Read text of Act No. 22 (Spanish) [PDF 292 KB]
Once a U.S. citizen becomes a resident of Puerto Rico, any income derived by that person from sources within Puerto Rico is excluded from U.S. federal income tax. Thus, to the extent a U.S. citizen becomes a resident of Puerto Rico, the individual is subject to tax in Puerto Rico on Puerto Rico-source income only—any non-Puerto Rico source income, however, is still subject to U.S. federal tax.
Under the Internal Revenue Code, capital gains are generally sourced by reference to the taxpayer’s place of residence.
The tax benefits and incentives provided by Act No. 22 are generally available to individuals who have not been residents of Puerto Rico during the 15-year period prior to date of enactment (January 17, 2012) and who become residents of Puerto Rico on or before December 31, 2035.
Nonresidents seeking to claim the tax incentives under Act No. 22 must obtain a tax decree from Puerto Rico Industrial Development Company. This tax decree establishes the terms of the exemptions and benefits, and has the effect and force of a contract during the entire benefit period.
There is no minimum employee requirement for a nonresident, individual owner of an international banking entity.
The tax incentives available to individuals under Act No. 22 include:
- 100% tax exemption on interest and dividend income earned after the nonresident individual becomes a resident of Puerto Rico; also applies with respect to alternative minimum tax (AMT) up to tax year 2036
- 100% tax exemption on interest, financial charges, dividends or distributive share on partnership income from international banking entities in Puerto Rico including AMT
- 100% tax exemption on long-term capital gains realized and recognized after becoming a resident of Puerto Rico but before January 1, 2036
- If not realized and recognized within the incentive timeframe, regular individual long-term capital gain applies (currently at 10%)
- Applies to appreciation of property after becoming a resident of Puerto Rico
- 5% tax on long-term capital gains realized before becoming a resident of Puerto Rico, but recognized after 10 years of becoming a resident of Puerto Rico, as long as recognized before January 1, 2036
- This 5% long-term capital gain tax only applies to the portion of gain that relates to the appreciation of the property while the individual lived outside Puerto Rico
- If the long-term capital gain is not recognized within these time periods, applicable individual long-term capital gain rate would apply on any Puerto Rico-source long-term capital gain
For more information, contact a tax professional with KPMG in Puerto Rico: