LAW OFFICES
GIVNER & KAYE
A PROFESSIONAL CORPORATION
SUITE 445
12100 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90025
www.GivnerKaye.com
BRUCE GIVNER
(bruce@GivnerKaye.com)
OWEN D. KAYE
(owen@GivnerKaye.com)
KATHLEEN GIVNER
(kathy@GivnerKaye.com)
NEDA BARKHORDAR
(neda@GivnerKaye.com)
PHONE (310) 207-8008
(818) 785-7579
FAX (310) 207-8708
(818) 785-3027
July 24, 2015
Puerto Rico1
Income Tax Incentives2
Residence
Requirement: Person.
(i) Physical Presence Test. Usually 183 days3
residence in Puerto
Rico per year.4
(ii) Tax Home Test. Do not have a tax home outside P.R.
(iii) Closer Connection Test. Do not have a closer connection to the
U.S. or a foreign country than to P.R.5
Corporate. 80% of the work, measured by payroll, performed in P.R.
Recommendation: do not keep a residence in the U.S.
Follow all of the objective criteria in FTB Publication 1031.6
Internal Revenue
Code: §9337
exempts P.R. residents from paying U.S. income tax on their
1
La isla del encanto – The Island of Enchantment. Officially the Commonwealth of Puerto Rico. An
unincorporated territory of the U.S. Total permanent population of 3.7 million, of whom 2.5 million live in the San
Juan metropolitan area, with 4 million visitors per year.
2
Based on U.S. Virgin Islands Economic Development Commission programs.
3
If you arrive at one minute before midnight, that counts as a full day in Puerto Rico. One hour time difference
from the East Coast. Reg. §1.937-1(c)(3)(i)(A).
4
Reg. §1.937-1(c)(1): “In general. A U.S. citizen or resident alien individual…satisfies the [the presence trust] if
that individual— (i) Was present in the…possession for at least 183 days during the taxable year; (ii) Was
present in the relevant possession for at least 549 days during the 3-year period consisting of the taxable year
and the 2 immediately preceding taxable years, provided that the individual was also present in the relevant
possession for at least 60 days during each taxable year of the period; (iii) Was present in the U.S. for no more
than 90 days during the taxable year; (iv) During the taxable year had earned income…in the U.S., if any, not
exceeding in the aggregate the amount specified in §861(a)(3)(B) [$3,000] and was present for more days in the
relevant possession than in the U.S.; or (v) Had no significant connection to the U.S. during the taxable year….”
5
When traveling to the U.S. you must fill out an entry form. Indicate that you live in P.R. and use your P.R.
address on any official government form.
6
“Factors to consider are as follows: amount of time you spend in California vs. amount you spend outside of
California; location of your spouse/RDP and children; location of your principal residence; state that issued your
driver’s license; state where your vehicles are registered; state in which you maintain your professional licenses;
state in which you are registered to vote; location of the banks where you maintain accounts; the origination
point of your financial transactions; location of your medical professionals and other healthcare providers
(doctors, dentists, etc.), accountants and attorneys; location of your social ties, such as your place of worship,
professional associations, or social and country clubs of which you are a member; location of your real property
and investments; permanency of your work assignments in California. This is only a partial list of the factors to
consider. Consider all the facts of your particular situation to determine your residence status.”

LAW OFFICES
GIVNER & KAYE
A PROFESSIONAL CORPORATION
Puerto Rico Income Tax Incentives
July 24, 2015
Page 2 of 3
P.R.-sourced income. Must file IRS Form 8898.8
P.R.’s Department of
Finance has exclusive right to tax local income.9
Puerto Rico’s
New Laws: General. 2012 – tax treatment is guaranteed for 20 years.10
Businesses. Act 20, the Export Services Act.11
Perform services in P.R.
on behalf of customers outside P.R. Cannot have branches or staff in
the U.S. Pay a flat 4% rate with profits paid to owners tax free. Must
take a reasonable salary which is taxed at up to 33%. Must have 3
employees, but you and your spouse can count as two. Six months to
comply. Labor laws are rigorous.
No. Live in the U.S. and set up a P.R. company that receives a market-
based fee for tasks it performs. Once enough cash has built up take up
residence in P.R. After a few years move back to the U.S. without
paying tax on the profits. If a U.S. person owns more than 10% of the
P.R. company it is a controlled foreign corporation and gives rise to
passive foreign investment company issues (perhaps 52% tax in U.S.).
7
“The following items shall not be included in gross income and shall be exempt from taxation under this
subtitle: (1) Resident of Puerto Rico for entire taxable year In the case of an individual who is a bona fide
resident of Puerto Rico during the entire taxable year, income derived from sources within Puerto Rico (except
amounts received for services performed as an employee of the United States or any agency thereof); but such
individual shall not be allowed as a deduction from his gross income any deductions (other than the deduction
under section 151, relating to personal exemptions), or any credit, properly allocable to or chargeable against
amounts excluded from gross income under this paragraph. (2) Taxable year of change of residence from
Puerto Rico In the case of an individual citizen of the United States who has been a bona fide resident of
Puerto Rico for a period of at least 2 years before the date on which he changes his residence from Puerto Rico,
income derived from sources therein (except amounts received for services performed as an employee of the
United States or any agency thereof) which is attributable to that part of such period of Puerto Rican residence
before such date; but such individual shall not be allowed as a deduction from his gross income any deductions
(other than the deduction for personal exemptions under section 151), or any credit, properly allocable to or
chargeable against amounts excluded from gross income under this paragraph. ”
8
“Statement for Individuals Who Begin or End Bona Fide Residence In a U.S. Possession.” Required by
§937(c) if you have worldwide gross income of more than $75,000.
9
§734 of Title 48 of the U.S. Code. The Internal Revenue Code For A New Puerto Rico. Rates are 0% up to
$12,000; 7% up to $26,000; 14% up to $42,570; 25% up to $62,750; and 33% over $62,750.
10
Under the 1950 Puerto Rico Federal Relations Act, the federal government treats Puerto Rico as a state for
most purposes. Therefore, the contract with a taxpayer is enforceable against both the governments of Puerto
Rico and the U.S.
11
Specifically mentioned in the Act: E-commerce businesses, particularly those which provide or publish digital
products and services; consulting firms of any kind, particularly those which do not require substantial travel to
the customer to provide the service; investment management; graphic design; internet marketing and
copywriting services; investment relations and PR; inbound and outbound call centers, especially bilingual call
centers; remote tax and legal consultancy, including tax preparation work; software development; R&D;
hospitals and laboratories; educational and training centers; and storage and distribution centers.

LAW OFFICES
GIVNER & KAYE
A PROFESSIONAL CORPORATION
Puerto Rico Income Tax Incentives
July 24, 2015
Page 3 of 3
Also, capital appreciation is taxed at 39% in P.R.
Individuals. Act 22 benefits business owners and active traders. $5,000
application fee.
Planning. Great to move if you expect massive capital gain in the next
18 to 36 months. Move back to the U.S. afterwards.
No tax on: (i) locally sourced interest;
(ii) locally sourced dividends;
(iii) all short-term and long-term capital gains accrued after becoming
a bona-fide resident of Puerto Rico.
U.S. tax on: (i) public company dividends;
(ii) mainland private business profits;
(iii) mainland interest;
(iv) deferred compensation earned in the states;
(v) Social Security benefits; and
(vi) U.S. real property (directly or through entities).
Phase-out: unrealized capital gain:12
(a) if sold within 10 years after move:
(1) full U.S. tax;
(2) 10% Puerto Rico tax (creditable against U.S. tax).
(b) if sold more than 10 years after move:
(1) no U.S. tax;
(2) 5% Puerto Rico tax.
Persons Who May
Qualify: Returning Puerto Rico residents who left before 2006.
Must become a resident of Puerto Rico by December 31, 2035.
12
Reg. §1.937-2(f)(1)(vi)(B). “In the case of property other than marketable securities, the portion of gain
attributable to the possession holding period…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…. …[If] the individual is a
bona fide resident of the relevant possession for more than a single continuous period, the number of days in
the numerator will be the aggregate of the number of days in each possession holding period. [T]he
denominator will include days that are required to be included in an individual's holding period §735(b), §1223,
and any other applicable holding period rule in the Internal Revenue Code.”
Example: assume that Joe’s 50% of the stock of a closely held California corporation is worth
$2,000,000 on the day he becomes a resident of P.R. and assume he has owned it for 10 years. Two years
later the other 50% shareholder buys Joe’s stock for $6,000,000. Joe’s holding period is 12 years, of which 2
years was in P.R. So 2/12ths or 16.67% of the $4,000,000 gain is allocable to P.R.