How to Get Puerto Rico Residency.
To qualify for Puerto Rico’s alluring tax breaks, one must have residence status on the island. This is the procedure to follow.
Act 60 of Puerto Rico has gotten a lot of people in the financial industry interested, and there’s a solid reason for it.
The island’s tax regulations, which are rather permissive, were designed specifically to entice investors and businesspeople from other countries.
You will first need to establish bona fide residence in Puerto Rico in order to be eligible for the advantages offered by the country, such as a corporation tax rate of just ten percent and the absence of taxes on capital gains.
To get resident status in the island of Puerto Rico, Americans do not have to give up their citizenship in their home country because Puerto Rico is a territory of the United States. Moving to Puerto Rico is not treated as immigration by the United States government; rather, it is regarded an internal movement.
To this day, being a lawful resident of Puerto Rico is subject to a number of prerequisites as well as laws. In this tutorial for investors, we will begin by providing a concise explanation of Act 60, and then proceed to examine the actions required to gain residence in Puerto Rico.
What exactly is Act 60 all about?
Since we have already offered a comprehensive analysis of Post 60 as well as other tax advantages in Puerto Rico in a prior article, we will simply touch briefly on the issue here.
In 2019, Puerto Rico revised and combined two older tax laws, known as Act 20 and Act 22, into a single legislation known as Act 60.
The purpose of “building a better and more effective business and investment climate” in Puerto Rico is made clear in the text of the Act, which has the explicit purpose of luring investors from other countries.
Aside from the fact that the island has a reputation for being a tax haven, the most recent economic advantages have made doing business in Puerto Rico more alluring than it has ever been.
The following are some of the tax incentives that are available to eligible resident businesses:
- A 4% corporation tax rate
- Gains on investments, interests, dividends and royalties are exempt from taxation.
- There is no tax on dividends and other distributions made from earnings and profits.
- Real and personal property taxes are exempted in the amount of 75%
- 50% exemption on municipal taxes
Requirements for Puerto Rican residence
To make use of any of these privileges, however, you will first need to show that you are a legal resident of Puerto Rico. Once you have satisfied the prerequisites, you will be required to send in Form 8898 to the Internal Revenue Service in order to change your resident status. The organization offers comprehensive directions for filling out this form, which gives an in-depth rundown of the prerequisites that will be covered in the next section.
The Internal Revenue Service outlines the three primary requirements for establishing Puerto Rican residency in Publication 570. First, an individual must be “present” on the island for a predetermined amount of time; second, they must have their “tax home” on the island;
and third, they must have “closer connections” to Puerto Rico than they do to any other location. Let’s have a look at what each of these needs implies in more detail.
The first criterion is the most important, and it will most likely be the most difficult to fulfill. The “Presence” test, as you may have guessed, determines whether or not you have spent the majority of your time on the island rather than in the contiguous United States (or elsewhere in the world).
In order to succeed on the presence exam, you must fulfill one of the following requirements, but not more than one.
You spent 183 days out of the tax year physically present in Puerto Rico.
You stayed in Puerto Rico for a total of at least 549 days during the current tax year as well as each of the two tax years before to this one, with at least 60 days each tax year.
During the whole tax year, you were only present on the mainland of the United States for a maximum of ninety days.
In the continental United States, you did not earn more than $3,000, and you spent more time in Puerto Rico than in the United States over the whole tax year.
During the whole tax year, you do not have any substantial contacts to the United States.
It is important to keep in mind that in accordance with these standards, even a short period of time (as little as a few hours) might be considered a “day” of presence on the island. In addition, at least 30 of those 183 days may be utilized as “free travel days.”
This means that you do not need to be physically present in Puerto Rico on those days; rather, you must refrain from being in any other location in the United States.
Tax Documents: Proof of Residency in Puerto Rico
The second criterion is not difficult to meet: for the whole tax year, you must keep what is known as a “tax home,” which refers to the tax jurisdiction in which the majority of your income is taxed. Your place of permanent residence will be considered your main place of work if you do not have a primary place of employment.
Your tax home cannot be situated anywhere else in the world during any other days of that tax year than Puerto Rico.
If you haven’t maintained a tax residence outside of Puerto Rico for the 183 days or more that have passed since the end of the previous tax year, you are exempt from this requirement for the first year after moving to the island.
To put it another way, if you transfer your tax home to the new location before July 1 of the same year that you move, you will be able to get resident status in the new state during the same year.
The last stipulation, which states that you must have a “closer connection” to Puerto Rico than you have to any other location, presents a challenge for an entirely different reason.
It’s possible that you’ve already realized how language is subjective. What precisely does it mean to have a “closer relationship” to this U.S. territory in its literal sense?
The Internal Revenue Service will seek for persuasive evidence that demonstrates your intention to create and continue living a life that is largely based in Puerto Rico. This data encompasses a wide variety of other elements as well.
The following are some of the things they could look into:
- Where in the county you’re registered to vote
- Where you reside, where your spouse works, where your children go to school, and so forth.
- Where the majority of your operations are located
- The state or country that issued your driver’s license.
- Where your possessions and your permanent home are found.
- Where exactly your bank is situated.
where the organizations are that you engage in or give to are situated (i.e., places of worship, clubs, charities, etc.)
To put it another way, the Internal Revenue Service wants to see evidence that you have completely uprooted your life in the United States and that you have every intention of living in Puerto Rico in the near future. It is unlikely that you will be able to pass the closer connection test unless you really relocate your whole way of life to the island, along with the lives of your spouse and children, if applicable.
As a consequence of this, if you are considering making Puerto Rico your permanent home, you should start the process of forming ties there as soon as you can.
This will take on a unique form for each individual, but a good place to begin would be to establish your main banking there, get a driver’s license from Puerto Rico, and join some organizations in the community.
One of the tax advantages that Act 60 offers, in addition to those already discussed, is subject to additional requirements. Individuals who want to avoid paying taxes on their capital gains, interest, dividends, and royalties must first buy a permanent property in Puerto Rico and then give at least $10,000 annually to charity. Only then will they be eligible for this tax break.
Moving your life and company activities to Puerto Rico is probably going to be necessary if you want to reap the full advantages of Puerto Rico’s most recent economic incentives.
However, if you put some thought into it, you should be able to finish the residence application procedure in a reasonable amount of time. Within the first year of your move to Puerto Rico, you will be able to make full use of the island’s business-friendly attitude, as well as its sunny beaches, tropical temperature, and rich cultural legacy.
This has been more of a high-level summary of the bona fide residence procedure rather than an in-depth analysis of the myriad of limits, exclusions, and special regulations that could be relevant.
You may get additional details by reading Publication 570, which is the IRS’s Tax Guide for Individuals with Income from U.S. Possessions.