How Puerto Rico turns into a zero-tax cryptocurrency island


The St Regis Bahia Beach Resort in Puerto Rico has a golf course and beachfront residences in a 195-hectare nature reserve, bordering azure waters and lush rainforest. But what is perhaps most appealing to those who are now rushing to this property is the section of its website explaining the tax benefits for residents of the island.

This was the case with Anthony Emtman, who left Los Angeles and bought an apartment in the complex in March. Ikigai Asset Management’s CEO is now part of a thriving cryptocurrency community along Puerto Rico’s north coast, where the tropical climate is a bonus.

Mr Emtman and his cryptocurrency peers are taking a page from the hedge fund books and looking to reside on the island for huge tax savings.

In the United States, high-income investors pay up to 20% capital gains tax and up to 37% on short-term gains. In Puerto Rico, they pay nothing.

Mainland-based businesses pay 21 percent federal corporate tax plus individual state tax, compared to just 4 percent on the island. This makes the move a no-brainer for some investors, especially as the dramatic growth in the cryptocurrency market continues and Democrats demand higher taxes on the rich.

The presence of digital currency enthusiasts is already palpable on the small island, where chance encounters and networking opportunities abound: skirmishes at taco stands, dining in luxury apartments and “Crypto Monday” gatherings in hotels and restaurants. of San Juan.

Cryptocurrency funds Pantera Capital and Redwood City Ventures are among those who have established offices on the island. Frances Haugen, Facebook product manager turned whistleblower, recently said the New York Times she lives in Puerto Rico partly to be with her “crypto friends”.

New York City Mayor-elect Eric Adams even went there in November with cryptocurrency billionaire Brock Pierce for dinner with Puerto Rican Governor Pedro Pierluisi.

Now, “it’s not just about ‘Moving to Puerto Rico to save tax’,” says Giovanni Mendez, a business and tax lawyer who advises those who move. “It’s’ Move to Puerto Rico because everyone’s there.”

The Puerto Rican government created the tax breaks in 2012 in hopes of injecting liquidity into the island’s struggling economy and diversifying its employment pool.

Hedge funds have gradually started to seek a foothold on the island, but what really spurred the wave of arrivals was the Covid-19 pandemic – which has driven large cities away and popularized remote working – and the recent explosion in the cryptocurrency markets.

Supporters of tax breaks describe it not only as a boost for an island mired in bankruptcy for more than four years – prolonged by hurricanes, earthquakes, a political scandal and the pandemic – but an opportunity for reinvention.

Still, the idea has its detractors: Some laws only apply to new residents, so longtime islanders aren’t eligible. This has made some hesitant to welcome the new generation of wealthy locals, fearing the income stream would exacerbate inequalities and create social tensions. As it stands, house prices are already rising to “absurd” levels.

During the last major cryptocurrency bull run in 2017, many investors attempted to move to Puerto Rico before the market peaked and then collapsed, Mendez said.

This year, Puerto Rico received more than 1,200 applications – a record – thanks to its Individual Investor Act, which exempts new residents from paying capital gains taxes, according to the Department of Economic Development and Trade of the island. The number of mainland Americans seeking tax breaks in Puerto Rico has tripled this year.

A further 274 corporations, limited liability companies, partnerships and other entities have been approved for the Export Services Act, which provides for a 4 percent corporate tax rate and a 100 percent exemption on dividends.

Both fall under Puerto Rico’s Law 60, a group of tax breaks that were consolidated in 2019 to attract investment not only from cryptocurrency, but also from finance, tech, and other industries.

The cryptocurrency crowd has mainly focused on three areas along the coast.

It’s not just about “Moving to Puerto Rico to Save Tax”. It’s “Move to Puerto Rico because everyone is there”

Giovanni Mendez, business and tax lawyer

There are secluded getaways, like Bahia and the Ritz-Carlton-branded Dorado Beach resort. Those looking for a more urban lifestyle have opted for Condado, an upscale neighborhood and shopping district in San Juan.

“There are restaurants and there are cafes and there is a mall,” says Brent Johnson, managing director of wealth management firm Santiago Capital, which moved from San Francisco to Condado in May. “It’s kind of like a mini Miami.”

While in Puerto Rico, Mr Johnson was able to connect with wealth management, private equity and cryptocurrency companies, as well as people from the real estate, pharmaceuticals, energy and agriculture industries.

“I felt like I could come here, do my job and stay connected to the financial community, much more than going somewhere like Hawaii or Mexico,” he says.

Real estate boom

The influx of newcomers is causing waves in the real estate market, especially in resort communities.

Dorado has seen the strongest growth, with prices almost tripling, according to Priscilla Ferrer, a Puerto Rican brokerage.

“It’s absurd,” she said. “These luxury properties are bought at an emotional price, not an economy price.”

Francisco Fournier, founding partner of Luxury Collection Real Estate, says it’s now common to see properties selling for over $ 20 million.

“Right now we’re selling a house in Dorado Beach for $ 27 million and another for $ 29 million,” he says.

In Bahia, prices per square foot have almost doubled, according to Blanca Lopez, founder of the Gramercy Real Estate Group.

It’s absurd. These luxury properties are bought at an emotional rate, not an economy rate

Priscilla Ferrer, Real Estate Broker, Puerto Rico

“We are seeing prices north of $ 3,000 per square foot,” she says, while the value of upscale homes in Condado is around $ 1,400 to $ 1,500 per square foot, an increase of about $ 1,500 per square foot. ‘about 35% compared to a year ago.

And there isn’t enough inventory to meet demand, as buyers are flocking to the island faster than high-end homes can be built.

As richer people gain ground elsewhere, it is hurting the housing and employment prospects of islanders, says Raul Santiago-Bartolomei, an assistant professor in the Graduate School of Planning at the University of Puerto Rico.

“This makes these places more inaccessible for a workforce and low-income households who have to live near these high potential areas,” he says.

There are several new residential towers rising in Condado but that won’t be enough to keep pace. There’s even a labor shortage, says Fournier, so Puerto Rico is working with the US State Department to get visas to bring in “people from the Dominican Republic, Mexico, Haiti and from South America because we don’t have the people to build ”.

So far, the incentives appear to be creating jobs.

From 2015 to 2019, the Individual Investor Law created around 4,400 jobs and the Export Services Law added 36,222, according to a study by Puerto Rican consultancy firm Estudios Tecnicos. Call centers made up most of the jobs, followed by consulting, advertising, public relations, and tax and accounting services.

As long as jobs arrive, “doors are open” for the cryptocurrency community, says Carlos Fontan, director of incentives at the Ministry of Economic Development and Trade.

The tax breaks do what they were meant to be, says Alberto Baco-Bague, former secretary of the department and driving force behind Law 60.

“Ideally, we want to build just one Puerto Rico,” he says. “Not one Puerto Rico for new residents and another for local business leaders.”

This makes these places more inaccessible to low-income labor and households who genuinely need to live near these high-opportunity areas.

Santiago-Bartolomei, assistant professor at the University of Puerto Rico

Yet one of the biggest challenges is convincing the local population of the economic benefits of the program.

The Individual Investor Law, also known as Law 22, only applies to non-Puerto Ricans, meaning islanders are not eligible. And while the Export Services Act is available to locals, many believe the opposite, as tax relief is often marketed alongside programs aimed at foreigners.

Puerto Rico isn’t the first to try to attract cryptocurrency investment, and it sure won’t be the last.

The economy of El Zonte, a surf town on the Pacific coast of El Salvador, runs on Bitcoin. President of El Salvador Nayib Bukele was a cryptocurrency supporter long before he took office in 2019.

This year, the country adopted Bitcoin as its national currency and announced plans for the first Bitcoin sovereign bonds and a tax-free Bitcoin city.

Portugal, too, does not do away with the buying or selling of cryptocurrencies, unless it is an individual’s primary source of income.

Update: December 30, 2021 5:00 a.m.


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