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Bloomberg Page 1 of 4 Paulson Said to Explore Puerto Rico as Home With Low Tax - Bloomberg Page 1 of 4 Paulson Said to Explore Puerto Rico as Home With Low Tax By Katherine Burton, Stephanie Ruhle and Zachary R. Mider - Mar 11, 2013 John Paulson, a lifelong New Yorker, 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. 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 on ordinary income. 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. Paulson’s firm declined to comment on his personal plans. “While we have looked at real estate investments in Puerto Rico, we have not made any investments, ” Paulson & Co. 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 . Unusual Choice John Paulson hasn’t decided whether to move and may opt to stay in New York, the people said. His firm would remain in New York. Wealthy individuals in the U.S. and Europe are relocating as governments raise taxes on top earners to shrink budget deficits that have become unsustainable after the 2007-2009 financial crisis. Actor Gerard Depardieu left France last year for Belgium and billionaire Bernard Arnault , who runs LVMH http://www.bloomberg.com/news/print/2013-03-11/paulson-said-to-explore-puerto-rico-as... 3/13/2013 Paulson Said to Explore Puerto Rico as Home With Low Tax - Bloomberg Page 2 of 4 Moet Hennessy Louis Vuitton SA (MC) , applied for Belgian nationality, after President Francois Hollande sought to introduce a 75 percent tax on millionaires. BlueCrest Capital Management Ltd. and Brevan Howard Asset Management LLP opened or expanded offices in Switzerland in the past three years after Britain raised taxes on the wealthy. 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. Occupy Visit Moving to a Caribbean island four hours by plane from New York City would be an unusual choice for Paulson. He grew up in Queens and graduated from New York University. He’s worked in Manhattan for the last three decades and last year donated $100 million to help conserve Central Park, steps from his six-story townhouse. In October 2011, when Occupy Wall Street protesters marched by the homes of Manhattan’s billionaires, Paulson chided them by pointing out his loyalty to the city. “The top 1 percent of New Yorkers pay over 40 percent of all income taxes, providing huge benefits to everyone in our city and state,” his firm said in a statement at the time, adding that the hedge fund had opted to stay in New York rather than flee to a low-tax state. “Instead of vilifying our most successful businesses, we should be supporting them and encouraging them to remain in New York City and continue to grow.” Losing Touch Paulson rose to fame in 2007 with a successful bet that subprime mortgages would tumble. The wager produced $15 billion in profits for his hedge fund and turned him into one of the 100 richest people in the world, with an estimated wealth of $11.2 billion as of last week, according to the Bloomberg Billionaires Index . The manager lost his touch in the past two years, posting losses in several strategies in 2011 and 2012, as bets on an economic recovery in the U.S. and a breakup of the euro proved wrong or poorly timed. Since the end of 2010, he has lost 64 percent in his Advantage Plus fund, once the firm’s largest. This year, his $900 million Gold Fund has dropped 26 percent amid a slump in the metal, after more than a decade of gains. Assets overseen by the firm have declined to $18 billion from a peak of $38 billion http://www.bloomberg.com/news/print/2013-03-11/paulson-said-to-explore-puerto-rico-as... 3/13/2013 Paulson Said to Explore Puerto Rico as Home With Low Tax - Bloomberg Page 3 of 4 in 2011. Promoting Investments 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. Under the Puerto Rican law, any capital gains accrued after a person moves there would be tax free. Dividend and interest income paid by U.S. companies would still be subject to U.S. federal taxes, though would not be taxed locally. In addition, new residents can benefit from another new law that taxes business income earned in Puerto Rico at 4 percent. That law could potentially apply to hedge fund fees earned by a resident for services rendered for U.S.-based clients, said Gabriel Hernandez, one of the framers of the Puerto Rican tax law and head of the tax division of BDO Puerto Rico PSC. Hernandez now gets a call every day from wealthy individuals involved in Internet, software or financial companies who are interested in moving to the island, he said. He declined to name any of the business people who have relocated or who are currently contemplating such a move. Preferential Treatment 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. Government Contract http://www.bloomberg.com/news/print/2013-03-11/paulson-said-to-explore-puerto-rico-as... 3/13/2013 Paulson Said to Explore Puerto Rico as Home With Low Tax - Bloomberg Page 4 of 4 One hedge-fund manager, Pascal Forest, has taken the additional step of setting up his firm, Forest Investments LLC, in San Juan. Forest, a former portfolio manager at London-based BlueGold Capital Management LLP, said the tax incentives played into his decision to move to the island, as did his wife, who is Puerto Rican and wanted to come home after 16 years. In order to become eligible for the new tax breaks, a person must live on the island for at least 183 days a year and prove that a preponderance of his social and family connections are there. Any person who moves to the island signs a contract with the government that guarantees the tax break through Dec. 31, 2035. “You have to actually become a bona fide resident of Puerto Rico, bring your children,” said Fernando Goyco-Covas, a tax lawyer at Adsuar Muniz Goyco Seda & Perez-Ochoa PSC. “You cannot do this just claiming you are a resident.” To contact the reporters on this story: Katherine Burton in New York at [email protected] ; Stephanie Ruhle in New York at [email protected] ; Zachary R. Mider in New York at [email protected] To contact the editor responsible for this story: Christian Baumgaertel at [email protected] ®2013 BLOOMBERG L.P. ALL RIGHTS RESERVED. http://www.bloomberg.com/news/print/2013-03-11/paulson-said-to-explore-puerto-rico-as... 3/13/2013.
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