With President Biden and the Democrats on the warpath to separate the richest Americans from their income, hedge funds managers are starting to expand into Puerto Rico - leaving open the possibility of relocating to the island to obtain huge tax breaks, according to Bloomberg.
Both ExodusPoint Capital Management and Millennium Management have opened local subsidiaries on the island, according to local records. ExodusPoint, headed by Michael Gelband, created a money-management in Puerto Rico on behalf of co-founder Hyung Soon Yee, who moved there last year.
Millennium, run by Izzy Englander, set up shop on the island just weeks after Biden won the 2020 US election.
And with Biden's proposed tax increases on the wealthy and corporations looming, those who venture to Puerto Rico may be able to avoid both state and federal taxes according to the report.
The lure for would-be tax-savers is a pair of laws Puerto Rico enacted in 2012 to attract wealthy mainlanders: the Export Services Act and the Individual Investors Act. The latter is of particular interest to hedge fund managers because it exempts capital-gains taxes, including those levied on the performance fees that comprise the bulk of their compensation. In New York, such income currently would be subject to aggregate federal, state and local taxes approaching 50%.
Puerto Rico received almost 3,500 applications for the tax incentives during fiscal 2019 and 2020, exceeding the combined total for the previous seven years, according to the commonwealth’s Department of Economic Development and Commerce. -Bloomberg
In the first six months leading up to March, over 1,000 applications for tax incentives were filed according to an agency spokeswoman. Applications for the tax breaks, which are generally available to new residents and services businesses which generate revenue outside Puerto Rico, are typically kept confidential until approval. The government office which vets them reports a seven-month backlog, which has been exacerbated by the pandemic and surging demand thanks to Biden's tax plans.
"You have a lot of people looking to relocate because they no longer have to be in close proximity to where they work," said Euro Pacific Capital head Peter Schiff, who moved his firm's asset management arm to San Juan in 2013. "The higher taxes are, the greater the appeal of coming here," he added.
Menlo Park-based Pantera Advisors, headed by Dan Morehead, established a money-management unit last month in the Puerto Rican town of Guaynabo, according to a filing.
According to SEC records, ExodusPoint and Millennium were the only large money managers with Puerto Rico affiliates as of the end of March. At present, neither firms' subsidiaries have been granted incentives under the Export Services Act, according to the government spokeswoman.
Real estate prices going ham
Around 20 miles west of the capital of San Juan lies Dorado, an area considered family-friendly which boasts high-end housing and the infrastructure required by finance professionals to access necessary computer networks on the mainland.
"There has been exceptional interest, in part because Dorado has access to fiber broadband," said Jared Dubin - who recently set up Troluce Capital Advisers to manage money for ExodusPoint. "The Dorado real estate market has been pretty wild," he added.
And of course, the flood of new money managers snapping up high-end real estate is squeezing prices even higher in the region.
Millennium incorporated a San Juan-based company, MPG PRManagement, on Nov. 23, according to records maintained by Puerto Rico’s Department of State. The subsidiary had four money managers working there at year-end, SEC records show. In June, ExodusPoint incorporated its subsidiary in Dorado, where Lee, 52, now lives. He owns 50% of that entity, ExodusPoint Capital Management Puerto Rico, and shares ownership of the rest with Gelband through another affiliate, according to a regulatory filing.
Lee, whose Facebook page shows him seated at the controls of a private plane, has a commercial pilot rating and is certified to fly small jets, Federal Aviation Administration records show. In September, ExodusPoint revised its SEC filings to say that Lee’s business trips on a plane he had recently purchased would be partially covered by the firm’s expense policy. It allows Lee and Gelband to seek reimbursement from ExodusPoint hedge funds for private flights, with repayment limited to the equivalent cost of first-class commercial airfare.
"If people are interested in drastic life changes in order to pay less tax, then I have one item on my list," according to Stewart Patton - a Belize-based attorney who helps US expats optimize their tax situations.
"Move to Puerto Rico..."