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Isla del Encanto - The Tropical Paradise for Tax Planning

By now it should be known that I grew up in the Panama Canal Zone. However, my Latin "thing" didn't happen until I was in the 10th grade. One of my football teammates played congas in a Salsa band in Panama City. Another baseball teammate and friend whose parents were Puerto Rican and Panamanian (the perfect genes for being a Salsero!) was a huge fan of the Fania All-Stars. The Fania All-Stars were the best recording acts in Afro-Cuban (Aka Salsa) signed with the Fania record label. One of my big regrets at West Point was missing the opportunity to see the Fania All-Stars at Madison Square Gardens. For the record, I met Celia Cruz and saw her perform in Miami and the Bronx with Johnny Pacheco and Tito Puente. I have corresponded with Willy Colon. Are you impressed yet? One of the best things was seeing my older brother Willy discover this great music. If you love horns, it does not get better than classic Salsa.

Puerto Rico has always benefited in the past by offering corporations a myriad of tax incentives. Puerto Rico has played an important part in the global tax planning of many large multinational corporations particularly pharmaceutical companies. Large corporations have effectively utilized double tax treaties for decades to minimize their global taxation. Double tax treaties have facilitated foreign taxpayers in their inbound investments within the United States. However, American individual and small business taxpayers have not had the same opportunity to utilize offshore corporations due to the tax rules dealing with controlled foreign corporations and passive foreign investment companies and foreign trusts. The U.S. government has tried to find and close any and all offshore planning opportunities.

The case of Puerto Rico is an interesting one. As a commonwealth, the Island has always teetered between statehood and independence. More recently, a combination of devastating events including the Island's bankruptcy, a hurricane and Covid 19, Puerto Rico is still standing tall and fighting for its survival. The Puerto Rican government introduced an incredible tax incentive program in 2012 to attract investment on the Island. At the same time, Puerto Ricans were moving to Orlando and Tampa, "Gringos" were moving to San Juan. Despite the setbacks (bankruptcy, hurricane, and global pandemic), the programs have shown promise. In my view, the Number 1 problem, is that the business owner or investor cannot make the sale to the spouse to move to Puerto Rico. No one would ever turn their back on significant tax incentive programs but for the dilemma, " How do I convince my spouse to move?"

Sophisticated tax planning has created a path to achieving this result. A taxpayer from Birmingham, Alabama can benefit from a Puerto Rican tax incentive program by transferring key functions within his business to Puerto Rico without relocating to Puerto Rico. The Puerto Rican exempt company is taxed at only four percent with no Federal or state taxation. Furthermore, the business owner can repatriate the profits of the Puerto Rican exempt company without taxation. No one had to learn Spanish, and no one had to learn to dance! More importantly, no one goes to jail!


Several events have kept the Puerto Rican tax incentive program from achieving its rightful place in the Sun. First, the PR Government's bankruptcy and increase in crime did not help matters. Second, a devastating hurricane physically destroyed the Island. More recently, the Covid pandemic shut the Island down. The tax incentive programs are alive and well. The latest twist is the ability to utilize these benefits without moving the wife and kids to San Juan / (nothing wrong with that!) just as Chip and Buffy are about to enter high school. Puerto Rico is the Island of Enchantment for tax purposes and every other purpose!


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