Why Declarations of Domicile and Non-Domicile Are Important When Relocating to Puerto Rico
- Posted: April 26, 2023
- Posted by: Travis Lynk
- Last Reviewed: April 26, 2023
See how moving to Puerto Rico is easier with declarations of domicile and non-domicile.
Moving to Puerto Rico
Relocating to another country can be tedious and exhausting because of all the red tape. Luckily, moving from the mainland to the U.S. territory of Puerto Rico is a relatively easy process. Puerto Rico has also become a top destination for those who aim to pay little or no tax.
You can’t avoid paying taxes entirely in Puerto Rico, but its tax incentives are very generous for qualified individuals and businesses.
Suppose you decide to move to Puerto Rico to benefit from the tax advantages of the Act 60 program. You’ll have to fulfill several conditions to become a bona fide resident. The declaration of domicile and the declaration of non-domicile are two pieces of evidence that will help establish your bona fide residency.
Declaration of Domicile
What Is the Declaration of Domicile?
The declaration of domicile is a legal document that tells the government the location of your long-term home. Your domicile is your permanent home. The declaration of domicile legally verifies your intention to remain at that place indefinitely.
The word “domicile” is often used interchangeably with “residence,” but they do not have the same meaning in legal terms. A residence is a temporary home in which you live for a prescribed period. A domicile is a home where you plan to live for an indefinite period.
This means that you can have more than one place of residence but only one domicile. Your domicile is also necessarily your residence, but your residence may or may not be your domicile.
In the declaration of domicile, you have to specify the following:
- Your full name
- Your new address
- Your former city of residence
- The date you became a bona fide resident of the new territory
- The date the document was signed
The document must be signed and submitted in the presence of witnesses, who must provide their signatures, and notarized by a public notary, commissioner of oaths, or solicitor.
Why Is the Declaration of Domicile Important?
The declaration of domicile involves significant legal consequences for an individual. Your domicile is the address you declare to vote, bank, register vehicles, and pay taxes. It is the basis for determining which country, state or territory, and courts have the jurisdiction to adjudicate your lawsuits, probate wills, administer estates, and assess state income and death taxes.
When moving to Puerto Rico to reap the benefits of the Act 60 program, you must prove to the IRS and the Puerto Rican government that you are a bona fide resident. This means you need to pass several tests.
One of these is the closer connection test.
To pass the closer connection test, you must move your entire life to the island. This entails executing a declaration of domicile to change your domicile to Puerto Rico officially.
Your declaration of domicile as Puerto Rico, coupled with your non-dom status concerning your previous home, cements your Puerto Rican bona fide residency. This is seen as effectively an indication that you will live in Puerto Rico on a long-term basis, allowing you to pay tax at a much lower level under Act 60.
Declaration of Non-Domicile
What Is the Declaration of Non-Domicile?
The declaration of non-domicile is a legal document that you use to officially state that you no longer consider a certain state or territory your location of long-term residence.
Non-dom status is a centuries-old concept and is not unique to Puerto Rico; recently non-doms in the United Kingdom have made headlines, as they do not have to pay UK tax on their earnings in other countries. For example, British Chancellor Rishi Sunak’s wife, Akshata Murty, is an Indian citizen who has claimed non-dom status in the UK for UK tax purposes. Thus, she is not treated as an ordinary British tax resident. In accordance with British law, she must pay UK taxes on her UK income, but does not have to pay UK taxes on foreign income earned outside of the UK.
Of course, you don’t need British residency or even a UK bank account to declare non-dom status for Act 60 purposes.
Declaring non-dom status for the state you’re moving from indicates to the authorities of your previous domicile that you’ve changed the location of your permanent home.
When you apply for non-dom status, you’ll need to provide the same information we touched on earlier for the declaration of domicile.
As with the declaration of domicile, this document will have to be signed and submitted in the presence of witnesses, who must provide their signatures, and must be sworn before a public notary, commissioner of oaths, or solicitor.
Why Is the Declaration of Non-Domicile Important?
It’s not possible to have multiple domiciles simultaneously in the United States. Declaring Puerto Rico as your domicile requires you to claim non-dom status in your previous state. Non-dom status means your previous state and the associated courts have no jurisdiction over your legal and tax status. The year after your move, you’ll avoid paying tax altogether to your previous state.
To become a bona fide resident of Puerto Rico, you must declare Puerto Rico as your domicile and show the Puerto Rican government that you have achieved non-dom status in your previous state. This will help you to pass the closer connection test.
Let’s take a closer look at what you need to do to pass the Puerto Rico bona fide residency tests.
How to Establish Bona Fide Residency in Puerto Rico
The IRS administers bona fide residency tests to ensure that an individual investor intends to stay in Puerto Rico for an extended period before exempting the individual from regular federal income tax laws.
The tests involved are as follows:
The Presence Test
An individual can satisfy the requirements of the first test by fulfilling any one of the following conditions:
- Be present in Puerto Rico for at least 183 days in the tax year.
- Be present in Puerto Rico for at least 549 days in the three-year period of the current tax year and the two previous tax years and be in Puerto Rico for at least 60 days in each tax year during that period.
- Do not be present in the United States for more than 90 days during the tax year.
- Do not have more than $3,000 in earned income (defined as pay for personal services performed, such as wages, salaries, or professional fees) in the United States during the tax year, and be present in Puerto Rico for more days than in the United States.
- Have no significant connection to the United States during the tax year.
Note: Being present in Puerto Rico means being physically present on Puerto Rican soil during any part of the day.
The individual also receives 30 automatic presence days of international travel (not to the United States) per tax year. This means that being present in Puerto Rico for 153 days per tax year is enough if the individual travels outside the United States.
This only works if the individual spends more time in Puerto Rico than in the United States during the tax year and passes the presence test by spending at least 549 days within a three-year period in Puerto Rico with at least 60 days of physical presence per year.
Individuals who leave Puerto Rico for medical purposes or cannot return due to a disaster also may receive automatic presence days.
The Tax Home Test
This test prohibits having a tax home outside of Puerto Rico during any part of the tax year. A tax home, according to the IRS, is the primary place of business or employment. If an individual lacks a place of employment, the primary residence will be considered the tax home.
The Closer Connection Test
This test assesses the individual’s loyalty to Puerto Rico. To determine whether an individual maintains a closer connection to Puerto Rico, the IRS takes into account many factors such as:
- location of their permanent home
- immediate family
- personal belongings
- principal bank
- organizational affiliations
- jurisdiction of their driver’s license
- voting registration
This is where legally declaring Puerto Rico as your domicile and your non-dom status in your previous state improve your odds of approval. These documents regarding your domicile and non-dom status are useful in satisfying the test’s requirements.
The New “Test” in Act 60
According to the Act 60 program, an individual with a tax exemption decree must purchase a real estate property within two years of obtaining it. This property must also remain the individual’s primary residence throughout the decree term. Although not a residency test per se, this is the final piece of the puzzle in proving an individual’s bona fide residency.
After satisfying all the requirements to become a bona fide resident of Puerto Rico, the individual needs to file Form 8898 to notify the IRS of the new status. This form officially declares the beginning or end of bona fide residency in a U.S. territory.
A Few Steps to Paradise
Many U.S. citizens have moved to Puerto Rico seeking all the benefits that come with living in this Caribbean paradise. Thanks to Act 60, many of those who relocate from the mainland can pay income tax at a lower rate on the island.
The incentives don’t stop with this improved tax status; the island’s awe-inspiring natural beauty, sunny weather, and countless fun activities also make it a perfect place to live.
Taking care of your declaration of domicile and claiming non-dom status in your previous state are important steps in moving your life to Puerto Rico.
If you need more information on how to relocate to Puerto Rico, contact our team at PRelocate.
Disclaimer: Neither PRelocate, LLC, nor any of its affiliates (together “PRelocate”) are law firms, and this is not legal advice. You should use common sense and rely on your own legal counsel for a formal legal opinion on Puerto Rico’s tax incentives, maintaining bona fide residence in Puerto Rico, and any other issues related to taxes or residency in Puerto Rico. PRelocate does not assume any responsibility for the contents of, or the consequences of using, any version of any real estate or other document templates or any spreadsheets found on our website (together, the “Materials”). Before using any Materials, you should consult with legal counsel licensed to practice in the relevant jurisdiction.
Read MoreJuly 8, 2022
Read MoreOctober 28, 2021