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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. A 6-month automatic extension to file is available, extending the due date until 15 October. The extension must be accompanied by the full balance of the income tax due.

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.

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.

Estimated tax
Every individual with a tax liability greater than $1,000, is required to estimate his/her tax liability for the current taxable year. The estimated tax must be paid in four equal installments by:

  • April 15th
  • June 15th
  • September 15th; and
  • January 15th of the next taxable year.
Tax year

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

Income tax rates

The ordinary taxable income of individuals residing in Puerto Rico is taxed at progressive rates ranging from 0% to 33%. Other types of income are taxed at the following rates:

  • long term capital gains – net long-term capital gains are subject to a 15% preferential tax. Capital gains are long-term if the capital asset is held for more than one year prior to the realization of gain or loss.
  • certain dividends and partnership distributions – corporate dividends and partnership profit distributions (if taxed as a corporation) received by an individual from a Puerto Rico Entity, are subject to a 15% preferential tax.
  • interest on certain obligations or deposits with banking organisations – interest from deposits in interest-bearing accounts or in certificates of deposits of individuals, estates, and trusts in banking institutions is subject to a 17% or 10% preferential tax, at the option of the taxpayer.

Tax rates for 2020

The ordinary tax rates for:

  • individual taxpayers (including unmarried taxpayers, married taxpayers with prenuptial or postnuptial agreements with total separation of assets, and married individuals not living together);
  • married individuals filing jointly; or
  • married individuals filing separately, are:
Taxable income Percentage of exemption
$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

Gradual adjustment

A 5% gradual adjustment (not to exceed $8,895) of the lower tax rates, the personal exemptions and credit for dependents, applies to individual taxpayers with a net taxable income exceeding $500,000.

For taxable years beginning after 31 December 2020, the tax determined is 92% of the sum of the regular tax and the gradual adjustment for individuals with gross income of $100,000 or less. For individuals with gross income greater than $100,000, the tax determined is 95% of the sum of the regular tax and the gradual adjustment.
Alternate basic tax (ABT)

The PR Tax Code provides for an ABT equivalent to the alternative minimum tax in the U.S. The ABT tax for tax years beginning after 31 December 2018, is:

Tax rate Net taxable income subject to ABT
1% if net taxable income is between $25,000 – $50,000
3% if net taxable income is between $50,000 – $75,000
5% if net taxable income is between $75,000 – $150,000
10% if net taxable income is between $150,000 – $250,000
24% if net taxable income is over $250,000

Optional tax

An optional tax is available for individuals whose gross income is substantially received from services subject to withholding at source. The tax rates are:

Tax rate Gross income from services
6% if gross income of $100,000 or less
10% if gross income is between $100,000 – $200,000
13% if gross income is between $200,000 – $300,000
15% if gross income is between $300,000 – $400,000
17% if gross income is between $400,000 – $500,000
20% if gross income is $500,000 or over

To qualify for the optional tax method, individuals must comply with the following rules:

  • at least 80% of the total gross income for the taxable year is derived from the rendering of services subject to withholding at source; and
  • the total gross income earned was subject to withholding at source or the payment of estimated taxes.
Sample income tax calculation

Sample income tax calculation for the year ending on 31 December 2020:

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.

Residence

The income subject to Puerto Rico income tax is determined based on the expatriate’s residence status and the source of the income received.

Tax residence

For tax residency purposes, the PR Tax Code defines the term 'resident individual' as an individual who is domiciled in Puerto Rico. It is presumed that an individual is a resident of Puerto Rico if they have been present in the island for a period of at least 183 days during the calendar year. However, other facts and circumstances must be analyzed as well as the intention of his/her stay in Puerto Rico.

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 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 federal 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:

  • presence test - comply with one of the 5 conditions for physical presence in Puerto Rico set forth in the Section 937 regulations, such as be present in Puerto Rico for at least 183 days during the taxable year;
  • tax home test - not have a tax home outside Puerto Rico during any part of the taxable year; and
  • closer connection test - not have a closer connection to the United States or a foreign country than to Puerto Rico during any part of the taxable year

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 their income earned for the services performed in Puerto Rico.

Federal tax

Bona fide residents of Puerto Rico are subject to federal income tax on their worldwide income. However, Section 933 of the US Tax Code allows a bona fide resident of Puerto Rico to exclude Puerto Rico-source income for federal income tax purposes; provided they are subject to federal income tax on income from sources outside Puerto Rico.

The exclusion of Puerto Rico source income for federal income tax purposes, does not apply to the salary received by a U.S. government employee working in Puerto Rico, who must include federal income from work done in Puerto Rico as part of both, Puerto Rico, and federal income tax purposes.

Nevertheless, income tax paid in Puerto Rico on salaries received by a U.S. government employee for services rendered in Puerto Rico may be credited against federal income tax liability, subject to certain limitations.

Non-residents tax

A US citizen that is not a resident of Puerto Rico, but receives income from sources within Puerto Rico, is required to file a Puerto Rico income tax return unless the total tax was withheld at source. When determining taxable income subject to Puerto Rico tax, a US citizen not residing in Puerto Rico may only claim deductions that are properly allocable to such income.

In the case of a nonresident non-US citizen, generally, is subject to a 29% Puerto Rico tax withholding at source on gross income from interest, royalties, salaries, wages, annuities, compensation, remuneration, emoluments, distributable share of income from a special partnership, net capital gains, and other fixed or determinable, annual, or periodic income from sources within Puerto Rico. Dividend income from sources within Puerto Rico is generally subject to a 15% income tax rate. The distributive share of income from a corporation of individuals is subject to a 33% income tax rate.

A nonresident non-US citizen may deduct losses not connected to a trade or business, but incurred in a transaction entered into for profit, but only if the profit from the transaction would have been taxable. Moreover, if they are engaged in a trade or business in Puerto Rico at any time during the taxable year, they are subject to Puerto Rico tax at regular rates on their net income that is effectively connected to such trade or business in Puerto Rico.

When determining the net income of a nonresident non-US citizen, deductions are allowed to the extent that they are effectively connected with the conduct of a trade or business in Puerto Rico. If the nonresident receives income from sources within Puerto Rico, they are required to file a Puerto Rico income tax return, unless the total tax was withheld at source.

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 individual is considered a bona fide 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, among others, that constitutes compensation for services. There is also a requirement for the individual’s employer to withhold Puerto Rico’s income tax from the assessable employment income. The applicable tax rates depend on the individual’s residence status.

In the case of a nonresident US citizens, the required withholding is 20% of the Puerto Rico source income, while in the case of a nonresident non-U.S. citizens, 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 for 2020' section above).

Source of employment

As previously stated, when services are performed in Puerto Rico, the income is sourced to Puerto Rico and, thus, 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 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 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 non-US citizen performing services in Puerto Rico is that the individual is considered as engaged in trade or business in Puerto Rico, and as such, able to use the graduated tax rates instead of being subject to a fixed 29% tax rate.

Other taxes?
Capital gains tax

As of 2020, long-term capital gains 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, capital gain source of income 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