March 15: Updates with a statement from Paulson & Co.
On March 15, Paulson said he won’t set up a permanent residence in Puerto Rico. “In light of media attention surrounding a relocation to Puerto Rico, he has no plans to move to Puerto Rico,” Paulson & Co., his hedge fund, said in a statement. “While Mr. Paulson has considered real estate investments and has vacationed on the island, he has no plans to establish a permanent residence there.”
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 his plans. 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. said in a statement. The firm is one of the largest shareholders of Popular (BPOP), owner of the biggest lender in Puerto Rico.
A handful of wealthy individuals in the U.S. and Europe are relocating as governments raise taxes on top earners to shrink budget deficits. Actor Gérard Depardieu left France last year for Belgium and is now a Russian citizen, and billionaire Bernard Arnault, who runs LVMH Moët Hennessy Louis Vuitton (MC:FP), applied for Belgian nationality after President François Hollande sought to introduce a 75 percent tax on millionaires.
Under the year-old Puerto Rican law, new residents pay no local or U.S. federal taxes on capital gains, according to Alberto Bacó Bagué, Puerto Rico’s secretary of economic development and commerce. The law could prove a boon to 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.
The preferential treatment for the new residents aims to promote investments in real estate, boost services and consumption, and attract foreign businesses to the island, Bacó Bagué says. Ten wealthy individuals have already relocated to Puerto Rico to take advantage of the new laws, he says, and 40 more are currently talking to the government about moving and have brought their families to look at housing and schools. About a third of them are hedge fund managers, he adds.
To become eligible for the tax break, 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,” says Fernando Goyco-Covas, a tax lawyer at Adsuar Muñiz Goyco Seda & Pérez-Ochoa. “You cannot do this just claiming you are a resident.”
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 March 11, according to the Bloomberg Billionaires Index. The manager has lost his touch the past two years, 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 in 2011.
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 past 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, including Paulson’s, the hedge fund manager 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 chosen 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.”