How to Pass Puerto Rico's Residency Test

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Act 20 and Act 22 are two of the most well-known tax incentives in Puerto Rico, but in order to take advantage of them, you must be a bona-fide resident. Just visiting Puerto Rico isn’t enough; to establish residency, you have to make the island your home.

Fortunately, passing the residency tests isn’t a matter of guesswork. There are straightforward requirements to pass each part of the residency test. If you’re ready to take advantage of Puerto Rico’s tax advantages, here’s what you need to know to pass the three-part residency test.

Passing Puerto Rico’s “presence” residency test

This is the first of the three requirements to become a bona fide resident of Puerto Rico. To pass, at least one of the following must be true:

  • You were physically present in Puerto Rico at any point in the day for at least 183 days during a tax year. For purposes of the test, you’re considered “present” in Puerto Rico even if you’re on business or personal travel for up to 30 days, as long as your travel isn’t to the United States.
  • During the three-year period that includes the current tax year and the two immediately prior, you were in Puerto Rico for at least 549 days. Note that you must spend at least 60 days on the islands in each of the three years.
  • You spend fewer than 90 days per year in the United States.
  • You earned income of less than $3,000 in the United States, and spent more time in Puerto Rico than in the United States, in the tax year.
  • You had no “significant connection” to the United States during the tax year.

There are exceptions and special considerations for individuals in the military, full-time students, and those serving as elected representatives in the United States. In the case of evacuation due to natural disaster, such as Hurricane Irma, there are other exceptions to the “presence” rule.

You can download the Day Tracker tool to keep track of your presence in Puerto Rico.

Passing the “tax home” residency test

This one is the easiest to satisfy—if you don’t have a tax home outside Puerto Rico for any part of the tax year, you’ve passed the test. For purposes of the residency test, your tax home is where you primarily conduct your business. If your work doesn’t require maintaining an office or place of business, then your tax home is where you reside.

You may be able to pass the “tax home” test the year-of-your-move to Puerto Rico if you meet certain requirements, the most significant are that you do not have a tax home outside Puerto Rico at any time during the final 183 days of the year, and that you maintain a tax home in Puerto Rico for the three years immediately following the move. If you don’t meet those requirements, you may be subject to IRS clawbacks for the year of the move. Generally speaking, it’s a good idea to time your move for November or December so the following year is continuous in Puerto Rico.

Passing the “closer connection” residency test

This test is based on facts and circumstances about your life in Puerto Rico, considered in aggregate by the IRS, and compared to your connections in the United States or other places.

The following nine factors contribute to satisfying the “closer connection” test:

  1. Where is your permanent home?
  2. Where does your family reside?
  3. Where do you keep your personal property and belongings such as cars, furniture, clothing, and jewelry?
  4. Where are your cultural, political, social, and religious relationships maintained?
  5. Where do you bank?
  6. Where do you conduct business?
  7. Where was your driver’s license issued?
  8. Where do you vote?
  9. What country do you designate as your residence on official documents and forms?

Here’s a real example of the “closer connection” test:

A fund manager moves to Puerto Rico and rents an apartment. He joins the local Chamber of Commerce, attends religious services, and keeps a car in Puerto Rico. His wife and his two high school-aged children remain in the United States so the teens can complete their education. He co-owns with his wife the home she and the children live in, and visits frequently, always mindful of the “presence” test requirements.

However, he is still a country club member in the states, and has U.S. bank and brokerage accounts and he receives those statements at his address in Connecticut. He also maintains his Connecticut driver’s license and voter registration.

In this case, the fund manager appears to have closer connections to the United States than to Puerto Rico and would therefore fail the residency test.

It’s a good idea to address each of the questions as soon as you relocate to Puerto Rico—and document all the steps you took to do so.

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