Implemented under the previous administration of former Gov. Luis Fortuño and aggressively promoted by Gov. Alejandro García Padilla’s economic development team, the [Act 20 & 22] incentives constitute one of the rare programs to be fully embraced by Puerto Rico’s two main political parties, which bodes well for its continuity and future growth. Former DDEC Secretary José Ramón Pérez-Riera was the principal architect and advocate for the Act 20/22 program, and his successor, current DDEC chief Alberto Bacó Bagué, is among the program’s biggest promoters. “I make it a point every chance I get to recognize the previous administration’s role and the vision it had in enacting these laws,” Bacó recently told reporters. Pérez-Riera, now a partner at Madison Astur LLC and the Puerto Rico Economic Development Co., a San Juan-based private economic development group, credits the new administration for recognizing the potential of the laws and embracing them. “If Acts 20/22 are to fulfill their transformative potential, we need to view them as part of a long-term strategy that needs to be maintained for decades rather than years. I give much credit to the current administration for promoting the laws as they have been doing. Executing on someone else’s strategies to obtain the best results, without pride of ownership getting in the way, is a selfless act that needs to be recognized and admired, and which we don’t see enough of in public service,” Pérez-Riera said. .... Supporters say that Pérez-Riera, relying on his business experience and legal acumen, was adept at finding creative solutions that re-defined the role of Puerto Rico’s DDEC secretary. As the main architect and proponent of Acts No. 20 & 22 of 2012, Pérez-Riera championed the approval of these two laws, prepared the comprehensive sets of regulations and procedures that made the laws operational after their approval, and produced the marketing materials that are now being used extensively to promote them. He got the word out to the local, national and international press on the new incentives, and went on several road shows with investors to explain the virtues of the laws that had been approved. He was the single voice that challenged naysayers and detractors of the laws at that time, explaining that they would someday transform our economy into a professional services juggernaut—under the U.S. flag—that would eventually challenge Singapore in that regard. “José Ramón [Pérez-Riera] worked around the clock to get these laws approved and make them operational in a very short period of time leading up to the election. He understood better than anyone how important these laws would be for Puerto Rico’s future, and he was on a mission to complete everything and at a level of quality that met his high standards. I should say that although José Ramón’s self-imposed work ethic was legendary throughout our administration, he seemed to kick it up to another level to make Acts 20/22 a reality,” said former Gov. Fortuño. .... [P]erhaps Pérez-Riera’s greatest achievement while serving as DDEC secretary—and what may ultimately become the lasting legacy of his time in government—is the creation and implementation of Acts 20/22, providing incentives that would bring capital from abroad, and that allowed for Puerto Rico to position itself as a world-class services center. .... “José Ramón led the outside counsel directly and every step of the way, and was immersed himself in the nuts and bolts of the process. He figured out how to walk the line between incentivizing economic development and generating government revenue. He’s also extremely hard-working. It was hard to keep up with him. Eventually, we became accustomed to his telephone conferences into the morning hours. If you consider the incentives he established and his contributions on the fiscal side, Pérez-Riera is the most effective secretary of Economic Development & Commerce that Puerto Rico has had to date,” González-Magaz added.
The truth is that the incentives contained in both laws—the elimination of all federal taxes on passive income that accrues after moving to the island under Act 22 and a flat 4% tax on companies that export their professional services from Puerto Rico under Act 20—are offers too good to refuse. To its credit, Gov. Alejandro García Padilla’s economic development team has made quick work drawing scores of investors from North and South America to set up their main residence in Puerto Rico. They are to be commended for continuing the work that was begun under the previous administration of former Gov. Luis Fortuño. That is the sort of bipartisan continuity that helped transform Puerto Rico from the poorhouse of the Caribbean into an industrial power house in the 1950s and 1960s, when Operation Bootstrap—which had commenced under Puerto Rico’s first elected Governor, Luis Muñoz Marín—was continued under former Gov. Luis A. Ferré. So it has been with Acts 20/22. The two tax-incentive laws were conceived under the Fortuño administration by former Department of Economic Development & Commerce Secretary José Ramón Pérez-Riera, who armed them with procedures to make them effective and produced the marketing materials being used today. In an exclusive interview with CARIBBEAN BUSINESS, Acts 20/22 mastermind Pérez-Riera explained that the incentives must be seen “as part of a long-term strategy that needs to be maintained for decades rather than years to fulfill their transformative potential.” Now, nearly 18 months after García Padilla took office, Pérez-Riera’s vision is coming true with nearly 300 wealthy investors who have set up residency in Puerto Rico. Some are already making local investments. Among those investments are huge projects backed by Paulson, who has seemingly taken up most of Puerto Rico’s distressed beachfront properties. Paulson’s most publicized purchases of prime real estate are the Vanderbilt Hotel, which he acquired for almost 30 cents on the dollar, and the St. Regis Bahía Beach Resort, where he also bought a majority stake for far less money than the property is worth. However, he has also invested in their new growth.
Puerto Rico's economy is at a tipping point, creating risk as well as great opportunities, said the keynote speakers who addressed a group of about 200 prospective candidates for moving to Puerto Rico to benefit from Laws 20 and 22 at the P.R. Investment Summit, held last week at the Condado Vanderbilt Hotel. Former Gov. Luis Fortuño passed the incentives created under former Economic Development & Commerce Secretary José Ramón Pérez-Riera with little fanfare in 2012. After the last election, Gov. Alejandro García Padilla's administration began touting these tax breaks—which include a 0% tax on investment income and a 4% tax on service income, such as a hedge fund's management fees—to promote investments in real estate, boost services and consumption, and attract foreign businesses to the island. To date, 205 people have moved to the island under Act 20/22 decrees. They are expected to invest $10 billion in Puerto Rico over the next two years, according to the Economic Development & Commerce Department (DDEC by its Spanish acronym). "Puerto Rico is in the process of a great reinvention. We are at an inflexion point and, after years of decline, asset values here are creating generational opportunities," billionaire Nicolas Prouty, CEO of Putnam Bridge Funding, who has invested $750 million in Puerto Rico, told a packed ballroom.
Just take a look and you will see Act 20/22ers are all around— hanging out at Silk in Condado, eating at Santaella near La Placita in Santurce, drinking a coffee at Cuatro Sombras in Old San Juan or taking an early morning flight to Vieques. The financiers and entrepreneurs moving to Puerto Rico to cash in on big tax savings that will enable them to substantially grow their money are expected to invest $10 billion on the island by 2017, said Alberto Bacó Bagué, secretary of the Economic Development & Commerce Department (DDEC by its Spanish initials). To date, 205 people have moved to the island under Law 20/22 decrees. These include eight billionaires of the caliber of John Paulson, founder & president of Paulson & Co., and Nick Prouty, founder & CEO of Putnam Bridge Funding, who jointly have already invested about $1.5 billion in Puerto Rico, a capital infusion that is expected to create 1,000 permanent jobs. "While most people with tax decrees will invest about $2 million to $3 million, these billionaires who have come in under the radar are going to invest $10 billion over the next two years. When this is coupled with what we are doing in manufacturing, such as the expansion of Lufthansa, we should have economic growth of 3% to 4% in 2015," Bacó said, quoting estimates of the Boston Consulting Group and economist Gustavo Vélez. Former Gov. Luis Fortuño passed the incentives created under former DDEC Secretary José Ramón Pérez-Riera with little publicity in 2012. Then Gov. Alejandro García Padilla's administration began touting these tax breaks—which include a 0% tax on investment income and a 4% tax on service income, such as a hedge fund's management fees—to promote investments in real estate, boost services and consumption, and attract foreign businesses to the island. U.S. citizens, even when they live abroad, have to file U.S. federal income tax, with the sole exception of Puerto Rico, which is the only place in the world U.S. citizens don't have to pay federal income tax unless they report stateside income. Wealthy taxpayers who opt to re-establish overseas to a foreign country have to surrender their U.S. passports and pay an exit tax of 23.8% on unrealized capital gains.
Calls for a new model have since been heard from every corner. Many have been proposed. None ever managed much traction. When Bacó’s predecessor, José Ramón Pérez-Riera, began articulating a new Singapore-style service-economy vision, few paid much attention, not even in his own government. When he finally bulldozed the enactment of 20 and 22 in 2012 to enable the vision, the consensus among business and government leaders alike was that the new laws would amount to a rather marginal contribution. A yawn. No big deal. The focus remained fixated on the long-running combination of manufacturing and tourism, particularly given that a different party won the election and was widely expected to follow the awful local tradition of throwing out sound ideas from the previous tribe when yours takes over. [Puerto Rico's Secretary of Economic Development and Commerce, Alberto] Bacó, however, decided to break with tradition. “I make it a point every chance I get to recognize the previous administration’s role and the vision they had in enacting these laws,” he told Business Today. For him, the epiphany came at a December 2012 meeting with Governor-elect Alejandro García Padilla and Law 20/22 investor Pavan Agarwal. Agarwal, who will speak at an April 24 panel of early adopters, made the case to the new García Padilla and Bacó team. His Sun West Mortgage was one of the first Law 20 companies on the island, and he and his family soon followed, moving to Puerto Rico to take advantage of Law 22. “We decided right then and there to make this the heart of our strategy going forward,” Bacó said.
With industrial promotions having dried up in recent years and showing no sign of turning around, thanks to higher costs at home and the emergence of lower labor costs abroad—manufacturing jobs are now well under 10% of total employment in Puerto Rico, and falling—local government has turned decisively to service-export promotions as one of the keys to future growth. The tectonic shift in public policy began under the previous administration of Gov. Luis Fortuño and his Secretary of Economic Development & Commerce (DDEC by its Spanish initials), José Pérez-Riera, and has continued without missing a beat by the administration of Gov. Alejandro García Padilla and new DDEC Secretary Alberto Bacó Bagué—an unusual and much-applauded example of continuity following a change in government. The Fortuño & Pérez-Riera team, pursuing one of the cornerstones of the economic development model they put in place—known as the Strategic Model for a New Economy (MENE by its Spanish initials)—took their four-year term to enact several laws designed to spur the growth of service exports by local companies and bring in foreign and U.S. mainland-based companies to export their services out of Puerto Rico. The new team’s mission now is to take those laws and convert Puerto Rico into “the leading service hub in the Americas,” Bacó added, broadening the island’s sphere of influence and replacing manufacturing as the lead industry in local job creation. .... The service-related incentive laws enacted by the previous administration, were: Law 273 to create an off-shore finance center on the island; Law 98 to create an offshore insurance center; Law 27 for film and creative services; tourism-related laws 74, 113 and 118; Law 83 for green energy; Law 132 for housing; and most recently Law 20 to incentivize “every other conceivable service,” Bacó said.
On Jan. 17, 2012, Puerto Rico enacted Law No. 22 of 2012, also known as the “Individual Investors Incentives Act” (Law 22). The law provides tax exemptions to eligible individuals residing in Puerto Rico, and may have profound implications for the continued economic recovery of the island. To avail themselves of such benefits, individual investors need to become residents of Puerto Rico and apply for a tax-exemption decree, which has generated interest from many investors as well as criticism from detractors. Law 22 is designed to primarily attract to Puerto Rico high-net-worth individuals, empty nesters, retirees who currently relocate to other states and individual investors from the U.S. and other countries, by eliminating all taxes on passive income that accrues after they relocate to the island. While dividends and interest income earned by Puerto Rico residents on U.S. securities are generally taxed by the federal government, capital gains taxes on their sales are based on residence. “Although Puerto Rico is a U.S. territory, pursuant to Section 933 of the U.S. Internal Revenue Code of 1986, bona-fide residents of Puerto Rico aren’t subject to federal taxes on income derived from sources within Puerto Rico. Therefore, U.S. citizens that are bona-fide residents of Puerto Rico benefiting from Law 22 will only be subject to federal taxation on income derived from sources outside of Puerto Rico. The law provides the following benefits to new Puerto Rico bona-fide residents on qualified investments: (i) 100% tax exemption from Puerto Rico income taxes on all dividends; (ii) 100% tax exemption from Puerto Rico income taxes on all interest; and (iii) 100% tax exemption from Puerto Rico income taxes on all short-term and long-term capital gains accrued after the individual becomes a bona-fide resident of Puerto Rico,” said José R. Pérez-Riera, former DDEC secretary under the administration of former Gov. Luis Fortuño. Pérez-Riera is widely credited as the intellectual father of Laws 20 and 22 of 2012. Both of these laws were signed by Fortuño in early 2012, but hadn’t yet been aggressively marketed and promoted until the new administration of Gov. Alejandro García Padilla and DDEC Secretary [Alberto] Bacó started doing so after taking office in January. This is a refreshing thing to see in Puerto Rico politics and a sign that both main political parties recognize the great potential that these two laws have for the island’s economic development. .... The fact that the García Padilla administration considers Law 22 one of the cornerstones of its economic development strategy presents a change in policy by the leadership of the Popular Democratic Party— including the governor, San Juan Mayor Carmen Yulín Cruz, Senate President Eduardo Bhatia, House Speaker Jaime Perelló, Rep. Luis Vega Ramos and La Fortaleza Chief of Staff Jorge Colberg Toro—all of whom voted against the bill when it was approved by the Legislature during the previous administration.
If you are looking into the new Puerto Rico incentives known as Act 20 of 2012 (Exportation of Services Incentives Act) & Act 22 of 2012 (Individual Investors Incentives Act), Predco is in a unique position to help as you determine the best route for you and your loved ones. One of Predco's professionals, Mr. Pérez-Riera, was the person responsible for the vision, conception, drafting, approval and implementation of these laws when he served as Secretary of Economic Development and Commerce of Puerto Rico from 2009 to 2012.
The recently passed Exportation of Services Incentives Act seeks to encourage local service providers to expand their services to persons outside of Puerto Rico, to promote the development of new businesses in Puerto Rico and to stimulate the inbound transfer of non-local service providers to Puerto Rico. The purpose of the Export Services Act is to establish and develop in Puerto Rico a global services hub for all services. On the other hand, the Individual Investors Incentives Act provides a tax exemption on passive income tax for individuals that relocate to Puerto Rico to make the island their legal residence. This has had a beneficial effect on the economy through the consumption of the new residents, as well as the injection of new capital and liquidity for local Puerto Rico transactions that would otherwise fail. Below you will find a few selected media excerpts about Acts 20 & 22 of 2012, and how they were created and approved: