[ Offshore Tax ] Is Earned Income tax-free in Puerto Rico? Video

[ Offshore Tax ] Is Earned Income tax-free in Puerto Rico?

As a US citizen, you're subject to US tax on your worldwide income, whether you live inside the US or outside the US. Of course, many tax incentives are available for ex-pats, like the foreign earned income exclusion, foreign tax credit, and the ability to operate a business through a non-US corporation.
However, if you become a "bona fide resident of Puerto Rico," you're no longer subject to US federal income tax on your Puerto Rico source income. Instead, you're only subject to Puerto Rican income tax on that income.
Then, under a law referred to as Act 60 (formerly Act 20 and Act 22), Puerto Rico has enacted several tax incentives, the two most popular of which are as follows:
a Puerto Rican corporation engaged in certain types of service businesses only pays a Puerto Rican tax of 4%.
You pay 0% tax on certain dividends and capital gains you realize while you're a bona fide resident of Puerto Rico.

TIMESTAMPS:
0:00 INTRO
0:30 Earned income taxes in Puerto Rico
2:30 Capital gains taxes in Puerto Rico
3:37 Corporate Taxes in Puerto Rico
4:55 OUTRO



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DERREN JOSEPH:
If you have state source income from one of the other states or territories, there'll be a subject to tax as it normally would be. And you also mentioned it's particularly attractive to those who enjoy passive income, interest dividends, and capital gains. But if you have Earned income, so for example, let's say you're a consultant and you sit in Puerto, Rico, that income, that Earned income would also be tax-free.

GIANCARLO ESQUILIN:
Yeah, well basically the Earned income and the service income board are not free nor tax-free. There are tax benefits for that. And basically, that's another disposition that was previously under Act 20. Now under Act 60 and the Export Service Act or the export tax benefits, that basically allows a company or an individual to relocate to Puerto Rico or open a new company in Puerto, Rico and export services from Puerto Rico to any part of the world. So if they provide the services while working in Puerto Rico that you can say, Hey, if you provided the services in Puerto Rico, that's Puerto Rico source income as described by the Puerto Rico tax code and the US tax code, that will be subject to a preferential tax rate of 4% tax. That is a flat tax of 4% tax. And if it is a company and the income that is generated is subject to the 4% tax dividend paid by that income from that corporation is fully accepted. So that basically means that certainly if there is an owner-employee, you need to analyze if they need to have a regional compensation that he needs to pay their social security Medicare taxes, some kind of income taxes on his board. But certainly, dividends pay from return earnings accumulated from the export service activity are exempt at the individual level. So one of the best strategies, certainly to, if the owner is a Puerto Rico, one of five resident, and the corporation that provide the services is a Puerto Rico entity, entity Dividends paid by that corporation are treated like Puerto Rico source income under the eyes of the IRS. You will pay, or the company will pay 4% tax dividends received by the owner will be fully exempt at Puerto Rico and federal levels.

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