Puerto Rico Creates Tax Shelters in Appeal to the Rich

Story originally appeared on the New York Times.

Known for its white-sand beaches and killer rums, Puerto Rico hopes to stake a new claim: tax haven for the wealthy.

Since the beginning of the year, the island has gone on a campaign to promote tax incentives that took effect last year, marketing its beautiful beaches, private schools and bargain costs in an effort to lure well-heeled hedge fund managers and business executives to its shores.

So far, Puerto Rico’s pitch has attracted a handful of under-the-radar millionaires. Several American executives of mostly smaller financial firms say they have already relocated to the island, and Puerto Rican officials say another 40 persons, mostly from the United States, have applied.

The tax savings could add up to “at least in the six figures” each year, said Barry Breeman, an American who said he was moving to Puerto Rico with his wife. Mr. Breeman is the co-founder of the New York-based Caribbean Property Group, a real estate investment firm that has substantial holdings on the island.

Millionaires are nice, but Puerto Rican officials hope to reel in billionaires like John A. Paulson, the hedge fund manager who Bloomberg News reported earlier this month was weighing a move.

The attention prompted an unusual statement from Mr. Paulson, which declared that he was not relocating. (Still, Mr. Paulson, a 57-year-old New Yorker, had briefly considered a move, say two people with knowledge of his plans.)

If not Mr. Paulson, government officials and real estate brokers in Puerto Rico hope to sell other wealthy mainland Americans on what they hope will become the next Singapore or Ireland as a favored low-tax destination. Puerto Rico is closer and, compared with Ireland, decidedly warmer. And unlike in Switzerland or other havens, in Puerto Rico, Americans do not give up their citizenship.

“There’s nothing wrong with spending 183 days a year on a sailboat or yacht and working from here,” said Alberto Bacó Bagué, the secretary of economic development and commerce for the island, in a telephone interview. “We’re catching up to Ireland and Singapore — you can shelter income legally, and legally in a good way.”

Puerto Rico is a commonwealth of the United States, but for tax purposes, it is treated differently. Most residents of Puerto Rico, with the exception of federal employees, already pay no federal income tax. A person needs to live 183 days a year on the island to become a legal resident.

The new tax breaks are a twist on the island’s tradition of using tax perks to bolster the economy. Puerto Rico’s per-capita income is around $15,200, half that of Mississippi, the poorest state in the nation. In 2006, a previous incentive exempting United States companies from paying taxes on profits from Puerto Rican manufacturing ended after Congress said that the incentive had bilked taxpayers.

The new tax breaks are a radical shift in that they focus on financial, legal and other services, not manufacturing. Puerto Rico slashed taxes on interest and dividends to zero from 33 percent, and it lowered taxes on capital gains, a major source of income for hedge fund managers, to zero to 10 percent.

The incentives work with existing United States breaks. While residents still have to file a federal tax return, they do not have to pay capital gains taxes of 15 percent on assets held before moving and sold after 10 years of island residency.

The new tax incentives “likely will be considered more broadly by some taxpayers as a new opportunity for income shifting and tax deferral,” said Michael Pfeifer, an international tax lawyer at the law firm Caplin Drysdale in Washington.

Mr. Bacó, the Puerto Rican economic development official, is planning a road show on the East Coast next month to woo financial and law firms as well as wealthy individuals to moving to Puerto Rico.

Because of its new aggressive tax breaks, Puerto Rico is a supercharged version of Florida, which does not tax individuals on ordinary income.

Recently, a business development group in Palm Beach, Fla., wined and dined 10 executives from the Northeast who had flown in for a two-day tour showcasing the state’s tax advantages, complete with golf outings, showings of oceanfront office space and a soiree aboard a yacht.

Florida has already landed one big fish: Edward S. Lampert of ESL Investments moved his headquarters from Greenwich, Conn., to near Miami last year.

The sales pitches by Florida and Puerto Rico tap into a growing resentment among affluent people who feel that they have been vilified by politicians or believe they have unfairly become targets for disproportionately higher taxes. In one highly publicized example, the actor Gérard Depardieu, angry over a plan by the French government to raise taxes to 75 percent for the wealthy, accepted a Russian passport from President Vladimir V. Putin. Russia has a flat tax rate of 13 percent.

But a move to Puerto Rico may be easier said than done. Privately, some lawyers and accountants in the United States express concern that individuals who move to the American island for its lower taxes might appear “unpatriotic” in a widening crackdown by authorities on offshore tax dodging through Switzerland, Israel and Singapore.

And while the island’s tax breaks are legal, some investors say they do not want their hedge fund managers straying too far from their mainland office.

“Citi Private Bank expects hedge fund principals to be in a primary office with their critical employees close by,” David Bailin, the global head of managed investments for the firm, wrote in an e-mail.

Puerto Rico has been battered by several years of recession. Its unemployment rate is more than 13 percent, well above the national rate, and its economy remains mired. In December, Moody’s Investors Services downgraded the island’s debt to one notch above junk status; and in a recent research note, Breckenridge Capital Advisors said the island was “flirting with insolvency.” The island has the weakest pension fund in America and by some estimates could run out of money as soon as 2014.

An influx of wealthy financiers would provide a much-needed lift to the economy.

Margaret Pena Juvelier is a real estate broker with Sotheby’s International Realty who left the Upper East Side last fall to open an office in San Juan. “We’re getting an average of 10 to 15 calls or e-mails a day from people who want to look at homes,” she said.

Ms. Juvelier often sends a black S.U.V. with a driver in a suit and tie to meet clients, some of whom fly in on private jets and pepper her with questions like “is there a Whole Foods here?” and “if I get really sick, do I have to be medevaced?”

Nicholas Prouty of the investment fund Valivian Advisors, who is moving to San Juan from Greenwich, Conn., said he wanted “the excitement of having new experiences coupled with the worry of the unknown.”

While the real estate broker Ana González Brunet declines to name names, saying “discretion to billionaires is important,” she said multiple individuals had recently looked at the 8,379-square-foot penthouse in the Acquamarina in the chic Condado neighborhood of San Juan. The $5 million condo has underground parking and a panoramic view of the ocean through floor-to-ceiling windows, and is near luxury boutiques like Cartier, Salvatore Ferragamo and Louis Vuitton.

“It’s like being in the best part of Manhattan,” Ms. González Brunet said.