Expatriate tax ebook - Puerto Rico

Basis of taxation

Charge to tax
Residence
Income from employment
Source of employment
Benefits (in kind)
Expatriate concessions
Relief for foreign taxes
Deductions against income

Charge to tax
Puerto Rico residents are subject to income tax on their worldwide income. Those that are non resident are subject to Puerto Rico tax on their Puerto Rico source income.

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

  • Tax residence
    In Puerto Rico (PR), anyone who is present in PR 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 PR, 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 PR. To be considered a bona fide resident, the expatriate must meet both of the following two criteria:  

  • be present in PR for at least 183 days during the taxable year, and
  • not have a tax home outside PR and must not show closer connections to the US or any other foreign country than to PR.

 

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

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 PR 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 U.S. citizen the required withholding is 20% of his/her PR income, while in the case of an alien, the required withholding is 29% of his/her PR income. Resident expatriates will have their tax withheld at source at the applicable tax rates (see income tax rates for 2011 section under facts and figures).

Source of employment
As mentioned above, when services are rendered in Puerto Rico, the income derived is PR source income and subject to PR 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 PR income tax charge will arise. Therefore, housing, meal allowances, provision of a car and relocation allowances will be subject to PR 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.

Expatriate concessions
There are no expatriate concessions in Puerto Rico.

Relief for foreign taxes
In the case of resident expatriates, a foreign tax credit may be claimed for taxes paid to any foreign country (including US) on income also being taxed in Puerto Rico.

Deductions against income
Certain expenses can be provided by an employer free of income tax where they qualify as wholly, exclusively and necessarily incurred in the performance of employment duties.

PR residents are allowed certain deductions. Since PR law cannot discriminate, non-resident US citizens are allowed the same deductions determined using the proportion of their PR income over their total income. 

A non-resident alien is allowed only deductions directly related to the income generated in PR. He would not be allowed any other deductions or personal or dependent exemptions. The advantage of filing a tax return for a non resident alien providing services in PR is that he/she would be considered as engaged in business in PR and as such will be able to use the graduated tax rates instead of being subject to a flat 29%.

 

 

Information about Puerto Rico:

  • introduction
  • facts and figures
  • basis of taxation
  • what taxes?
  • tax planning opportunities
  •  

     

    Last updated March 2013

    This information has been provided by Kevane Grant Thornton, Puerto Rican member firm within Grant Thornton International Ltd, and is for informational purposes only. Neither Kevane Grant Thornton or Grant Thornton International Ltd can guarantee the accuracy, timeliness or completeness of the data contained herein. As such, you should not act on the information without first seeking professional tax advice.

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