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Did You Know Puerto Rico Reduced Taxes For Wealthy Foreigners?

March 14, 2019 | Author: | Posted in ACCOUNTING

The press has recently widely publicized that the Commonwealth of Puerto Rico reduced taxes for rich individuals. Perhaps local leaders want to take advantage of the rising taxes irritating wealthy Americans. Certainly, the recent changes appear well timed and would be well suited for U. S. Nationals. Unlike other venues, they would not lose their nationality with an island domicile.

The new law has been broadly covered in the media. Of course, it is not surprising with such clear benefits as no tax liability on local business income and tax free capital gains for new residents. Although, the promised duration is the end of 2035, the stickler is a residency requirement.

To qualify as a resident, one needs to only stay on the island for at least 183 days each year. Income and gains derived before residency was established, but which has not been taxed yet is subject to the regular 10 percent rate. Investments prior to 2035;but after a decade of residence, will be taxed at 5 percent.

A number of critics have discouraged investors by raising some real and hypothetical disadvantages. The vacillation of John Paulson, the hedge fund billionaire has also been discussed in this light. Unsurprisingly, critics have questioned its value. They remind the public the law may gain an adverse reaction from the U. S. Government.

The goodwill of the mainland government is important. The Commonwealth remains a possession and relies significantly on federal subsidies and aid. These constitute about a quarter of the GDP, so it is not an insignificant factor. At the moment the territories benefit from favorable tax treatment. The island is the most favored beneficiary of these special rules. But this action has raised the possibility of Congressional scrutiny. Some representatives in Congress have said they will look into harmonizing the tax regime of the territories when comprehensive tax reform is undertaken.

There remains the possibility the United States government could withhold funds to make the Commonwealth harmonize its tax code or in the alternative give it statehood and accomplish the same by default. This is an actual possibility. Current residents have voted to become in a non-binding referendum conducted in November 2012. The President has stated he supports admission into the union. All that is in the way is for Congress to vote on its admission. Hypothetically, this may take place at any moment.

But this partisan roadblock may be lifted prior to the 2016 Presidential election. At the moment Republicans fear voters will tilt in favor of the Democrats. But, the Party has been seriously considering making itself more appealing to Hispanic voters. As its white party base ages, demographics are forcing a rethink in the Party. It has realized demographic changes call for a new vision and broader appeal. With Marco Rubio hailing from Florida, the residence of many mainland Puerto Ricans, Presidential calculations may dispel the present hurdle. The GOP may look upon statehood as an asset rather than a liability in this context.

For some, the 6 month residency term may be too long. Others may be deterred by the rising crime. Growing poverty and unemployment has fueled participation in the drug trade and its associated violence has impacted residential safety. However, despite the downside, the temptation of Puerto Rico reduced taxes may still be sufficiently enticing.

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