By: Ashley Docherty
February 4, 2022
A growing number of cryptocurrency enthusiasts and hedge fund investors, sometimes called “crypto colonizers,” have moved to Puerto Rico to take advantage of tax breaks designed to bring outside investors to the island. The increase in wealthy foreigners has raised real estate prices and created a growing discussion on whether this type of investment creates economic development in Puerto Rico.
Following Hurricane Maria in 2017 and the slow, insufficient response from the United States federal government to rebuild, Puerto Rico sought new ways to encourage outside investors to grow the island’s economy. Changes to the U.S. Tax Code and Act 60 passed by the Puerto Rican legislature created tax incentives that encouraged foreigners to move their businesses to the island. The U.S. Tax Code, 26 U.S. Code § 933, allows for individuals who reside 183 days a year in Puerto Rico to enjoy tax-free profits on their investments that would otherwise be subject to a capital gains tax. Additionally, Puerto Rico’s corporate tax rate is just 4% compared to the mainland federal corporate tax rate at 21%. Finally, Puerto Ricans do not qualify for many of these tax breaks; only individuals and businesses recently re-located to Puerto Rico can benefit from these tax laws.
Since then, Puerto Rico has experienced widespread political movements calling for reforms of government corruption in 2019. Activists have pointed to these laws designed to primarily benefit foreigners as examples of government corruption. Puerto Rico has long offered tax incentives for business brought by foreigners, most notably the pharmaceutical industry. Recent laws have certainly brought wealthy individuals from California, New York City, and Miami; however, whether these individuals have created economic development and new jobs for Puerto Ricans is questionable. Some see the growing tech industry, the recent metaverse summit called Metoverso, and the location of prominent crypto funds like Pantera Capital and Redwood City Ventures, in San Juan as a sign that the next tech hub in the United States could be in Puerto Rico.
However, others have pointed out that the tech industry’s boom often creates growing inequality and exorbitant real estate prices. Renowned economist from Columbia University, Joseph Stiglitz, stated that recent tax breaks add little to the Puerto Rican economy and instead indicate another example of disaster capitalism, a term coined by Naomi Klein, following Hurricane Maria. More importantly, a growing number of political leaders in Puerto Rico are taking aim at the tax breaks. Senator María de Lourdes Santiago Negrón, leader of the Independence Party, recently filed legislation to repeal Act 22.
For now, unless those at the helm of tech companies and government leaders make a greater effort to encourage sustainable development, real estate prices will likely continue to rise and most of the advantages of this innovative industry will be concentrated at the top.