverage of the Gerard Depardieu’s tax-induced exit from France.

Follow Scott Drenkard on Twitter @ScottDrenkard.