With Democrats pushing for higher taxes on the richest Americans to fund President Joe Biden’s infrastructure and climate initiatives, hedge fund managers are taking refuge in Puerto Rico.
ExodusPoint Capital Management and Millennium Management have established subsidiaries on the island, according to local records. That could help portfolio managers at the firms relocate to Puerto Rico to obtain huge tax breaks—an increasingly popular option now that the pandemic has made working remotely mainstream.
Michael Gelband’s ExodusPoint created a money-management unit on the island on behalf of co-founder Hyung Soon Lee, who moved there last year, and other investment talent in the region. Izzy Englander’s Millennium set up its own Puerto Rico arm weeks after Biden’s election.
The existence of the subsidiaries, which hasn’t been reported previously, holds greater significance now that Biden has proposed a series of tax increases on top earners. While some Wall Street denizens have been moving to locales with no state income taxes, such as Florida, those who venture to Puerto Rico may be able to avoid federal levies as well.
“You have a lot of people looking to relocate because they no longer have to be in close proximity to where they work,” said Peter Schiff, who moved the asset-management arm of his Westport, Connecticut-based brokerage, Euro Pacific Capital, to San Juan in 2013. “The higher the taxes are” in the U.S., Schiff said, “the greater the appeal of coming here.”
Dan Morehead’s Pantera Advisors, based in Menlo Park, California, set up a money-management unit last month in the town of Guaynabo, according to a filing.
Billionaire John Paulson, who made a fortune betting against the housing market ahead of the 2008 financial crisis, began scouting for real estate on the island in 2013. Paulson, who said in recent years that he intended to move to Puerto Rico, now has no plans to do so, according to a spokesman.
The lure for would-be tax-savers is a pair of laws Puerto Rico enacted in 2012 to attract wealthy mainlanders: the Export Services Act and the Individual Investors Act. The latter is of particular interest to hedge fund managers because it exempts capital-gains taxes, including those levied on the performance fees that comprise the bulk of their compensation. In New York, such income currently would be subject to aggregate federal, state and local taxes approaching 50%.
Puerto Rico received almost 3,500 applications for the tax incentives during fiscal 2019 and 2020, exceeding the combined total for the previous seven years, according to the commonwealth’s Department of Economic Development and Commerce. More than 1,000 applications were filed during the six months through March, an agency spokeswoman said.
The tax breaks are generally available to new residents and services businesses that generate revenue outside Puerto Rico. Applications are confidential until approved, and the government offices that vet the requests are grappling with a backlog of at least seven months that has been exacerbated by the pandemic and surging demand.
As of the end of March, ExodusPoint and Millennium were the only large money managers with affiliates in Puerto Rico, Securities and Exchange Commission records show. So far, Lee hasn’t received an exemption under the Individual Investors Act, and neither of the firms’ subsidiaries have been granted incentives under the Export Services Act, according to the government spokeswoman.