EDGAR ROS-MNDEZ

Exemption from U.S. Taxes for

Individuals Residing in Puerto Rico

Bona fide residents of Puerto Rico (US citizens or not) are subject to US federal
income taxes on a worldwide basis, pursuant to IRC Regs. 1.1-1(b).

Section 933 of US Code, however, excludes from US taxation all income derived from
Puerto Rico sources by a bona fide resident of Puerto Rico.

A bona fide resident of Puerto Rico is one that meets the physical presence, tax
home and closer connection tests prescribed in the IRC Regs. 1.937-1.

Generally, the relevant sourcing rules are:

Service income sourced based on the place where the services are rendered;
Capital gains based on residence of seller;
SWAPS based on residence of recipient of income;
Dividends based on residence of payor; and
Interest based on residence of payor.

Exclusion form U.S. Taxes for

Puerto Rico Entities
US Internal Revenue Code of 1986, as amended (US Code),
excludes Puerto Rico from the definition of United States.
Therefore, Puerto Rico entities, like other entities organized
outside of the US are not taxed in the US, unless:
engaged in a US trade or business (actually or constructively), in
which case they are taxed on income from US sources which is
effectively connected to their US trade or business; or derive
investment income from US sources.

Incentives for Puerto Rico Source Income

Exempt or Excluded from US Taxes

Entities organized outside of the US operating in Puerto Rico and

bona fide residents of Puerto Rico may legally avoid paying US
income taxes despite Puerto Ricos legal status as a US territory.

Consequently, the local tax treatment of the income derived from

Puerto Rico sources may be the only relevant tax consequences to
these persons.
Local Puerto Rico tax incentives lowering or eliminating PR local
taxes are of key importance when deciding to choose PR as a place
to reside and do business.

Puerto Rico Taxes on Individuals

Without Any Tax Incentives

Income Taxes maximum rate 33%

Alternative Minimum Tax 24%
Sales and Use Tax 7%
Estate and Gift Taxes 10% on non-Puerto Rico
property and tax credit for estate taxes paid to US
Property Taxes:
Real Estate varies by municipality- approximately 10% based
on 1957 values

Special Rules on Estate taxes

for US citizens

Estate Taxes
The gross estate of individuals residing in Puerto Rico at the time of their
death is composed of all property regardless of its location.
Nonetheless, the Puerto Rico estate tax to be paid by a US citizen born or
naturalized in the US will be equal to the amount of the credit that the US
estate may claim against the US federal estate tax under Section 2014(b)(2)
of the US Internal Revenue Code of 1986, as amended. Therefore, the
Puerto Rico estate tax will not cause any additional estate tax burden to the
Estate, since the Puerto Rico estate tax will be fully creditable against the
US federal estate tax. If no US federal estate tax is paid by the estate (and,
therefore, no credit for a Puerto Rico estate tax may be claimed), then, no
Puerto Rico estate tax will be imposed on the Puerto Rico property.

Puerto Rico Taxes on Entities

Without Any Tax Incentives

Income Taxes maximum rate 39%

Alternative Minimum Tax 30%
Sales and Use Tax 7%
Municipal License Taxes 0.5% on gross income
for non-financial businesses
Property Taxes:
Real Estate varies by municipality- approximately 10%
based on 1957 values
Personal Property varies by municipality approximately 8%

Certain Puerto Rico Incentives Laws

Act 20-2012 - Export Services; and
Act 22-2012 - Resident Individual Investors.

Act 20-2012 Export Services

Benefits provided under a 20 year decree;
4% income tax rate;
100% exempt distributions;
60% exemption from municipal license taxes (90% if located
in development zones of Vieques or Culebra); and
90% exemption from Real and Personal Property Taxes to
certain eligible services.
Tax benefits available to eligible businesses, defined as entities
which provide (i) eligible services for foreign markets (no nexus
with Puerto Rico), or (ii) promotion services.
Sunset: Applications will be accepted until December 31, 2020.

Act 20-2012 Eligible Services

Examples of Eligible services:
Consulting services for any trade or business;
Professional services as legal, tax and accounting services;
Investment banking and other financial services, including but
not limited to asset management, management of investment
alternatives, management of activities related to private capital
investment, management of coverage funds or high risk funds,
management of pools of capital, trust management that serves to
convert different groups of assets into securities, and escrow
accounts management services.

Case Study - Export Services Incentives

for Local Companies
Company A currently has a financial consulting firm
which does business exclusively in Puerto Rico.
Company A may expand its business locally or export to
the Caribbean Basin.

What is the right move?

ACT

20 benefits at work:

Puerto Rico
Growth

Caribbean Basin Expansion

Puerto Rico

Caribbean
Basin

COMPANY A

Increase in PR Income
PR Corporate Taxes (39%):
Revenue After Corp. Taxes:
Dividend Withholding Tax (10%)
Net PR Distribution

$1,000,000
-$390,000
$610,000
$61,000
$549,000

Tax Benefit of

Total Net CB Income

PR Tax Exports (4%)
NET CB Distribution

$1,000,000
-$ 40,000
$960,000

Dividend Withholding Tax-Exports

Net CB Distribution

-$0
$960,000

$411,000 per each

$1,000,000 of additional net income

Case Study - Export Services Incentives

for Overseas Players
Company B is currently doing warehousing and
distribution for third parties out of Florida and it is
considering relocating to PR.
Manage the exports from the Florida location or from
Puerto Rico.

ACT

20 benefits at work:

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Export from Florida Location

Export from FL
Net Income from Exports
State & Federal Corp. Taxes (41%)
Revenue after Corp. Taxes:
Dividend Withholding Taxes (23.8%)
Net State, USA Distribution

Export from PR Location

Export from PR
$1,000,000
-$410,000
$590,000
$140,420
$449,580

Net Income from Exports

PR Export Taxes (4%)
Revenue after Corp. Taxes:
Dividend Withholding Taxes (0%)
Net PR Distribution

$1,000,000
-$40,000
$960,000
-$0
$960,000

Tax Benefit of $510,420 per each $1,000,000

of additional net income

Procedural Matters on Act 20

Application must be submitted to Office of Industrial Tax
Exemption (OITE).
Approximately 90 days to consider eligibility.
Policy of minimum employment of 3 employees residing
in Puerto Rico.
Tax decree must be accepted and commencement of
operations notified.
Annual report to OITE.

Act 22-2012
Individual Resident Investors
Benefits provided under a decree:
100% income tax exemption (including alternative minimum tax) on interest
and dividends received.
100% exemption for capital gain accrued after becoming a resident of PR
and realized before January 1st, 2036.
10% tax on capital gain accrued before PR residency and realized within 10
years of becoming a PR resident (5% after 10 years, but before January 1st,
2036 on gain accrued before becoming a PR resident).

Individual Resident Investor - individual that becomes a PR

resident on or before the taxable year ending on December
31st, 2035 and has not been a resident of Puerto Rico for the
past 15 years preceding the effective date of Act 22 (January
16th, 1997 to January 16th, 2012)
Sunset: Benefits available until December 31, 2035

Case Study
Relocation of Individual Investor
Joe is a NYC resident considering moving to a lower tax
jurisdiction, as Florida. However, his tax advisor
suggested he consider Puerto Rico and provides the
following comparison.

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Income Tax Comparison

NYC Tax Liability
Gross
RE tax, mort int, charity
Taxable

Ordinary
1,000,000
0
1,000,000

Capital Gains
1,000,000
0
1,000,000

Total
2,000,000
0 1)
2,000,000

NYS income tax

NYC income tax
Phase-out
Federal taxable income
Federal tax
Medicare
NYS&NYC income tax
Total income tax
After-tax

(88,200)
(38,760)
30,000
903,040
(357,604)
(23,500)
(126,960)
(508,064)
491,936

(88,200)
(38,760)
30,000
903,040
(239,608)
(38,000)
(126,960)
(404,568)
595,432

(176,400)
(77,520)
60,000 1)
1,806,080
(597,212)
(61,500)
(253,920)
(912,632)
1,087,368

Federal (stated)
Deductions
Federal effective
Medicare
NYS
NYC
Total taxes
After-tax

39.60%
(3.8%)
35.76%
2.35%
8.82%
3.88%
50.81%
49.2%

26.53%
(2.6%)
23.96%
3.80%
8.82%
3.88%
40.46%
59.5%

33.07%
(3.2%)
29.86%
3.08%
8.82%
3.88%
45.63%
54.4%

State tax rates

NYS
NYC

8.82%
3.876%

8.82%
3.876%

8.82%
3.876%

% LTCG

66.7%

1) This table shows tax rates on marginal income after fixed dollar-amount deductions are fully utilized.

Income Tax Comparison

PR Tax Liability under Act 22-2012
Gross

US Source Ordinary
1,000,000

Capital Gains
1,000,000

RE tax, mort int, charity

Taxable

0
1,000,000

0
1,000,000

Total
2,000,000 1)
0
2,000,000

PR income tax
City income tax
Phase-out

0
0

0
0
0

0
0
0

Federal taxable income

Federal tax
Medicare

1,000,000
(396,000)
(23,500)

0
0
0

1,000,000
(396,000)
(23,500)

State and City income tax

Total income tax
After-tax

0
(419,500)
580,500

0
0
1,000,000

Federal (stated)
Deductions
Federal effective
Medicare
PR income tax
City income tax
Total taxes
After-tax

39.60%
0.0%
39.60%
2.35%
0.00%
0.000%
41.95%
58.1%

0.00%
0.0%
0.00%
0.00%
0.00%
0.000%
0.00%
100.0%

State tax rates

State Tax
City Tax

33.00%
0.000%

0.00%
0.000%

0 2)
(419,500)
1,580,500
19.80%
0.0%
19.80%
2.35%
0.00%
0.00%
22.15%
77.9%

1) Ordinary income assumes that is from sources out of Puerto Rico and capital gains assume that all gain realized is accrued after becoming a bona fide resident of Puerto Rico.
2) Credit for taxes paid to US will be credited to PR tax liability with respect to US Source ordinary income, reducing PR tax liability with respect to such income to zero.

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Income Tax Comparison

FL Tax Liability
Gross

Ordinary
1,000,000

Capital Gains
1,000,000

Total
2,000,000

RE tax, mort int, charity

Taxable

0
1,000,000

0
1,000,000

0
2,000,000

State income tax

City income tax
Phase-out

0
0
0

0
0
0

0
0
0

Federal taxable income

Federal tax
Medicare

1,000,000
(396,000)
(23,500)

1,000,000
(396,000)
(38,000)

2,000,000
(792,000)
(61,500)

State and City income tax

Total income tax
After-tax

0
(419,500)
580,500

0
(434,000)
566,000

0
(853,500)
1,146,500

Federal (stated)
Deductions
Federal effective
Medicare
FL income tax
City income tax
Total taxes
After-tax

39.60%
0.0%
39.60%
2.35%
0.00%
0.00%
41.95%
58.1%

39.60%
0.0%
39.60%
3.80%
0.00%
0.00%
43.40%
56.6%

39.60%
0.0%
39.60%
3.08%
0.00%
0.00%
42.68%
57.3%

State tax rates

State Tax
City Tax

0.00%
0.000%

0.00%
0.000%

Case Study - Relocation

of Individual Investor
If significant percentage of Joes income comes from
fixed income securities, a PR Mutual Fund may prove to
be an attractive investment tool for Joe:
Invests 80% of its assets in US fixed income securities; and
20% in local taxable PR.

What is the right move?

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Act 22 Tax Incentives at Work:

US Residency

PR Residency

PR Resident

US Resident
Interest from Taxable US

$1,000,000

USA Income Taxes (39.6%*):

Compensation after Taxes:

Interest from US fixed income and $1,000,000

Investments made by PR Fund

Fixed Income
- $396,000
$604,000

USA & PR Income Taxes on distributions (0%):

Interest Income after Taxes:

- $0

$1,000,000

$396,000 Tax Benefit for Individual Investor

* The 39.6% is the maximum rate applicable, assuming the taxpayer has other income
and it is subject to such maximum rate. A net investment income tax of 3.8% on the
lower of modified adjusted gross income or net investment income may be applicable.
Institutional Investors will be subject to a 5.85% income tax after the dividend deduction

Treatment of Non-PR Built-in Gains

Non-PR Builtin Gains realized and recognized within
10 years after the date residence is established in Puerto
Rico, it will be taxed at the income tax rate for capital
gains applicable for the tax year in which the gain is
realized (currently the capital tax rate is 10%) and at a
5% income tax rate if such gain is realized and
recognized after said 10-year period.

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Credit for Non-PR Built-in Gains

Tres. Regs under Section 937 provide that US residents
moving to Puerto Rico will be subject to federal income taxes
on any Non-PR Built-in Gains realized within 10 years after
moving.
However, Puerto Rico income taxes are creditable against
such federal income tax, and therefore, US residents moving
to Puerto Rico and realizing Non-PR Built-in Gains within a
10-year period after moving will be subject to the excess of
US taxes over Puerto Rico taxes on such Non-PR Built-in
Gains.

Valuation of Non-PR Built-in Gains

Under US Treasury Regulations Reg 1.937-2(f) in the case of

marketable securities, the portion of gain attributable to the
possession holding period will be determined by reference to the fair
market value of the marketable security at the close of the market on
the first day of the individual's possession holding period.

However, in the case of property other than marketable securities,

the portion of gain attributable to the possession holding period in the
relevant possession will be determined by multiplying the total gain on
disposition of the property by a fraction, the numerator of which is the
number of days in the possession holding period and the denominator
of which is the total number of days in the individual's holding period for
the property.

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Example Non-PR Built-in Gains

If stock from a publicly traded company is acquired by a US resident in

2006 for $40 and is worth $100 just before moving to Puerto Rico in 2012,
and then it is sold by the Puerto Rico resident on 2018 for $200, the
individual will be subject to income taxes for the gain realized on the sale as
follows:

Cost: $40

U.S. Tax

PR Tax

U.S. Tax
credit

Non-PR Built-in Gain: $60

$12 (20%
current rate)

$6 (10% current
rate)

$6 ($12-6)

$12 ($6+6)

Puerto Rico Gain: $100

$0

$0

$0

$0

after

PR

Net Tax (U.S. and PR)

After 10 years of moving from the US to Puerto Rico, the income tax on the
Non-PR Built-in Gains will not apply and bona-fide residents of Puerto Rico
will only be subject to a 5% Puerto Rico income tax on any portion of the
Non-PR Built-in Gain realized after 10 years from moving to Puerto Rico.

Procedural Matters on Act 22

Application must be submitted to Office of Industrial Tax
Exemption (OITE).
Approximately 30 days to consider eligibility.
Tax decree must be accepted and commencement of
residency notified within 1 year.
Annual report to OITE.

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Edgar Ros-Mndez
Member

Mr. Ros-Mndez is one of PMAs tax members and his practice focuses on international tax matters,
inbound and outbound corporate reorganizations, registered investment companies, structured
investment vehicles and other complex federal, international and Puerto Rico tax law matters.
Mr. Ros-Mndez has been active in some of the major Puerto Rico tourism related projects with
respect to the negotiation of tax incentive grants and the sale of tourism investment tax credits.
In the Puerto Rico industrial tax incentive area, Mr. Ros-Mndez has assisted clients in the industrial
and service sectors and in recent times has actively participated in the negotiation of tax incentives
for clients in the financial services industry. He has requested private letter rulings and negotiated
closing agreements with the Puerto Rico Treasury Department for the Firms clients. Mr. Ros-Mndez
has acted as tax counsel in the structuring of financing transactions with borrowers located in Puerto
Rico, the Baltic region, Eastern Europe, and Asia.

Education:

Bar Admissions:

o New York University School of Law, New York, NY

1999 LL.M. in Taxation

o Commonwealth of Puerto Rico, 1998

o University of Puerto Rico School of Law,

San Juan, PR 1997 J.D. Magna Cum Laude
Law Review, Member, 1995 - 1997

o U.S. Court of Appeals for the First Circuit, 1998

o Xavier University , Cincinnati, OH 1993

B.A. Cum Laude

o U.S. Tax Court, 2002

Pietrantoni Mndez & lvarez LLC

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The content of this presentation has been prepared for educational purposes. Its intention
is not, and it does not constitute, legal advice. It is recommended to everyone who reads
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out any transaction described here.

Circular 230: This presentation was not written to be used, is not intended to be used and
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obligations we have under Circular 230, governing standards of practice before the IRS.

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Thank you.

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