Puerto Rico is categorized as an unincorporated territory of the United States, and this designation has facilitated its current efforts in appealing to wealthy Americans and corporations.
The small island has launched a campaign encouraging wealthy individuals to relocate to shield future income from the Internal Revenue Service without giving up their passports, according to Bloomberg News. The article notes that Puerto Rico is currently struggling to improve its economy and is attempting to do so by encouraging affluent individuals to invest their money
in its economy, which may help it avoid IRS taxes. However, opponents of the campaign said the state is flirting with a dangerous concept, and one that may persuade Americans to potentially violate U.S. tax law
“They’re walking a fine line,” John Buckley, former tax counsel for Democrats on the House Ways and Means Committee, told Bloomberg. “This would be the first time that Puerto Rico would kind of deliberately erode the U.S. tax base for individuals.”
Bloomberg reports that 10 wealthy Americans have already taken advantage of a new Puerto Rican law that enables them to avoid U.S. capital gains taxes if they sign an agreement with the island’s government. In order to participate in the agreement, U.S. individuals must pass residency tests – which requires them to spend 183 days in Puerto Rico – and make social and personal connections. Corporations are considering investing more heavily in the territory as well, namely because it is considered foreign territory for tax purposes. This allows companies that conduct operations on the island and make profits to earn and leave money in Puerto Rico without paying U.S. corporate income taxes.
As this trend begins to gain the attention of America’s more wealthy residents – such as billionaire John Paulson – Congress has noted that it will be paying closer attention to these developments.