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of both taxpayers and the IRS. The announced a formal campaign focusing
widespread adoption of remote work on U.S. individuals who have wrong- A person must meet
in many industries such as finance, law, fully claimed U.S. and Puerto Rican tax
and marketing has enabled many profes- benefits (see IRS, Large Business and extensive rules
sionals and businesses to move their International Active Campaigns, Puerto and requirements
residency and operations to Puerto Rico. Rico Act 22, Individual Investors Act
The island has attracted many U.S. (Dec. 9, 2021)). to qualify for the
favorable tax
persons with its warmer climate and A person must meet extensive rules
favorable tax regime. For example, a and requirements to qualify for the treatment available
Puerto Rican investment incentive law favorable tax treatment available to resi-
to residents of Puerto
passed in 2012, the Individual Inves- dents of Puerto Rico. Not least among
tors Act (Act 22, now Chapter 2 of Act them are the high thresholds to qualify Rico.
60), exempts from taxation all passive as a bona fide resident; however, these
income, such as interest, dividends, and requirements are beyond the scope of
capital gains, realized or accrued after this item. Instead, the following discus-
an individual becomes a bona fide resi- sion focuses on the type of income
dent of Puerto Rico. Furthermore, the eligible for the U.S. income tax exemp- typically applicable to nonresident aliens
prospect of higher U.S. federal and state tion for U.S. taxpayers that establish under Secs. 871–879. Rather, Puerto
income taxes prompts many taxpayers bona fide residence in Puerto Rico. The Rico residents are subject to the same
to flee to lower-tax jurisdictions. Puerto taxation of preemigration gains is of par- worldwide income tax at graduated rates
Rico residency offers some U.S. citizens ticular importance to U.S. taxpayers who imposed by Sec. 1 that applies to U.S.
and residents the ability to exit, to some own significant appreciated assets. Gen- citizens and residents. However, Sec.
extent, the U.S. income tax system with- erally, while U.S. taxpayers can greatly 933(1) provides an important exemp-
out renouncing citizenship or becoming reduce the tax burden on the growth of tion from U.S. income tax for certain
subject to the exit tax regime under their businesses and investments occur- Puerto Rico residents on their income
Sec. 877A. ring while they reside in Puerto Rico, derived from Puerto Rican sources.
The profiles of taxpayers moving preemigration growth and appreciation It should be noted that this is not a
their homes and businesses to Puerto are in many cases subject to U.S. income blanket exemption but only covers
Rico include cryptoasset and other in- taxation, even if the gain is recognized Puerto Rican–source income. In effect,
vestors, attorneys, investment fund man- after establishing bona fide residence in for bona fide residents of Puerto Rico,
agers, and other business owners. Recent Puerto Rico. only Puerto Rican income tax applies to
press has shed light on the extraordinary such income.
tax benefits enjoyed by some residents of US exemption from income tax
Puerto Rico, adding allure to the tactic. for certain residents of Puerto Income derived from sources
The growing number of U.S. persons Rico in Puerto Rico with respect to
that have moved to Puerto Rico has also Under Sec. 876, bona fide residents of capital gains
caught the attention of the IRS, which Puerto Rico are not subject to the rules Secs. 861–865 provide the rules for
classifying income from sources within
Puerto Rico (Sec. 937(b)(1)). Generally,
under Sec. 865(a), income from the sale
of personal property is sourced to the
country of residence. This rule covers
the disposition of investments and other
capital investments but not real estate or
inventory sold in the course of business.
A U.S. citizen or resident will not be
PHOTO BY NAPA74/ISTOCK sourcing gains under Sec. 865 if he or
treated as a U.S. resident for purposes of
she has a tax home in a foreign country.
Any possession outside the United
States, including Puerto Rico, qualifies

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