In a recent development, the United States Internal Revenue Service (IRS) and federal prosecutors are reportedly conducting investigations into wealthy crypto traders and fund managers suspected of exploiting Puerto Rico’s tax breaks. Bloomberg reported that civil and criminal cases are being built against hedge fund managers, crypto traders, and other affluent Americans who may have misrepresented their residency and income to take unfair advantage of the tax benefits.
The probe extends beyond individual traders and managers; attorneys and accountants responsible for promoting Puerto Rico’s tax program are also under scrutiny. At least two criminal investigations are expected to result in charges, including conspiracy and wire fraud. The investigations highlight concerns about the misuse of Act 22, which was intended to drive investment and benefit Puerto Rico but has allegedly exacerbated inequality and transformed the island territory into a tax haven.
Under Puerto Rico’s tax policy implemented in 2012, over 5,000 American individuals relocated to the country to benefit from significant tax exemptions. These include a 100% exemption on dividends, a 60% exemption on municipal taxes, and no federal taxes on income earned within the region. Furthermore, more than 3,600 businesses have been able to avoid dividend taxation and are subjected only to a 4% tax on exports.
Although these tax benefits are generous, the eligibility requirements are stringent. Individuals must prove residency on the island for at least 183 days per year and establish it as their “tax home.” Lawyers familiar with the regime suggest that these strict rules tempt some individuals to manipulate numbers and engage in fraudulent practices while filing their tax returns.
Prominent figures such as Peter Schiff and Michael Terpin have relocated to Puerto Rico for tax reasons. While praising Puerto Rico as a tax haven, Terpin expressed confidence in his compliance with the rigorous tax policy, stating that he keeps meticulous records and seeks advice from tax lawyers and accountants.
While some celebrate the tax breaks for attracting high-profile fund managers and entrepreneurs to Puerto Rico, critics argue that these policies have led to protests, labeling the new affluent residents as low-tax “colonizers” who have driven up the cost of living.
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