Qualifications for bona fide residents of Puerto Rico

If I spend 183 days in Puerto Rico, do I qualify as a bona fide resident of Puerto Rico?

This is one of the most common question of U.S. citizens that are Individual Resident Investors with a Tax Grant under Act 60 (formerly Act 22). Citizens of the U.S. who live in foreign countries (countries other than the U.S. including Puerto Rico) pay U.S. federal taxes. However, in certain cases, U.S. citizens who move to Puerto Rico do not have to pay U.S. federal taxes.

Pursuant to Section 933 of the U.S. Internal Revenue Code of 1986, as amended (“The U.S. Code”), income derived from sources within Puerto Rico by individuals who are bona fide residents of Puerto Rico during the entire taxable year are not included in gross income and are exempt from taxation under the U.S. Code. In other words, if a U.S. citizen (1) relocates to Puerto Rico, (2) meets the requirements for the bona fide residency of Puerto Rico under the U.S. Code and its regulations, and (3) derives all their income from sources with Puerto Rico (i.e., ordinary and passive income), they can be exempt from ALL U.S. income taxation and, in effect, do not have to file a U.S. tax return.

The term bona fide resident of Puerto Rico, under the U.S. Code and its regulations, refers to a person who (1) meets the physical presence test (i.e., the person is present in Puerto Rico for at least 183 days during the taxable year), (2) does not have a tax home outside of Puerto Rico during the taxable year, and (3) does not have a closer connection to the U.S. or a foreign country other than to Puerto Rico at any time during the taxable year. Being a bona fide resident of Puerto Rico is not simply about the number of days you spend in the country. Basically, you would need to prove that you are Puerto Rican, meaning that you will need to show that Puerto Rico is your center of life. Nevertheless, to become a bona fide resident of Puerto Rico you would need to wholeheartedly relocate to Puerto Rico. You can spend time in the U.S., but you cannot spend more time in the U.S. than in Puerto Rico, and you should always return to Puerto Rico. Likewise, the same rule applies to traveling to any other countries. If you have homes in other countries, you must prove that your Puerto Rican home is the most significant of them all. You can prove that Puerto Rico is the center of your life by building the case for two specific arguments:

1. You have no other tax home outside of Puerto Rico

Your tax home is the center of all your economic activity. The country in which your office is located is your tax home, meaning that if you commute between Puerto Rico and your office in the U.S. (or any other location), Puerto Rico will not be considered your tax home. Therefore, you must relocate your office to Puerto Rico. In addition, while you can technically still hold U.S. bank accounts, your case would be weakened if you were to run all your financial activity through those accounts. You need to show every possible economic connection to Puerto Rico, including financial movements through your Puerto Rican bank accounts.

2. You have no closer connections to any place other than Puerto Rico

You can build the argument that you have no closer connections to any other place other than Puerto Rico by showing evidence that your personal life is rooted in Puerto Rico. For instance, this evidence may pertain to having a permanent home in Puerto Rico, moving your family and personal belongings to Puerto Rico, and by establishing social, political, cultural, professional, and religious ties in Puerto Rico. You should also obtain a Puerto Rican driving license, declare Puerto Rico as your official country of residence on all forms and documents, and register to vote in Puerto Rico. In fact, voter registration is non-negotiable. You must vote in Puerto Rico to truly make your case.

Many people will argue that if you spend 183 days in Puerto Rico each year, you can spend the other 182 days in the U.S. Certainly, you can spend time in the U.S., but it should not be more than a few months per taxable year and definitely not a full six months. To become a bona fide resident of Puerto Rico, you either live in Puerto Rico or do not. It is not worth the risk!

Our tax advisors can help with this and other tax-related topics. Contact us via our webpage www.taxlawventures.com