New Puerto Rico Legislation May Offer Extensive Tax Benefits To Hedge Fund Managers (As Well As Others)

Puerto Rico recently enacted tax legislation which may offer extensive benefits to hedge fund managers and other U.S. persons. Based on conversations with the Puerto Rican Government, Puerto Rico is very supportive of the use of this new legislation as a way to attract financial services business.

The legislation has generally eliminated the taxation of new residents on Puerto Rican-sourced passive or investment income. Thus, Puerto Rico now offers the ability to eliminate (or substantially reduce) your federal income tax on certain income and eliminate any state taxation without expatriating (that is, without giving up your U.S. citizenship). In general, to be considered a resident for these purposes, you must spend at least 183 days per year in Puerto Rico. This is similar to an incentive offered by the U.S. Virgin Islands. Not many managers have chosen to become residents of the U.S. Virgin Islands. Puerto Rico as an option may be a great opportunity in the right circumstances.

Many fund managers may wish to consider this opportunity in light of anticipated increases in federal income tax rates, which may be substantial. This includes fund managers who have considered moving to the U.S. Virgin Islands but have opted not to do so.

In addition, the recently enacted legislation may permit a hedge fund manager to shift some of its operations to Puerto Rico and be subject to an income tax rate of 4% on its income derived from Puerto Rican operations. Subsequently, under general federal income tax principles, the manager may be able to repatriate such income in the future at favorable tax rates and without an interest charge.

There are many tax and non-tax factors to consider in each of these alternatives. How do you structure your operations? What does it mean to become a resident of Puerto Rico? How do you structure your management fees and incentive allocations? What income remains taxable in the U.S.? What is the lifestyle like in Puerto Rico? We can guide you through these unique tax opportunities to see how they may benefit you as well as guide you in implementing any changes.