Treasure Island: Puerto Rico Bids To Become New Age Tax Haven

While the US asserts a sweeping right to tax citizens' income wherever they live and wherever it's earned, Section 933 of the tax code exempts residents of Puerto Rico from paying US income tax on their Puerto Rico-sourced income. Instead, the Commonwealth of Puerto Rico has the exclusive right to tax local income as it sees fit. To exploit this special status and help rescue its economy, Puerto Rico's Legislative Assembly adopted two laws in 2012 and expanded them last year. Act 20 entices hedge funds, family offices, professional service firms and even software developers to locate there by taxing their corporate profits from exported services at a flat 4% rate and allowing those profits to be paid out to the owners free of Puerto Rico income tax. Sadly, moving to Puerto Rico won't buy you a total dispensation from the Internal Revenue Service. Uncle Sam still wants his cut on dividends you receive from US public companies, profits from mainland private businesses, pensions and deferred compensation earned in the states, and Social Security benefits.