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Puerto Rico incentives code slashes individual investors law

By on June 25, 2018

Editor’s note: This report first appeared in the June 21-27 issue of Caribbean Business. 

Wording contained in the proposed new Incentives Code for Puerto Rico could virtually destroy the tax advantages and credits provided under Act 22 of 2012 to attract high-net-worth individuals to the island.

Act 22, the Individual Investors Law, was enacted to attract new residents to Puerto Rico by providing total exemption from local income taxes on all passive income realized or accrued after such individuals become bona fide island residents.

Fernando Goyco Covas, counsel for Pietrantoni Méndez & Álvarez, said wording in the new Incentives Code would not only deter potential investors from moving to the island because they will not enjoy tax incentives but would also promote investment off-island instead of in Puerto Rico.

First, according to Goyco Covas, the proposed Incentives Code limits the kinds of investments that can be made under Act 22. Under the Incentives Code, the term “valores” is defined as securities, referring to bonds, stocks or notes, which is very limited. He said the bill should use the broader term “investment assets,” which would cover investments in real estate or even virtual coins.

Act 22 uses the term capital gains on “valores” or securities, but the law does not define the term, Goyco Covas said. When the government began to grant decrees under Act 22, it used the term “investment assets,” which is broader and can include a stamp collection but not things such inventory or commercial property that depreciates.

“But when you define the word “valores” as securities or bonds and notes, those are things sold on the Stock Exchange, outside of Puerto Rico. Individuals who moved to Puerto Rico because they trade in crypto or properties, will have to go back to the [U.S.] mainland because they would not qualify for the incentives,” he said.

Another area in the proposed Incentives Code that will cause problems for Act 22 investors is that the wording limits tax exemptions on capital gains to long-term capital gains, leaving out tax exemptions for short-term capital gains. Act 22 currently grants tax exemptions to short-term capital gains, which are investments held for a year or less before they are sold, as well as for long-term capital gains, which are gains on assets held for more than a year and are usually taxed at a lower rate.

Section 2022.02, titled “A special tax rate for resident individual investors on long-term capital gains,” provides a special 5 percent tax rate on the portion of the long-term capital gain yielded by an individual investor on securities held before becoming an island resident. Section 2022 also says individual investors will not have to pay any local taxes on the net capital gains resulting from the appreciation of securities after the investor becomes a resident. The specific disposition does not mention any tax exemption for short-term capital gains.

“Because the section is titled ‘special tax on long-term capital gains,’ it appears the tax exemption only applies to long-term capital gains and excludes short-term capital gains. Because of that, individuals who are traders or whose capital gains are short term, will think twice about moving to Puerto Rico,” he said.

The proposed Incentives Code, filed as House Bill 1635 and Senate Bill 1013, is being evaluated by the Finance committees of the two legislative chambers and is slated to go to a vote in a special session that will be convened by the governor.

Lobbyists from different business groups are pushing for changes in the legislation, which consolidated Puerto Rico’s incentives into one document. As it is written, the bill is slated to achieve $300 million in savings to help the government implement tax reform, which is separate legislation.

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