How to Become a Bona-Fide Resident of Puerto Rico
- Posted: May 15, 2018
- Posted by: Travis Lynk
- Last Reviewed: January 9, 2019
How to Become a Bona-Fide Resident of Puerto Rico
Update 1/9/19: Email us to obtain a copy of our new PR Residency Guide (PDF). This comprehensive document contains all IRS rules, interpretations, and best practices when moving.
Understanding and taking advantage of Puerto Rico’s tax incentive programs can be a complicated undertaking. However, if you don’t couple those efforts with strict adherence to US tax rules, you’re spinning your wheels, and could run into big problems down the road. This article focuses on how to establish residency in Puerto Rico for tax purposes.
The Three Tests for Residency
In almost all tax advantaged scenarios, you need to become a bona-fide resident of Puerto Rico. This means you, your business, your family, and your possessions live and act like an everyday resident of Puerto Rico. Excluding special cases like military individuals, to be a bona-fide resident you must satisfy all three tests during the calendar tax year (Jan 1 – Dec 31).
Test #1 – Presence
To satisfy, you must meet one of the following conditions:
- You were present in Puerto Rico for at least 183 days during the tax year (“boots on the ground” at any point during the day).
- You were present in Puerto Rico for at least 549 days during the 3-year period that includes the current tax year and the 2 immediately preceding tax years. During each year of the 3-year period, you must be present in the relevant possession for at least 60 days.
- You were present in the United States for no more than 90 days during the tax year.
- You earned income in the United States of no more than a total of $3,000 and were present for more days in the relevant possession than in the United States during the tax year (earned income is pay for personal services performed, such as wages, salaries, or professional fees).
- You had no significant connection to the United States during the tax year.
Our recommendation: get our Day Tracker Tool from our downloads page, and be present in Puerto Rico for at least 183 days during each of years 1 and 2; ensure year 3 gets you to at least 549 days cumulatively.
Special considerations pertaining to the Presence Test:
- You are considered present in Puerto Rico for the day if you meet one of the following:
- You were accompanying a family member for physician-involved inpatient illness
- You were forced away due to major disaster or evacuation (see next bullet)
- You are travelling internationally, but not in the US, up to 30 days
- You are a full-time student in the U.S.
- You are serving as an elected official from Puerto Rico in the U.S.
- Due to Hurricane Irma and Hurricane Maria in 2017, the 14-day period of absence resulting from a major disaster rule, which does not count against your days of presence outside a relevant U.S. possession, has been extended to 268 days effective beginning September 6, 2017, and ending May 31, 2018. Therefore, an individual who is outside of Puerto Rico on any day during this 268-day period will be treated as leaving or being unable to return to the relevant U.S. territory as a result of Hurricanes Irma or Maria, and will not lose their status as a bona-fide resident of Puerto Rico or the U.S. Virgin Islands during this period. You must have been a resident of Puerto Rico in 2017 to take advantage of this exception.
- You are treated as having a significant connection to the U.S. if you:
- Have a permanent home there that is always available, not including rental property
- You are registered to vote in the US, or
- You have a spouse or child under 18 whose home is in the US (excluding if they are in school or have legally divorced parents).
Test #2 – Tax Home
You satisfy the conditions of this test if you did not have a tax home outside of Puerto Rico during any part of the year. Sometimes referred to as “the office test,” your tax home is your regular place of business or employment regardless of where you maintain your family home. If you do not have a normal place of business, this rule defaults to where you regularly live. In short, your principal office needs be in Puerto Rico.
Our recommendation: do not keep a primary office for yourself in the US where you regularly produce business value in-person. For hedge funds, the rule is simply where it is located. Case law exists for the Tax Home, see the Estate of Sanders 144 T.C. No. 5.
Test #3 – Closer Connection
You satisfy the conditions of this test if during any part of the tax year you do not have a “closer connection” outside of Puerto Rico, than from inside Puerto Rico. This test is sometimes referred to as the “in your heart test”. The following factors are considered in aggregate by the IRS, and then compared between the US and Puerto Rico:
- The location of your permanent home
- The location of your family
- The location of your personal belongings, like automobiles, furniture, clothing, and jewelry
- The location of social, political, cultural, or religious organizations with which you have a relationship
- The location where you conduct your banking activities
- The location where you conduct your business activities
- The location of your driver’s license
- The location of the jurisdiction in which you vote
- The country of residence you designate on forms and documents
Our recommendation: address the majority of the factors listed above upon relocation and maintain documentation.
Special rule for the “year of a move”
You will satisfy the Tax Home Test and Closer Connection Test during the year of your move only if you meet all three of the following:
- You have not been a bona-fide resident of another country in the last 3 years
- You do not have a tax home outside of Puerto Rico in the final 183 days of the tax year
- You are a bona-fide resident of Puerto Rico for each of the 3 tax years immediately following your move (this includes the year of your move)
Note: the benefit here is that for the year of your move only, what happened in regards to the Tax Home Test and Closer Connection Test during the first half of the year becomes discounted.
Resource: IRS Publication 570
Contact us for more information.
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