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- PUERTO RICO TAX CODE: The Difference Between Act 20 and Act 22
Regular readers of Island Insider already know about the benefits Act 22 of the Puerto Rican Tax Code. The Individual Investor Act encourages people to take up residence in Puerto Rico by offering extremely low – in fact almost zero – income tax rates.
However, before you pack your bags, purchase a beach house, or look up pina colada recipes, there are a few thing s you should know.
Here are the Top Three Myths About Act 22:
I can live in Puerto Rico part-time.
Technically this is true: it depends what you consider ‘part-time’. To be eligible for Act 22 tax Exemption, you must be a legal resident of Puerto Rico (i.e. spend at least 183 days annually on the island) as well as acquire residential real estate. That’s because Puerto Rico is seeking long-term investment, and the best way to ensure that is attracting individuals interested in putting down roots and joining the community.
Puerto Rico isn’t interested in encouraging shell companies that operate out of mail boxes. Businesses can qualify for Act 20 exemption without relocating to Puerto Rico, but individuals must live here to enjoy the tax benefits.
I’ll never pay income tax again!
Don’t be ridiculous: of course you will. While Puerto Rico has enviably low income tax for certain businesses and individuals, this only applies to passive sources of income. Passive sources include things like dividend and interest incomes as well as long- and short-term capital gains on investments.
Income earned from active sources (such as doing consultancy work or creative work for hire) is still liable for tax.
While in Puerto Rico I rent out my house in the United States, and all that rental income is mine.
No it isn’t. You won’t pay taxes in Puerto Rico, but Uncle Sam will still want a piece of your rental income back home.