Puerto Rico: Tropical Tax Haven for America's Super-Rich

By Updated at 2014-06-27 18:57:51 +0000

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It’s 2 a.m. at the La Factoria bar in Puerto Rico’s Old San Juan, a hipster joint with a sagging couch, tile floors, and Christmas lights that wouldn’t be out of place in Brooklyn’s Williamsburg. While Get Lucky plays, tipsy couples slink out the doors onto the colonial city’s cobblestone streets and into this warm April night. At the bar, a 28-year-old hedge fund trader—the type of person who posts his SAT results on his LinkedIn page—is ranting about the tax code. He’s obsessed with it, complaining that the U.S. is the only major country taxing citizens on their worldwide income, no matter where they reside. That’s why he moved here.

Struggling to emerge from an almost decadelong economic slump, the Puerto Rican government signed a law in early 2012 that creates a tax haven for U.S. citizens. If they live on the island for at least 183 days a year, they pay minimal or no taxes, and unlike with a move to Singapore or Bermuda, Americans don’t have to turn in their passports. (Puerto Ricans are U.S. citizens but cannot vote in federal elections.) About 200 traders, private equity moguls, and entrepreneurs have already moved or committed to moving, according to Puerto Rico’s Department of Economic Development and Commerce, and billionaire John Paulson is spearheading a drive to entice others to join them.

Puerto Rico’s low-tax welcome mat comes as some of the wealthiest Americans grow more anxious about tax increases and rhetoric directed at the rich. Tax bills have risen after a 10-year break under President George W. Bush that disproportionately favored the rich. The 2008 global financial crisis and the recession that followed also unleashed movements such as Occupy Wall Street that focused attention on growing inequality and the responsibility of large financial institutions in helping to create the mess.

In October 2011 protesters marched by the homes of Manhattan’s billionaires, including Paulson’s. A little more than a year later, President Barack Obama beat Mitt Romney in an election that highlighted the latter’s wealth and private equity background. “I’m worried about the shifting mentality among the electorate, people blaming problems on the rich, on business, and on capitalism,” says Peter Schiff, a onetime candidate for the U.S. Senate from Connecticut and a former economic adviser to libertarian presidential hopeful Ron Paul. “I’m afraid that the tax rates that are already high will get higher in the years ahead,” maybe up to 60 percent or 70 percent, he added.

Schiff, who runs Westport (Conn.)-based brokerage Euro Pacific Capital, relocated his $900 million asset management arm from Newport Beach, Calif., to San Juan in 2013. He plans to move to the island within the next several years. (For now, a son from a first marriage is keeping him in Connecticut.)

Under Puerto Rico’s new rules, an individual who moves to the island pays no local or federal capital gains tax (capital gains are charged based on your tax home rather than where you earn them) and no local taxes on dividend or interest income for 20 years. Even someone working for a mainland company who is a resident of the island would be exempt from paying U.S. federal taxes on his salary. Moving to the island won’t kill all taxes: U.S. citizens still have to pay federal taxes on dividend or interest income from stateside companies. But the savings can be extraordinary, especially if considering the compounding effects, says Alex Daley, chief technology investment strategist at Casey Research, a firm that publishes reports for investors. Late last year, Daley moved from Stowe, Vt., to Palmas del Mar, about 45 minutes from San Juan. Say you put $100,000 in a 5 percent certificate of deposit that compounds annually and reinvest the proceeds every year. If you lived in Puerto Rico, you’d earn $165,000 in interest over two decades, Daley calculates. If you lived in California, your state and federal taxes could reduce that to as little as $64,000.

Paulson, who made $15 billion for himself and his investors betting against U.S. mortgages during the financial crisis, helped start the wave of transplants last year, when he considered moving to the island. Paulson cited excessive media attention as his reason for staying put in the States. The press reports had an unintended consequence, though: Word quickly spread to other wealthy individuals that Puerto Rico wanted them.

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