Global expatriate tax guide

Expatriate tax - Puerto Rico

Expatriates taking up employment in Puerto Rico are subject to comprehensive tax and employment visa requirements. The United States (US) immigration rules apply in Puerto Rico. Before visiting or working on the Island, foreign nationals must obtain visas from a US embassy or consulate.

The tax team at Kevane Grant Thornton, can help expatriates and their employers identify Puerto Rico’s tax planning opportunities and review tax equalization policies, as well as providing compliance services regarding U.S. and Puerto Rico’s tax filing requirements.

Click on each of the areas below to expand for more information:

Facts and figures
Employment visas

Foreign nationals who want or need to work in Puerto Rico on a temporary basis (that is, they will not obtain permanent residence), must be certified by the U.S. Department of Labor. Generally, a petition from a local employer is attached to the visa application. A person holding a temporary visitor’s visa cannot be employed by a Puerto Rico employer.

When the expatriate is a US citizen, the above procedures are not required.

Tax returns and compliance

Personal tax returns should be filed by April 15th following the end of the tax year concerned. A 6-month automatic extension to file is available, extending the due date until 15 October.

Even when the required income tax amount is withheld by the employer and deposited with the Puerto Rico Department of Treasury, the taxpayer has the right to file an individual income tax return to claim applicable exemptions, deductions, and to pay tax according to the progressive tax tables applicable individuals.

For taxable years beginning after 31 December 2018, individual taxpayers (residents and non-residents) are required to file an individual income tax return when they have gross income unless the tax was fully paid by withholding at source.

Tax year

Generally, Puerto Rico’s tax year for individuals runs from 1 January to 31 December.

Income tax rates

Pursuant to the Puerto Rico Internal Revenue Code, as amended (“PR Code”), the ordinary tax rates for: individuals (including unmarried, married couples with prenuptial agreement with total separation of assets and married couples not living together), married filing jointly and married filing separately, are as follows:

  • $9,000 or less : 0%
  • $9,001 – $25,000: 7% of the excess over $9,000
  • $25,001 – $41,500: $1,120 plus 14% of the excess over $25,000
  • $41,501 – $61,500: $3,430 plus 25% of the excess over $41,500
  • $61,501 and over: $8,430 plus 33% of the excess over $61,500

There is a gradual adjustment of the lower tax rates, the personal exemption and credit for dependents, and for taxpayers whose net taxable income is over $500,000. The PR Code also provides for an alternate basic tax equivalent to the alternative minimum tax in the US.

For taxable years beginning after 31 December 2018, the tax determined is 95% of the sum of the regular tax and the gradual adjustment.

Description USD
Employment income $ 74,500
Benefits provided (ie housing) 28,200
Gross income $ 102,700
Less:  
Qualified pension contributions (employees) (10,000)
Overseas workdays
(20% of gross income)
(20,540)
Personal allowance (7,000)
Taxable income 65,160
Tax bill* $ 9,156
95% of the sum of the regular tax and the gradual adjustment.
Basis of taxation
Charge to tax

Puerto Rico residents are subject to income tax on their worldwide income. Conversely, nonresidents are subject to Puerto Rico tax on their Puerto Rico-source income only.

Residence

As mentioned above, the income subject to Puerto Rico income tax is determined based on the expatriate’s residence status.

Tax residence

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.

Income from employment

In the case of a nonresident, the tax is assessed on employment income derived from services performed in Puerto Rico. Some exceptions may apply depending on the amount of income generated in Puerto Rico, and the time spent in the Island.

If the expatriate is considered a resident of Puerto Rico, all their income, no matter where earned or derived, is taxed in Puerto Rico.

Assessable employment income includes wages, salaries, overtime pay, bonuses, gratuities, perquisites, benefits, and anything that constitutes compensation for services. There is also a requirement for the expatriate’s employer to withhold Puerto Rico income tax from the assessable employment income. The applicable tax rates depend on the expatriate’s residence status.

In the case of a nonresident US citizen of Puerto Rico, the required withholding is 20% of the Puerto Rico source income, while in the case of a nonresident alien, the required withholding is 29%.

Resident expatriates will have their tax withheld at source at the applicable tax rates (see applicable tax rates on the 'Tax rates' section above).

Source of employment

As previously stated, when services are performed in Puerto Rico, the income is sourced to Puerto Rico and, thus, is subject to Puerto Rico taxation for both residents and non-residents. In the case of resident expatriates, all other worldwide income is also subject to Puerto Rico taxation

Benefits (in kind)

In general, when the benefit is enjoyed in Puerto Rico, an income tax charge should arise. Therefore, housing, meal allowances, provision of car or relocation allowances, may be subject to Puerto Rico income tax. This taxation is in addition to the tax of the expatriate’s salary if these are considered as compensation and no reimbursement of expenses incurred while away from the expatriate’s tax home.

Expatriate concessions

There are no expatriate concessions in Puerto Rico.

Relief for foreign taxes

In the case of resident expatriates, a foreign tax credit may be claimed for taxes paid to any foreign country (including US), on foreign income (including US income) reported in Puerto Rico.

Deductions from taxable income

Certain expenses can be provided by an employer tax-free when they qualify as wholly, exclusively, and necessarily incurred in the performance of employment duties.

Residents of Puerto Rico are allowed certain deductions. Since Puerto Rico law cannot discriminate, nonresident US citizens are allowed the same deductions determined by using the proportion of their Puerto Rico income over their total income.

A nonresident alien is allowed only deductions directly related to the income generated in Puerto Rico. They would not be allowed any other deductions, personal or dependent exemptions.

The advantage of filing an income tax return for a nonresident alien performing services in Puerto Rico is that the individual would be considered as engaged in trade or business in Puerto Rico, and as such, could able to use the graduated tax rates instead of being subject to a fixed 29% tax rate.

What taxes?
Capital gains tax

As of 2019, long-term capital gains (more than one year) are subject to a maximum rate of 15%. Short-term gains (one year or less) are subject to the regular income tax rates. An expatriate’s exposure to income tax on capital gains is determined by their Puerto Rico tax residence status and source of capital gain.

Under the provisions of the PR Code, the source of capital on the sale of personal property, in general, depends on the residence status of the taxpayer. Generally, capital gains tax is assessed on net gains after deducting the cost of acquisition of the asset from sale proceeds.

Inheritance, estate and gift taxes

Effective 1 January 2018, Puerto Rico repealed estate and gift taxes. A requirement for filing estate and gift tax returns depends on the expatriate’s Puerto Rico tax residence and domicile position. Nonresident expatriates will be subject to reporting only upon the transfer of Puerto Rico property.

Investment income

The expatriate’s tax residence status and source of income determine whether investment income such as interest, dividends, etc., is subject to Puerto Rico income tax.

Local taxes

There are no other local taxes for the expatriates to consider.

Real estate tax

Real estate tax rates fluctuate from 8.03% to 12.33%, depending on the municipality where the property is located.

Expatriates are affected only if they own real property located in Puerto Rico (ie a house in Puerto Rico).

Social security taxes

The US social security contributions apply in Puerto Rico on the same basis and rates as in the Mainland. Please refer to these rules to determine how they may affect your assignments to Puerto Rico.

Stock options

Stock options may be qualified or nonqualified. The tax advantages of qualified stock options are generally the deferral of the imposition of the income tax on compensation and generating a capital gain when the shares are disposed after holding them for at least one year and a day.

Wealth tax

There is no wealth tax in Puerto Rico.

Other specific taxes

There are no other specific taxes related to expatriates in Puerto Rico.

Tax planning opportunities

Where a foreign assignment continues to exist and part of the expatriate’s duties are performed outside of Puerto Rico, any employment income received with respect to the foreign duties remain not subject to Puerto Rico tax, provided the expatriate is not a resident of Puerto Rico.

 

For further information on expatriate tax services in Puerto Rico please contact:

Lina Morales
E lina.morales@pr.gt.com

Ali Díaz
E ali.diaz@pr.gt.com

Omar Mues
E omar.mues@pr.gt.com