Imagine this, Bill Crypto has a passion for digital currency, lives in Los Angeles, California and has been investing in cryptocurrency since Bitcoin was in its infancy. He’s struck it rich in crypto and has even opened his own crypto-related business that is making him richer than he could ever imagine. The downside of all this success are the astronomical taxes he is paying to the state and federal government. But Bill Crypto has found what he is calling a “tax haven” in Puerto Rico. By becoming a bona fide resident of Puerto Rico and establishing his business there, Bill Crypto could save hundreds of thousands of dollars in taxes with Puerto Rico’s Act 60 tax law. He won’t have to pay taxes on passive income and will only have to pay 4% in corporate taxes while retaining his U.S. citizenship. It is the perfect solution.

Bill Crypto sells his house, packs his bags and moves to Puerto Rico. As soon as Bill Crypto steps off the plane in San Juan he rents a car and heads strait to the bar where he celebrates this new chapter in his life. As the sun is setting, Bill Crypto stumbles out of the bar, hops into his rental car and begins to drive to his new apartment when he makes a fast turn and strikes a pedestrian. The pedestrian survives but is seriously injured and Bill Crypto is in for a rude awakening. The injured pedestrian has seen crypto-rich guys like Bill Crypto before and sues him receiving a $100M verdict. Bill Crypto is rich but not that rich. His crypto is worth $30M and he’s about to lose it all and then some.

What should Bill Crypto have done differently? One, not driven drunk. But two, he should have protected his cryptocurrency and his other assets in a Cook Islands Trust. If Bill Crypto had invested in an asset protection strategy and fully utilized a Cook Islands Trust, his $30M in cryptocurrency and other assets could have been secure and the judgment resulting from the lawsuit would not have been recognized in the Cook Islands jurisdiction.

Bill Crypto is a bit of an extreme case but unfortunate events happen every day and protecting your digital assets is an important step to take in securing your cryptocurrency investments.

As blockchain businesses and crypto entrepreneurs and investors, like Bill Crypto, are migrating to the tax haven of Puerto Rico to reap the benefits of minimal corporate taxes and zero crypto taxes, there are specific criteria that need to be met before claiming to be a bona fide resident of Puerto Rica. Once those specific criteria are fulfilled the tax savings could be in the millions of dollars. However, should something unfortunate happen like a lawsuit or bankruptcy, those tax savings (and other assets) will be available for the taking from court orders and creditors. To mitigate from such risk, asset protection is a must and establishing a Cook Islands Trust is the best way to do just that.

Understanding the Relationship Between Puerto Rico and Cryptocurrency

Puerto Rico is an unincorporated territory of the United States. It functions as its own polity, which means Puerto Rico has more independence than U.S. states as it can establish its own local laws, specifically tax laws. The reason Puerto Rico has become such an appealing place for crypto investors to flock to is exactly that—tax laws.

In 2012 Puerto Rico passed two tax laws, Act 20 and Act 22 (now collectively referred to as Act 60), to entice entrepreneurs and big business to gain residency and establish businesses in Puerto Rico as a way to stimulate Puerto Rico’s economic growth through export service businesses, job creation, investment, and blockchain and crypto innovation. Act 20 (Export Services Act) offers a 4% corporate tax rate and tax exemption from all dividends for export service companies that establish offices in Puerto Rico. Act 22 (Individual Investors Act) offers total exemption from Puerto Rico income tax on all passive income (e.g., capital gain, dividends, interest) after an individual establishes residency in Puerto Rico. This means, for example, there are no capital gains taxes paid on cryptocurrency accrued while being a bona fide resident in Puerto Rico unlike in the United States where cryptocurrency is viewed as property and capital gains are taxed accordingly.

While Act 22 sounds like the cryptocurrency millionaire’s dream—minimal taxes while maintaining U.S. citizenship—there are stipulations on claiming residency in Puerto Rico in order to take advantage of the Act 22 tax break. To prove you are a bona fide resident of Puerto Rico and enjoy the benefits of Act 22, an individual must meet certain criteria, 1) a presence test, 2) a tax home test and 3) a closer connection test. These criteria are comprised of specific requirements, however, not every requirement is necessary. Below include but are not limited to examples of some of these more attainable requirements. Visit here for more details.

Presence Test

  • Must move to and be present in Puerto Rico for 183 days of the tax year. Or must be present at least 549 days in Puerto Rico during the three-year period that includes the current tax year and previous two tax years. During each year of the three-year period, you must be present in Puerto Rico for at least 60 days in each year
  • Must not be a resident of Puerto Rico in the last 10 years

Tax Home Test

  • Must maintain your tax home, otherwise known as your primary place of employment or primary place of residency, in Puerto Rico throughout the tax year

Closer Connection Test

  • Must not have a closer connection to the U.S. or a foreign country than to Puerto Rico
  • Must have a permanent home in Puerto Rico
  • Must have belongings (e.g., cars, furniture, clothing, jewelry) owned by you and your family in Puerto Rico
  • Must conduct banking, business activities, religious activities, etc. in Puerto Rico

Visit IRS – Publication 570 and Bona Fide Resident of Puerto Rico – Closer Connection Test for more details.

How A Cook Islands Trust Can Protect Bona Fide Residents of Puerto Rico

As a bona fide resident of Puerto Rico, you will see your wealth grow via the tax advantages in Puerto Rico. However, as a resident, you will continue to maintain your U.S. citizenship and therefore become vulnerable to multiple risks like U.S. lawsuits, creditors, seizures, forfeitures, etc. The best way to protect against such risk is to establish a Cook Islands Trust.

What is a Cook Islands Trust?

A Cook Islands Trust is an offshore asset protection trust. We’ll breakdown exactly what that means.

The Cook Islands is a small country comprised of a collection of islands located in the South Pacific with a legal system based on English common law that have legal institutions of a first world nation. The Cook Islands became the global leader in financial services and asset protection trusts under the Cook Islands International Trust Act of 1984. The Cook Islands International Trust Act represented the first asset protection statute in the world. Why is this so important? Because of the Cook Islands’ asset protection statutes and legal system structure, the Cook Islands is among the most formidable, offshore asset protection jurisdictions. By placing your assets (e.g., crypto investments, investment portfolios, life insurance policies, intellectual property, company stock and shares, cash in non-U.S. bank accounts and real estate) in a Cook Islands Trust, your assets receive a very strong level of protection from foreign court orders, banks, seizures, forfeitures, and creditor claims.

The Benefits of a Cook Islands Trust

The Cook Islands’ judicial system and the structure of a Cook Islands Trust presents multiple benefits to the grantor of the trust. Some of those benefits include,

  • The Cook Islands’ legal system is in no way bound to the United States and should there be a foreign judgment from the U.S., the Cook Islands will not recognize the judgment. In the instance of a lawsuit, the plaintiff would have to litigate or re-litigate the issue at a court of law in the Cook Islands, which can be a very expensive and lengthy process.
  • Should a plaintiff file a lawsuit in the Cook Islands to seize the assets in your trust the legal burden lies on the plaintiff to prove beyond a reasonable doubt that assets were placed in a Cook Islands Trust with the intent to defraud.
  • There is a two-year statute of limitations in the Cook Islands on all creditors that bring an action against you or the trust.
  • A Cook Islands Trust can protect assets—tangible and digital—that are not located within the islands, and you can transact with them electronically without having to travel to the Cook Islands.
  • The Cook Islands do not charge taxes on assets in a trust.
  • A Cook Islands Trust structure is flexible and thus allows many investment opportunities.
  • Deeds under a Cook Islands Trust do not have be publicly registered.

Asset Protection and Tax Planning as a Bona Fide Resident of Puerto Rico

With this understanding of what it takes to prove residency in Puerto Rico, the crypto tax savings benefits as well as how to protect your assets with a Cook Islands Trust, if you are planning to or in the process of becoming a resident of Puerto Rico then now is the time to protect your crypto and optimize your tax savings. Contact Blake Harris Law to establish an asset protection plan as a bona fide resident of Puerto Rico.

Contact

If you’re interested in more information about asset protection and a Cook Islands Trust, contact Blake Harris Law by using our contact form or via email at Info@BlakeHarrisLaw.com.

About the Authors

Blake Harris, Esq., Attorney, Managing Attorney

Blake Harris is the managing attorney at Blake Harris Law, where he assists clients with wills and trusts, asset protection, and probate. Blake’s extensive experience helping families plan for and manage the transfer of their assets has made him well regarded as an authority in handling the difficult and sensitive issues surrounding estate planning, asset protection, and probate.

Further Reading

For more information about cryptocurrency, taxes, asset protection and residency in Puerto Rico, access our resources below.