Becoming a Bona Fide Resident of Puerto Rico
Becoming a Bona Fide Resident
You’re moving to Puerto Rico! If you’re one of the many people who want to move to the island, whether it’s for the Act 20 & 22 tax incentives, the amazing beaches or another opportunity, you’ll quickly learn that it’s a bit more complicated than moving from state to state.
Puerto Rico is a U.S. territory and as such has special treatment in the IRS tax code. In order to be taxed in Puerto Rico and not by the IRS, you need to become a bona fide resident (BFR) of Puerto Rico. This includes being on the island for at least 183 days of the year and having a closer connection to Puerto Rico than to the states.
“What’s the maximum number of days I can be in the states and still be a BFR of PR?”
“What if I need to go back for client meetings?”
“I plan on travelling internationally this year, will that impact my residency?”
Depending on when you are moving and whether you have business (or leisure) travel that will take you off the island, these questions and more will come up. To help answer them, we’ve found this amazing chart from tax-charts.com by Andrew Mitchell LLC, which is a great resource to help you determine whether you will qualify as bona fide resident and what you need to achieve it.
Click here for full chart.
Act 20 & Act 22 implications
Being a bona fide resident of Puerto Rico is an on-going exercise, not something that you achieve once and don’t need to worry about again. You may have the big items covered by spending over 183 days on the island and having a home only in Puerto Rico, but what about your office?
As you can see in the chart, having an office outside of Puerto Rico opens you up to risk. So even if you’re an Act 22 trader who can work from anywhere, you should be careful of having a secondary office or working from an affiliated company’s office while off the island.
With Act 20 you also want to consider the ‘residency requirement’ of the Act itself. As we wrote in this article about the requirements of export services being performed from Puerto Rico, you should be careful not to perform the services outlined in your decree while on your next trip to the states.
Plan for an audit
Let’s face it, by moving to Puerto Rico you’re moving money and revenue away from the IRS. It’s legal but it may still put you at greater risk of an audit to prove that it’s within the legal framework. A tax lawyer is critical in helping you set up your business in Puerto Rico and to advise you on contracts, structure, and what you should do to remove any doubt that you’re a bona fide resident of Puerto Rico. You may never be audited by the IRS or Hacienda, but if you are you don’t want to take any chances.