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Taxation in Puerto Rico
 
 
 

General

Puerto Rico residents are subject to income tax on their worldwide income. Those that are non-residents, are subject to Puerto Rico tax on their Puerto Rico source income. Expatriates taking up employment in Puerto Rico will be subject to comprehensive tax and employment visa requirements.

As mentioned above, the income that will be subject to Puerto Rico’s income tax will be determined by the expatriate's residence status.

In Puerto Rico, anyone who is present in Puerto Rico for a period of 183 days or more within a taxable year could be considered a resident. Other facts and circumstances, in addition to the number of days spent in Puerto Rico, are considered when determining whether an expatriate is considered a resident or not. A very important aspect to consider is the intention of the taxpayer as to the length and nature of their stay.

For US purposes, Internal Revenue Code section 937 has established new rules to determine whether an expatriate is considered a resident of Puerto Rico. To be considered a bona fide resident, the expatriate must meet both of the following two criteria:

be present in Puerto Rico for at least 183 days during the taxable year; and

not have a tax home outside Puerto Rico and must not show closer connections to the US or any other foreign country than to Puerto Rico.

Determination of residency is important, because a Puerto Rico resident will be taxed in Puerto Rico on his/her worldwide income, which is all his/her income from whatever source it is derived. A non-resident, however, will be taxed in Puerto Rico on his/her Puerto Rico source income only, which in the expatriate’s case would usually be the portion of their income earned for the services performed in Puerto Rico.

Income from Employment

In the case of a non-resident, a charge to tax in Puerto Rico will be assessed on employment income derived from services rendered in Puerto Rico. Some exceptions apply, depending on the amount of income generated in Puerto Rico and the time spent in Puerto Rico. If the expatriate is considered a Puerto Rico resident, then all his/her income, no matter where earned or derived, will be taxed in Puerto Rico.

Assessable employment income includes all wages, salaries, overtime pay, bonuses, gratuities, perquisites, benefits, etc, that constitutes compensation for services.

There is also a requirement for the expatriate's employer to withhold Puerto Rico’s income tax from the assessable employment income. The applicable rates will depend on the expatriate’s residence status. In the case of a non-resident US citizen the required withholding is 20% of his/her Puerto Rico income, while in the case of an alien, the required withholding is 29% of his/her Puerto Rico income. Resident expatriates will have their tax withheld at source at the applicable tax rates.

Source of Employment
As mentioned above, when services are rendered in Puerto Rico, the income derived is Puerto Rican source income and subject to Puerto Rico taxation for both residents and non-residents. In addition, in the case of resident expatriates, all other worldwide income will also be subject to Puerto Rico taxation.

Benefits (in kind)
In general, where the benefit is enjoyed in Puerto Rico, a Puerto Rico income tax charge will arise. Therefore, housing, meal allowances, provision of a car and relocation allowances will be subject to Puerto Rico income tax. This will be in addition to the tax on the expatriate's salary if these are considered compensation and not reimbursement of expenses incurred away from the expatriate’s tax home.

Capital Gains Tax
Long term capital gains are subject to a maximum rate of 10% as of 2008. Short term gains (six months or less) are subject to the regular income tax rates. Again, an expatriate's exposure to income tax on capital gains will be determined by their Puerto Rican tax residence status. Non-resident expatriates are subject to income tax on gains realised from Puerto Rico sources. In general, capital gains tax will be assessed on net gains after deducting the cost of acquisition of the asset from sale proceeds.


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