Departing a socialist regime to avoid paying taxes is not just a French thing anymore: Bloomberg reports that one of the most famous hedge fund managers of the late 2000s, if not so much recently, John "Boricua" Paulson "is exploring a move to Puerto Rico, where a new law would eliminate taxes on gains from the $9.5 billion he has invested in his own hedge funds, according to four people who have spoken to him about a possible relocation." In moving to Puerto Rico, Paulson would merely be the latest person to avoid paying any taxes associated with Paulson & Company: virtually every other investor in Paulson's hedge funds also has no taxes to worry about, for a far simpler reason: taxes are generally incurred on profits, not three years in a row of relentless losses.
All of this, of course, was to be expected when Paolo Pellegrini, or the brain behind the only truly profitable strategy the former Bear salesman's fund had, departed long ago. As for Paulson's resting on his laurels: he has so far succeeded admirably in doing so for over 5 years, much to the chagrin of what little LPs he has left. Once he hits 6 years, the Phil Falcone 6 year itch hits, and stuff gets from bad to worse. Watch out for Paulson floating impractical ideas about developing satellite companies... or not. Which is perhaps why Paulson is now actively looking to lock in what profits he may have with his fund, but far from America's 50% marginal tax rate.
Ten wealthy Americans have already taken advantage of the year-old Puerto Rican law that lets new residents pay no local or U.S. federal taxes on capital gains, according to Alberto Baco Bague, Secretary of Economic Development and Commerce of Puerto Rico. The marginal tax rate for affluent New Yorkers can exceed 50 percent.
The Puerto Rican tax law provides a boon for someone like Paulson, who earns most of his money from investments. The federal rate for top earners in the U.S. is 23.8 percent on long-term capital gains and dividends and 39.6 percent on ordinary income, which includes short-term gains and interest. State and local taxes can push the marginal rate for rich New Yorkers higher.
Paulson, 57, recently looked at real estate in the exclusive Condado neighborhood of San Juan, where an 8,379- square-foot penthouse, complete with six underground parking spaces, lists for $5 million. The area is home to St. John’s School, a private English-language academy where he and his wife could send their two children, said the people, who asked not to be named because the discussions were private.
“While we have looked at real estate investments in Puerto Rico, we have not made any investments,” Paulson & Co., which oversees $18 billion, said in a statement. The firm is one of the largest holders of Popular Inc., which owns the biggest lender in Puerto Rico, and it runs a $300 million real estate fund that has properties in Florida, Nevada, Arizona, California, Colorado and Hawaii.
Perhaps because what money was available in the petty cash drawer was being used to pay margin on those collapsing gold miner positions?
The Puerto Rico move is not to be confused with other perfectly legal tax-evasion strategies put in place by Paulson and others:
Paulson executives, too, have already taken steps that may allow them to pay lower taxes. Last year, they put about $450 million into a new Bermuda reinsurance company that in turn invested all of its assets in Paulson & Co. funds. The structure positions them to defer any taxes on investment income from the funds for years, and to pay only the lower capital gains rate when they do.
Will other rich and not so patriotic US millionaires jump on the Puerto Rico wagon? Most certainly:
Residents of Puerto Rico, an unincorporated territory of the U.S., typically pay a local tax rate of as much as 33 percent, according to Gabriel. They don’t pay U.S. taxes on income from Puerto Rico, but are taxed on dividends and interest from U.S. companies. They are not subject to capital gains taxes in the U.S. and pay a 10 percent capital gains tax locally, from which new residents are exempt.
The preferential treatment for the new residents aims to promote investments in real estate, boost services and consumption, and encourage foreign service providers to move their businesses to the country, said Puerto Rico’s Baco Bague.
In addition to the 10 wealthy individuals who have already relocated to Puerto Rico to take advantage of the new laws, 40 more are currently talking to the government about moving and have brought their families to look at housing and schools, said Baco Bague. About 35 percent are hedge-fund managers, he added.
Cue an Obama executive order making it illegal for anyone with a net worth of over $1 billion to move to Puerto Rico.