Russell Katz, general counsel for DSM Capital Partners, dispelled any association with the island’s programs. “DSM Capital Partners LLC does not have any connection with Puerto Rico’s tax incentive programs. We have no involvement in this.”
Among other recipients: brokerage firm Fairbridge Capital Market Inc. disbanded its Puerto Rico office in 2016, while Mosaic Investment Partners Inc.— which is still active, according to the government’s corporate registry—could not be reached at its listed number.
Private investment advisory and wealth management firms like Blue Capital Management Inc., which declined comment, and investment firm X-Square Capital LLC, which did not respond to requests for comment, had both set up offices on the island.
More than 2,300 individuals were also granted tax exemptions on passive income, such as dividends and capital gains, under the Individual Investors Act (formerly known as Act 22) between 2012 and 2019, according to the IRS report. Of those individuals, the IRS could identify only 25%—or 647 individuals—who had previously resided in California, Florida, New Jersey, New York, and Texas. They paid nearly $558 million in combined federal income taxes in the five years prior to their relocation to Puerto Rico, representing a fraction of potential loss revenue to the U.S. Treasury’s coffers.
Get Me to Puerto Rico
That trend has continued since the start of the pandemic, with the number of Manhattan residents relocating to Puerto Rico growing by at least fourfold compared to the previous year, according to change of address datafrom the United States Postal Service.
Between March 2020 and February 2021, at least 82 requests were filed for permanent moves to Puerto Rico by New York City residents compared with only 22 the previous year. Additionally, at least another 11 Manhattan addresses temporarily forwarded their mail during the pandemic to the island. None had done so the year prior.
Lawyers specializing in Puerto Rican tax incentives say they get five to 15 queries a day from prospective clients interested in determining if they qualify for the tax incentives.
Many are day traders without traditional jobs that spend their wealth making trades on stocks, securities, commodities, and cryptocurrencies, earning capital gains that are 100% tax-exempt. Others include investment bankers and hedge fund managers, who either manage funds or provide financial advice to clients, allowing them to earn tax-exempt carried interest.
“We’re seeing quite a class of investment bankers and financial advisors setting up shop here,” said Isis Carballo-Irigoyen, chair of McConnell Valdes LLC’s tax practice group.
‘A Lot Of Baggage’
Individuals identified by the IRS will have to prove their Puerto Rican residency, a key factor in claiming the tax benefits. Taxpayers must live on the island for a minimum of a 183 days annually every year to be considered a bona fide resident.
Mark Leeds, an attorney who advises U.S. taxpayers on the territories’ tax incentives, says “there’s a lot of baggage” tied to the term bona fide resident in the federal code and can be “a very difficult determination” for individuals. .
Maintaining a residency in the eyes of the IRS goes beyond simply leasing an apartment in popular Dorado Beach. It includes bringing your main possessions, joining local clubs, updating your voter registration status, moving with your spouse, and enrolling your children in the island’s schools.
“You should also try to minimize contact with mainland U.S.,” said Carballo-Irigoyen. “If the IRS were to audit and they look at your life, they have to be convinced this is where you live.”
Moving, even if someone has qualified for tax incentives from Puerto Rico, doesn’t necessarily make someone exempt from filing a U.S. tax return, Leeds said. Also, “it’s only Puerto Rico source income that is eligible for exemption. It’s not foreign source. It’s not U.S. source. Only Puerto Rico source.”
In its audits, for example, the New York Department of Taxation tries to determine an individual’s “true intentions,” according to a spokesman for the agency. That means a taxpayer providing clear evidence they’ve really moved to another state, including the sale of their home in New York, closing any businesses, and relocating their belongings. Problems arise when people claim to have moved but can’t supply any supporting evidence.
“If you’ve done things right, you have nothing to worry about it,” said Carballo-Irigoyen. “But if you’re playing games, then you need to worry.”
—With assistance from Aaron Kessler.
This article was provided by Bloomberg News.