One of the things that generates political fireworks each year is the number and names of famous Americans renouncing their US citizenship. Regardless of whether you are politically a liberal or conservative, the topic generates a lot of conversation.
For some, it’s a reaction to the belief that the country is headed in the wrong direction. For others, it’s a negative reaction to what the US stands for in the world.
Regardless of your political perspective, I believe many more people would consider expatriation for tax purposes if your grandparents had not gone through such difficulties emigrating from the Old Country, or Grandpa had not served in World War II or the Korean War.
I also think that is very difficult to give up your citizenship for tax purposes when you’ve served in the US Armed Forces. The voices in your mind will not let up.
What if I were to tell you that you can gain many of the tax benefits of expatriation without giving up your US citizenship?
The goal of this planning strategy is to leave America, without leaving it for citizenship purposes.
Puerto Rico passed a series of stunning tax legislation in 2012, making the US commonwealth highly desirable as a jurisdiction from a tax standpoint.
This article will focus on an alternative strategy to a taxpayer giving up US citizenship for tax purposes and instead becoming a Puerto Rican resident for tax purposes.
Taxation of Americans Who Expatriate
What are the tax reasons for giving up your US citizenship?
American citizens and permanent residents are taxed on their worldwide income and assets regardless of if they become tax residents of other jurisdictions. This is a burden that no other citizen of a developed country has to deal with.
I personally have known two US citizens who gave up their US citizenship.
One of the two could easily have fared as well under the new Puerto Rican tax planning opportunities as a former investment professional living off of investment income and mostly short-term capital gain income from investments in hedge funds. The other one was three or four steps ahead of the G-Men.
One of the more publicized stories was that of Ken Dart, who gave up his citizenship to become a citizen of Belize, with his personal residence in the US becoming the consulate for Belize.
Denise Rich, whose ex-husband Marc Rich was officially pardoned by President Clinton, joined her ex-husband in giving up US citizenship to become a Swiss citizen. Then there was Tina Turner, who had been living in Europe for many years, giving up her citizenship.
The exit tax has become increasingly confiscatory over the years.
The great news is that because of the new laws in Puerto Rico, Americans can obtain most of the tax benefits of renunciation with actually having to give up their US citizenship and worrying about the exit tax.
Why Puerto Rico?
Puerto Rico is a tropical island with sunny beaches and over 50 flights per day to a number of major US cities.
Puerto Ricans are US citizens, and the currency is the US dollar. No passport is required for travel to Puerto Rico by US citizens. The banks in Puerto Rico are regulated by the US Federal Deposit Insurance Corporation (FDIC). However, Puerto Rico has its own tax system.
Bona fide residents of Puerto Rico who have Puerto Rican-sourced income are exempt from US taxation.
The Puerto Rico solution provides an opportunity to completely avoid US federal taxation on passive income as well as Puerto Rican taxation on the same income without having to give up your US citizenship.
The Individual Investors Act
Under the new law, a US taxpayer who gains Puerto Rican tax residency will be exempt on his short-term and long-term capital gain income for US federal and Puerto Rican tax purposes.
Dividend and portfolio interest income are also exempt from Puerto Rican tax.
Export Services Act
Businesses that relocate to Puerto Rico can significantly reduce their taxable income.
The top US federal corporate tax rate is 35%.
Under the Export Services Act in Puerto Rico, services that are directed to foreign markets may qualify for a top tax rate of only 4%.
The decision to give up your citizenship is not an easy one for any reason—be it taxes or personal.
The decision has many tradeoffs in my view, including limited access to the US on an ongoing basis. For anyone who has children, grandchildren, or friends in the US, expatriation may not be an option.
In effect, Puerto Rico has become an onshore jurisdiction with offshore attributes, without all of the red tape and compliance and reporting requirements of being offshore.
The provisions of the Export Services Act and the Individual Investors Act in Puerto Rico have created a new and unprecedented opportunity for US citizens, bringing a genuine alternative to renunciation.
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