I recently was interviewed on The JetSetter Show by the very knowledgeable Jason Hartman. We had a detailed discussion on the best ways for Americans to reduce their tax burden.
Jason has kindly allowed me to share our conversation with you below, which I don’t think you’ll want to miss.
Or if you would prefer the MP3 podcast, you can find it at this link.
Until next time,
Jason Hartman: Nick, welcome. How are you?
Nick Giambruno: I’m doing great, Jason. Thanks for having me.
Jason: My first question to you is why don’t you live in Puerto Rico? This is a pretty phenomenal opportunity, it sounds like.
Nick: I would definitely be in Puerto Rico, but my personal situation doesn’t allow me to at the moment. That said, it’s definitely a very attractive option for the intermediate term. In fact, two of my colleagues from Casey Research have moved there with their families and have established themselves down there.
Jason: Other than the very high murder rate, I love it.
Nick: Yeah, well, that’s probably the number-one concern of a lot of people. But you have to look at the details. Of course you have the same issues that apply to Puerto Rico as they would in any big city in the world, whether it’s Rio, New York City, and so forth.
The crime rate in San Juan, the capital, is comparable to Memphis, Tennessee.
Jason: If you want to get into American crime, the worst is probably Detroit or Chicago.
Nick: So you wouldn’t take the crime rates for Detroit or Chicago and extrapolate them for Illinois and Michigan. It wouldn’t deter you from, say, moving to different parts of Michigan just because of bad crime in Detroit. The same is true in Puerto Rico. There are rougher neighborhoods, but there are very nice neighborhoods in San Juan; and there are very safe areas throughout the island. It’s a big island, too—that’s an important point to stress. This isn’t just some tiny banana republic in the Caribbean.
Jason: Tell us about the opportunity to really have either no or very, very low tax.
Nick: To understand how big an opportunity this is, you have to understand how Americans are taxed. Americans are effectively the only nationality in the world that is taxed on its worldwide income regardless of residency. Every other nationality in the world, say, Canadians, for instance—they could just move from Canada to, say, the Cayman Islands, which has zero income tax, zero taxes on basically anything, and operate there on a pretty much tax-free environment. As an American, though, it’s different. The US government levies taxes on you no matter where you are resident. So if an American moves to the Cayman Islands or to Dubai or Singapore, he or she would still have to pay taxes to the American government and file taxes, no matter where they live and no matter where they earn their income. So that’s really a unique, unfortunate attribute of being an American.
Puerto Rico is different because it is actually part of the US, and it has a unique status because it’s not a state and it’s not a foreign country. It’s what is known as a commonwealth or a territory; and the way it’s set up—and the way it has existed for over 100 years—is that Puerto Rican residents are all US citizens, but they do not have to pay US federal taxes on their Puerto Rican-sourced income. They pay taxes on that income to the Puerto Rican government. And this arrangement allows for the Puerto Rican government to offer incentives to mainland Americans who move to Puerto Rico that pretty much no other jurisdiction can offer.
Jason: Yeah, that’s fantastic. Tell us, what is the tax rate?
Nick: So there are two programs. The first program is aimed at individuals. It’s called Act 22, the Individual Investor’s Act. This act reduces capital gains, interest income, and dividend tax rates to zero. Now there’s a caveat. The investment income has to be sourced in Puerto Rico. Now what does that mean? That means if you have interest income, it has to come from a Puerto Rican bank, for example. If you have dividends, they have to come from a Puerto Rican corporation. Now that on its own is kind of limiting—you can get interest free of tax on a crummy CD in a Puerto Rican bank, so what? But the big issue here is capital gains, because the source of capital gains is determined by where you are. So you could move to Puerto Rico. You could keep your Fidelity E-Trade or other US brokerage account, and you could trade stocks, and the capital gains on those stocks would count as Puerto Rican-sourced income and therefore applicable to the tax benefits, which is zero capital gains. So capital gains is where the real benefits are.
Jason: Let me just comment on that. First of all, if you invest in the stock market, you are not likely to actually have any capital gains—since Wall Street is the modern version of organized crime, as I like to say. But the insiders in the stock game, the hedge fund managers, I know they’ve been moving to Puerto Rico. I know some of these people who have fallen for Bitcoin just like the tulip bulb craze, they’ve talked about moving—and maybe some have, I’m sure—to Puerto Rico to cash in their capital gains. I suppose you could do this with real estate too. I don’t know though, maybe real estate is a little different. The nice thing about real estate is, it’s so tax favored. But say you want to cash out of some real estate, is that treated differently because real estate is sort of a local type of physical asset?
Nick: It depends where the real estate is located and individual circumstances. It’s also worth mentioning that the tax benefits for the individuals and their capital gains, it doesn’t just apply to the stock market. It can apply to other things. A private business located in the US for example. Real estate is kind of a special and individualized case, you’re going to have to work that out with an attorney or a tax professional who looks at the whole picture of your tax circumstances.
Jason: I always have to make the disclaimer, I’m not a lawyer, I’m not a tax advisor, but I’m kind of thinking there might be a way around that if the real estate is held in an entity and maybe, depends where the entity is based or incorporated, I don’t know. Just a thought.
Nick: Yes, that kind of thing a possibility. Let me give you an example on how this works with something else. You know how I just told you about how dividends and interest—the tax benefits are kind of limiting because they need to be Puerto Rican sourced. There’s a strategy to sort of re-source your dividend and your interest income. So for example what you would do is you would form a mutual fund in Puerto Rico. You would have that mutual fund own stocks in the US and bonds in the US and get that interest and that dividend, but then the mutual fund could pay you a dividend; and that would re-source the investment income into Puerto Rican-sourced income, and thus eligible for the favorable tax treatment. That’s a possible strategy. It doesn’t work for everybody, but if you have somebody set it up, it can work.
Jason: Very interesting. And how hard is it to start your own mutual fund?
Nick: Well, it doesn’t have to be that complex. It can just have one shareholder. But of course there will be costs involved, so for a small scale it’s not really worth it. But if you’re a high-net-worth individual or you’re managing money, it could be worth it.
Now the other aspect to the tax advantages is for businesses that export their services. So if you’re in Puerto Rico and you perform a service for somebody outside of Puerto Rico—like a consultant or a writer—they reduce your effective corporate tax rate to 4%, and in some cases 3%.
Jason: Okay, so basically you have an online business and you move to Puerto Rico personally. How much time do you have to actually spend there?
Nick: Generally speaking, you have to be there around 183 days a year; however, days leaving or days entering Puerto Rico count toward that 183-day total. However, if you travel a lot, there are other ways to meet this requirement depending on your individual circumstances.
Jason: If someone wants to take advantage of the Puerto Rico opportunity, you don’t have to relinquish your citizenship, which is pretty incredible. You can be a US citizen. So what’s the best way to approach this, then? Do you have sort of a best practices for this?
Nick: How this all applies to everybody in their individual cases can kind of be complex. So what we did is we put together a very comprehensive report on this topic. You can find out more about that on InternationalMan.com.
We’re speaking from experience here, not theory. Two of my colleagues from Casey Research have gone through and done this process. We are on the ground there, and we know the people who grant these tax benefits, and we know the law firms and the tax accountants and so forth. So I would recommend if you want further details, check out that report.
Jason: How about best places to live within Puerto Rico? We’ve talked about how the big city is crime infested, like most big cities, but where are the expats living?
Nick: San Juan is the capitol, the big city, and not all of San Juan is crime infested. There actually are some very beautiful areas in San Juan. In fact, one of my colleagues lives in San Juan. The area is called Condado. It’s an upscale area right by the beach. So besides Condado, Old San Juan is another interesting area. Outside of San Juan there are some other places, too. If you are a high-net-worth individual, you can look at a place called Dorado. It’s a gated community.
There are a number of other gated communities in Puerto Rico. Another colleague of mine lives in Palmas del Mar. He describes it as just as pretty much as nice as Dorado, but at a fraction of the price. That’s in the southeast part of the island.
Jason: And what else should people know about this?
Nick: One thing to consider is how the US government could react. They could find some way to adjust the language in the law that would nullify the tax incentives. Now, it’s very possible that they could do that. However, they also would face a cost, because the fact of the matter is that these programs are helping Puerto Rico with its financial situation. And if they stopped, it would be more likely that the US would have to come in with some sort of bailout or even more financial aid to the island. If the US government sought to end these benefits, they might be shooting themselves in the foot, because it might come back to bite them in the form of an unpopular bailout.
Jason: I was going to ask you, why would the IRS allow this?
Nick: It’s important to emphasize that this arrangement with Puerto Rico has existed for almost 100 years. Not these specific tax benefits. These specific tax benefits are a couple of years old. The framework in which the tax benefits work, though, have existed for about 100 years. So this is nothing new to the US government—they have long known that Puerto Rico can structure tax incentives this way.
Another reason why they may not seek to end the benefits is that it would fundamentally change the nature of the relationship with the US and Puerto Rico. It would undermine the commonwealth status of the island.
The benefits could also end if Puerto Rico became the 51st state, but I don’t see this issue being pushed. It has languished for decades, and I don’t see any imminently changes.
Jason: Wyoming, Texas, Florida, Washington State, and others have low or no state income tax, but of course you would be subject to the federal tax. Puerto Rico is just an amazing opportunity to basically get out of paying the federal income tax, isn’t it?
Nick: Short of renunciation and death, it’s about the only way.
Jason: Wow, that’s just amazing. Now some people have asked me about the US Virgin Islands, saying that they offer the same types of tax benefits that are available in Puerto Rico. True or false?
Nick: It’s sort of like comparing apples to oranges. First of all, you have to understand that the Puerto Rico decision is not just a tax decision, it’s not just an investment decision. It’s a lifestyle decision, because you have to go and you have to live there for a certain number of days, and living in Puerto Rico and the Virgin Islands is completely different. Puerto Rico is much larger, much more developed, much more infrastructure and so forth. Also, the benefits in the Virgin Island typically were geared toward very high-net-worth individuals who can create these complex partnership or foundation-type structures, so it really wasn’t within reach of say your average business owner or average individual. Puerto Rico’s benefits are within reach of those people. That’s the difference.
Jason: Well, anything else you want the listeners to know, Nick?
Nick: One thing I’d like to add is that the way these benefits are set up is as a contract that you have with the Puerto Rican government. Sort of like a private decree that they give you. And once you obtain your private decree, the benefits are valid for 20 years. That protects you from changes in the Puerto Rican government. So if the Puerto Rican government changes tomorrow and cuts off these tax benefits, they could, but they could cut them off only to new people. If you’ve already obtained your private decree, which is a legally enforceable contract, then you are pretty much set. You have tax certainty, which is a pretty interesting notion, because who knows what the tax rates are going to be tomorrow in the US. You don’t know. But if you go to Puerto Rico and you get a private decree, you will know what your tax rates are going to be.
Jason: Well, Nick, thank you so much for telling us about this. Really just an amazing opportunity, and I’d encourage people to look into it more, and you can find that on Nick’s website and get that special report.
Nick: One thing about the report: it’s been verified by one of the most prominent law firms in Puerto Rico. It’s also been reviewed by government officials and a lot of professionals. So this is verified information that comes from our on-the-ground experience in actually implementing these incentives. It’s information I don’t think you can really find anywhere else, and if you’re serious about this option, it will definitely save you time and money.
In our report we list our trusted professional resources that we have personally used and we have personally vetted. So we do provide references to lawyers, to tax accountants who are familiar with this, because this is a very specialized area and most of people in these fields don’t really know about Puerto Rico, and those in Puerto Rico don’t know about the US side of the law as well. So it’s important to know and find individuals, professionals, who are familiar not only with the US side of things, but with the Puerto Rico side of things. That’s not an easy thing to do, and that’s what we’ve listed in our report, and these are people whom we’ve worked with and can vouch for that they’ve provided value and they know what they’re talking about.
Jason: I assume that there is no asset-protection benefit with Puerto Rico, since it’s a US territory. You lower your tax rate but creditor-wise and things like that, those courts will all recognize US judgments, all those banks will and so forth, right?
Nick: Yes, that’s true, but the flip side to that is that your private decree is also protected by that same court system. So this is not just like, you know, some banana republic that can shred up contracts. This court system works within the US court system, so when you get those benefits enshrined in that private decree, it’s really backed up by the US court system.
But that being said, you certainly don’t have to keep your money in Puerto Rico. If I were living in Puerto Rico, I’d keep my money in a safe offshore bank account, say in Hong Kong or Singapore or within a Cook Island’s trust. There’s no reason for you to keep your money in Puerto Rico if you don’t want to. You can generate your income pretty much tax-free in Puerto Rico and then move that money wherever you see fit.
Jason: Fantastic, well, very interesting opportunity. Nick, thanks for telling us about it.
Nick: My pleasure.
Editor’s Note: You can find the comprehensive report on Puerto Rico’s stunning tax incentives here.