“Mr SubPrime” John Paulson contemplates move to Puerto Rico to escape US taxes

If you’re a billionaire currently living in New York City then, as strange as it may seem, it just might be time to decamp your investment firm to Puerto Rico. Well, that’s what none other than John Paulson is reportedly considering in order to escape punitive taxes in the US with the forthcoming change in status Of capital gains derived remuneration. Ten billionaires have supposedly already relocated to Puerto Rico and another forty are in negotiations with the Government there.

With embattled Governments in both Europe and the US trying all kinds of tricks to finance their elephantine debts, the wealthier are now decisively looking for somewhat more friendly tax climates to call home. The concept of “we are all in this together” seems to have passed these guys by…

In the US, the highest rate for the US federal individual tax rate is 23.8% on long-term capital gains and dividends and 39.6% on ordinary income. State and local taxes can push the marginal rate higher as is the case in New York, where the marginal rate can exceed 50% for top earners. In Puerto Rico, tax law is much softer and with the approval a year ago of a new law, new residents even benefit from tax exemptions, allowing them to pay no local or federal taxes on capital gains until 2035.

John Paulson

With such an investor friendly backdrop, the small Caribbean island of Puerto Rico is attempting to compete with traditional tax havens like the Cayman Islands, Monaco, BVI etc and attract some of the wealthiest American citizens in particular to its shores. Precisely the sort of man as John Paulson.

The king of subprime, who made a personal fortune of over $7bn shorting mortgage backed securities ahead of the crisis of 2008/09, has been reported to be looking at real estate in the Condado neighborhood of San Juan. Paulson and his company have so far denied the move but according to some sources close to the Puerto Rican government, it seems the news – first quoted on Bloomberg is true.

It is interesting we think to reproduce here some of Paulson & Co.’s comments at the time of the Occupy Wall Street protests:

“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.”

We at SBM believe the Paulson story is somewhat intriguing as to be exempt from capital gains tax you must of course be liable to CGT and over recent years, JP has actually been incurring losses – suffering 3 horrible years of returns – all the more painful that he has $9.5 billion of his own stake in his own funds. His Advantage Plus fund has dropped an astonishing 64% since the end of 2010 and his $900 million call on gold and the gold mining sector is down 26% so far this year. Assets overseen by Paulson have now dropped from a peak of $38 billion in 2011 to $18 billion. Perhaps Paulson is anticipating a monster rally that will take him back to the heady heights and he can walk off into the sunset with a second mammon haul..?!

Paulson’s gold fund is the biggest holder of the SPDR Gold Trust and has also stakes in gold miners such as Anglogold, Barrick Gold, Novagold and Agnico-Eagle Mines. All of these miners have recorded ugly performances since the beginning of 2013. It would be have been much better for him to be a reader of SBM and to buy our top picks of Bumi, ENRC, or Lonmin!