As mentioned above, the income subject to Puerto Rico income tax is determined based on the expatriate’s residence status.
Pursuant to the PR Code, the term 'resident individual' means a person who is domiciled in Puerto Rico. It is presumed that a person is a resident of Puerto Rico if that person has been present in the Island for a period of at least 183 days during the calendar year.
There are no current regulations issued under the PR Code to clarify the definition of 'resident individual'. Furthermore, there is no guidance as to whether an individual can become a resident of Puerto Rico immediately after moving into Puerto Rico, or whether an individual can have a domicile in Puerto Rico for only one year. Generally, if their intention regarding their stay is merely temporary and meets other requirements, even when they had been in Puerto Rico for 183 days or more, they may not be considered bona fide residents of Puerto Rico.
There are various cases decided under the Puerto Rico Internal Revenue Code of 1994, as amended, that provides guidance on this matter. In said cases, the Supreme Court of Puerto Rico determined that to qualify as a resident of Puerto Rico for income tax purposes, an individual must have:
- at least one-year of residency in Puerto Rico (actual physical presence); and
- intent to reside in Puerto Rico for an indefinite amount of time.
For US income tax purposes, the United States Internal Revenue Code, as amended (US Code), has its own rules to determine whether an expatriate is considered a bona fide resident of Puerto Rico. Namely, the US Code states 3 requirements that must be met:
- comply with one of the following requirements in connection to physical presence in Puerto Rico set forth in the Section 937 regulations (presence test);
- o presence in Puerto Rico for at least 183 days during the taxable year
- presence in Puerto Rico for at least 549 days during the three-year period consisting of the taxable year and the two immediately preceding taxable years, provided that the individual was also present in Puerto Rico for at least 60 days during each taxable year of the three-year period
- presence in the US was for no more than 90 days during the taxable year
- during the taxable year had earned income in the US, if any, not exceeding in aggregate of $3,000 and was present for more days in Puerto Rico than in the US
- had no significant connection to the US during the taxable year.
- not have a tax home outside Puerto Rico during any part of the taxable year (tax home test); and
- not have a closer connection to the United States or a foreign country than to Puerto Rico during any part of the taxable year (closer connection test).
Determination of residency is essential, since a resident of Puerto Rico is taxed in the Island on their worldwide income. A nonresident, however, is taxed only on their Puerto Rico source income, which in an expatriate’s case, would usually be the portion of his or her income earned for the services performed in Puerto Rico.