Under the Puerto Rican law, any capital gains accrued after a person moves there would be tax free. Dividend and interest income paid by U.S. companies would still be subject to U.S. federal taxes, though would not be taxed locally.

In addition, new residents can benefit from another new law that taxes business income earned in Puerto Rico at 4 percent. That law could potentially apply to hedge fund fees earned by a resident for services rendered for U.S.-based clients, said Gabriel Hernandez, one of the framers of the Puerto Rican tax law and head of the tax division of BDO Puerto Rico PSC.

Hernandez now gets a call every day from wealthy individuals involved in Internet, software or financial companies who are interested in moving to the island, he said. He declined to name any of the business people who have relocated or who are currently contemplating such a move.

Preferential Treatment

Residents of Puerto Rico, an unincorporated territory of the U.S., typically pay a local tax rate of as much as 33 percent, according to Gabriel. They don’t pay U.S. taxes on income from Puerto Rico, but are taxed on dividends and interest from U.S. companies. They are not subject to capital gains taxes in the U.S. and pay a 10 percent capital gains tax locally, from which new residents are exempt.

The preferential treatment for the new residents aims to promote investments in real estate, boost services and consumption, and encourage foreign service providers to move their businesses to the country, said Puerto Rico’s Baco Bague.

In addition to the 10 wealthy individuals who have already relocated to Puerto Rico to take advantage of the new laws, 40 more are currently talking to the government about moving and have brought their families to look at housing and schools, said Baco Bague. About 35 percent are hedge-fund managers, he added.

Government Contract

One hedge-fund manager, Pascal Forest, has taken the additional step of setting up his firm, Forest Investments LLC, in San Juan. Forest, a former portfolio manager at London-based BlueGold Capital Management LLP, said the tax incentives played into his decision to move to the island, as did his wife, who is Puerto Rican and wanted to come home after 16 years away from her home.

In order to become eligible for the new tax breaks, a person must live on the island for at least 183 days a year and prove that a preponderance of his social and family connections are there. Any person who moves to the island signs a contract with the government that guarantees the tax break through Dec. 31, 2035.