From Here To Eternity Or San Juan! - Transitional Tax Planning With Pre-IPO Or Appreciating Closely Held Stock

Author:Mr Gerald Nowotny
Profession:Osborne & Osborne PA


Speaking of Eternity, I must admit that I am a big fan of gospel music. While I like old school or traditional gospel, I prefer the newer R&B urban sound popularized beginning with Andrew Crouch and later Fred Hammond and others. The fact of the matter is that I am a big fan of the Godfather of Soul - James Brown. He may not have been Citizen #1 but he was Soul Brother #1. Anyhow, what does that have to do with the PR?

One of the things that has happened over the last several decades in the PR and Latin America is Christian mission activity resulting in a strong movement towards Protestantism and particularly evangelical denominations and more specifically Pentecostal denominations. The impact on praise and worship music in Latin America and the PR has been significant. First, you need to know that the PR is the headquarters for Salsa music. As an entertainer or Salsa performer, you need to make it in the PR or you won't make it at all. The Cuban "salsero" Willy Chirino laments this fact is a song.

The great band leader Ricardo Rey (aka Richie Rey) and his musical partner Bobby Cruz from the "Salsa Clasica" days, were big stars in the Salsa genre in the 1960's and 1970's. The both became evangelists and introduced the Salsa genre to Christian music. This is your Boricua tidbit for today!

One of the biggest obstacles facing U.S. business owners or individuals contemplating Puerto Rican residency is the taxation of pre-residency capital appreciation. This article focuses on the use of the classic partnership or LLC freeze as a technique to transfer the capital appreciation in the year of move so that the gain might be captured after obtaining Puerto Rican residency in order to maximize the potential tax benefits of Act 22.

Overview of Puerto Rican Tax Considerations and Residency

  1. Puerto Rican Tax Basics

Two important pieces of legislation were passed by the Puerto Rican legislature in 2012. Both the Export Services Act (Act 20) and the Individual Investors Act (Act 22) were signed into law by the Governor of Puerto Rico on January 17, 2012.

A Puerto Rican entity is not sub­ject to U.S. income taxation unless the entity is en­gaged in a trade or business within the United States and its income is considered effectively connected income, or investment income.

What does it take to become a Puerto Rican resident in order to take advantage of Act 22? How about S50 for the application fee which is less than the cost of dinner in a good restaurant, and meeting three tax tests?

For federal income tax purposes the taxpayer will be considered a bona fide resident of Puerto Rico if you meet the following: (i) Substantial Presence Test -the physical presence test (generally spending 183 days in PR, or less than 90 days in the US); (ii) the tax home test; and (iii) Closer Connection Test - the closer connection test for the entire taxable year which means that you can't have stronger personal connections to another jurisdiction that is not Puerto Rico.

(1) The Individual Investor's Act

Under the Individual Investors Act, neither capital gains (long-term or short-term), interest, nor dividends are subject to Puerto Ri­can taxation. Dividend income is subject to U.S. fed­eral income taxation for U.S.-sourced dividend income, as is interest income unless...

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