Bloomberg — The St. Regis Bahia Beach Resort in Puerto Rico boasts a golf course and oceanfront residences in a 483-acre nature reserve, set along azure waters and lush rainforest. But what’s perhaps most appealing to those who are now rushing to this property is the section on its website explaining tax benefits for island residents.
That was the case for Anthony Emtman, who left Los Angeles behind and bought a condo at the resort in March. The chief executive officer of Ikigai Asset Management is now a part of a burgeoning crypto community along Puerto Rico’s north shore, where the tropical weather is just a bonus.
Emtman and his crypto peers are taking a page out of hedge funds’ books and seeking residence on the island to reap huge tax savings. High-earning investors in the U.S. pay up to 20% in capital gains tax and as much as 37% on short-term gains. In Puerto Rico, they pay nothing. And companies based on the American mainland pay 21% in federal corporate tax plus an individual state tax, compared to just 4% on the island. That makes the move a no-brainer for some investors, especially as the crypto market’s meteoric growth continues and Democrats push for higher taxes on the rich.
The presence of digital currency enthusiasts is already palpable on the small island, where chance encounters and networking opportunities abound: Run-ins at taco stands; spontaneous drinks and dinner at luxury condos; “Crypto Mondays” gatherings at hotels and restaurants across San Juan.
Crypto funds Pantera Capital and Redwood City Ventures are among those that have established offices on the island. Facebook product manager-turned-whistleblower Frances Haugen recently told the New York Times she’s living in Puerto Rico in part to be with her “crypto friends.” New York City’s mayor-elect, Eric Adams, even flew there in November with crypto-billionaire Brock Pierce for dinner with Puerto Rico’s Governor Pedro Pierluisi.
Now, “it’s not just, ‘Move to Puerto Rico to save tax,’” said Giovanni Mendez, a corporate and tax attorney advising those who relocate. “It’s, ‘Move to Puerto Rico because everybody is there.’”
The Puerto Rican government created the tax breaks in 2012 with the hopes of infusing the island’s struggling economy with cash and diversifying its job pool. Hedge funds gradually began seeking a toehold on the island, but what’s really supercharged the flurry of arrivals is the pandemic — which drove a shift away from big cities and popularized remote work — and the recent explosion in crypto markets.
Proponents of the tax breaks describe it as not only a boost for an island that’s been mired in bankruptcy for more than four years — prolonged by hurricanes, earthquakes, a political scandal and the pandemic — but an opportunity for reinvention. Still, the idea has its detractors: Some of the laws only apply to new residents, so lifelong islanders are ineligible. It’s made some hesitant to welcome the new crop of wealthy denizens, fearful that the flow of income will exacerbate inequality and create social tension. As is, real estate prices are already rocketing to “absurd” levels.
During the last big crypto bull run in 2017, many investors tried to move to Puerto Rico before the market peaked and then collapsed, said Mendez. So far this year, Puerto Rico has received more than 1,200 applications — a record — through its Individual Investors Act, which exempts new residents from paying taxes on capital gains, according to the island’s Department of Economic Development and Commerce. The number of U.S. mainlanders seeking Puerto Rico’s tax breaks has tripled this year.
Another 274 corporations, LLCs, partnerships and other entities were approved for the Exports Services Act, which provides a 4% corporate tax rate and a 100% exemption on dividends. Both fall under Puerto Rico’s Act 60, a group of tax breaks that were packaged together in 2019 to attract investment not just from crypto, but finance, tech and other industries.
The island even kicked off its first Puerto Rico Blockchain Week on Dec. 6. On the first day of the conference, Puerto Rico House Speaker Rafael “Tatito” Hernandez announced that the legislature would look into using blockchain technology to reduce government graft.
Eventually, “Puerto Rico will be recognized as a blockchain capital,” said Michael Terpin, the founder of BitAngels, who relocated to the island from Las Vegas in 2016. He says he’s referred to as the “messiah” in crypto circles for evangelizing the island’s tax benefits and new business community.
The crypto crowd has primarily gravitated to three areas along the coast.
There are the secluded escapes, like Bahia, which sits 26 miles east of San Juan, and the Ritz-Carlton-branded Dorado Beach resort, about 23 miles to the west of the capital. Those seeking a more urban lifestyle have opted for Condado, a high-end neighborhood and shopping district in San Juan, where condo and hotel towers line the oceanfront.
“There’s restaurants and there’s coffee shops and there’s a mall,” said Brent Johnson, the CEO of wealth management firm Santiago Capital, who moved from San Francisco to Condado in May. “It’s kind of like a mini Miami.”
During his time in Puerto Rico, Johnson has been able to connect with wealth management, private equity and crypto firms, as well as people in the real estate, pharmaceutical, energy and agricultural sectors.
“I felt like I could come here, do my job, and still be plugged into the financial community, much more so than going to somewhere like Hawaii or Mexico,” he said.
As for life in Bahia, “it’s like living in a rainforest,” said Ikigai’s Emtman. Except in this rainforest you can play tennis, basketball, golf, lift weights in the gym or go kayaking. When the sun goes down, the sports are swapped out for drinks.
“The welcoming nature and the friendliness and the inclusiveness of people means you end up over at someone’s place for a meal or a couple drinks,” he said.
That was the case for Brent James, a crypto investor who moved to Puerto Rico in 2018 from Atlanta.
About two months ago, he was eating tacos with a friend in Condado when he spotted Johnson biking. James recognized Johnson from his popular Twitter account.
“I shout out his name and he comes over and we started a conversation and became friends,” James said. Johnson invited him to a small gathering, which led to conversations about new projects and business opportunities.
“There’s a hunger for knowledge and opportunity on the island,” James said.
The influx of newcomers is causing waves in the real estate market, particularly in the resort communities.
Dorado has seen the most growth, with prices almost tripling, according to Priscilla Ferrer, a Puerto Rican broker and appraiser.
“It’s absurd,” she said. “These luxury properties are getting bought for an emotional rate and not an economic rate.”
Francisco Diaz Fournier, founding partner of Luxury Collection Real Estate, said it’s now common to see properties sell for more than $20 million.
“Right now we are selling a home in Dorado Beach for $27 million, and another one is going for $29 million,” he said.
In Bahia, prices per square foot have almost doubled, according to Blanca Lopez, founder of Gramercy Real Estate Group and daughter-in-law of Governor Pierluisi.
“We are seeing prices north of $3,000 per square foot,” she said, while high-end home values in Condado are around $1,400 to $1,500 per square foot, a roughly 35% increase from a year ago.
And there isn’t enough inventory to satiate demand, as buyers are flocking to the island faster than high-end homes can be built.
“We don’t have room, at least not in Dorado, Bahia or Condado,” said Diaz Fournier. “The market is spreading out, so we’re seeing spillovers in areas of San Juan where people wouldn’t look before.”
As wealthier people gain ground elsewhere, it hurts housing and job prospects for islanders, said Raul Santiago-Bartolomei, an assistant professor at the University of Puerto Rico’s graduate school of planning.
“It’s making these places more unattainable for a workforce and low-income households that actually need to be living near these high opportunity areas,” he said.
There are several new residential towers rising in Condado, but that won’t be enough to keep pace. Diaz Fournier said there’s even a labor shortage, so Puerto Rico is working with the U.S. Department of State to secure visas to bring “people from the Dominican Republic, Mexico, Haiti and South America because we don’t have the people to build.”
For him, the newcomers are welcome, after more than 500,000 residents left the island over the last two decades.
“This is really exciting,” he said. “These are the best years of Puerto Rico.”
‘One Puerto Rico’
So far, the incentives appear to be creating jobs.
From 2015 to 2019, the Individual Investors Act added around 4,400 jobs and the Export Services Act added 36,222, according to a study by Puerto Rican consulting firm Estudios Tecnicos. Call centers accounted for most of the jobs, followed by consulting services, advertising, public relations and tax and accounting services.
As long as the jobs are coming, the “doors are open” for the crypto community, said Carlos Fontan, director of incentives at the Department of Economic Development and Commerce.
The tax breaks are doing what they were intended to, said Alberto Baco-Bague, the department’s former secretary and a driving force behind Act 60.
In 2017, he created the Partnership for Modern Puerto Rico, an economic development think tank that connects local business leaders with incoming Act 60 members. John Paulson’s investment management firm, advisory services firm Grant Thornton and tech company Evertec are among its 100 members, whose total assets under management surpass $50 billion, according to Baco-Bague.
“Ideally we want to be building one Puerto Rico,” he said. “Not one Puerto Rico for new residents and another one for local business leaders.”
Still, one of the biggest challenges is convincing the local population of the program’s economic benefits. The Individual Investors Act, also known as Act 22, only applies to non-Puerto Ricans, meaning islanders are ineligible. And even though the Export Services Act is available to locals, many assume otherwise because the tax break is often marketed alongside programs for foreigners.
“There is certainly a cry for a more just taxation system in Puerto Rico,” said Caroline Lopez, a tax attorney who has been working with incentives since 2011. “Puerto Ricans are always wondering, ‘does it make sense that I’m paying all these taxes and a lot of people under Act 22 don’t?’”
During a visit to San Juan this month, Nobel-prize winning economist Joseph Stiglitz said the tax breaks were not an effective economic development tool.
“The people coming under Act 22 are not adding that much to the Puerto Rican economy,” he told a conference hosted by the Center for a New Economy. “They are spending a little, but very little, and at the same time they’re raising real estate prices and the cost of living for others. They are, what we economists call, a negative externality.”
Puerto Rico isn’t the first to try and attract crypto investment, and it certainly won’t be the last. The economy of El Zonte, a surf town on El Salvador’s Pacific coast surf town, runs on Bitcoin. El Salvador’s President Nayib Bukele was a proponent of crypto long before taking office in 2019. This year, the country adopted Bitcoin as its national currency, and announced plans for the first-ever sovereign Bitcoin bonds and a tax-free Bitcoin City. Portugal, too, isn’t taxing the buying or selling of cryptocurrencies, unless it’s an individual’s main source of income.
Juan Carlos Pedreira, a Puerto Rican crypto entrepreneur, says the growing interest, particularly among young islanders, provides a unique opportunity.
If it’s not taken seriously, “we are going to miss the chance to reinvent the island.”