If you are in the process of moving to the beautiful island of Puerto Rico, you have come to the right place to learn about the requirements of becoming a bona fide resident! If you're not sure why you might enjoy moving to Puerto Rico, check out one of my other blog posts here.
Before we get into the requirements, let's talk about how becoming a bona fide resident of Puerto Rico may be beneficial to you. Act 22 of 2012 from Puerto Rico, also known as the Act to Promote the Relocation of Investors to Puerto Rico is an Act that exempts local taxes on all passive income generated by Puerto Rico Bona Fide Residents.
The main purpose of the Act is to promote and attract immigration to the island in the hope such individuals who move to the island invest in themselves while simultaneously investing in the local economy, and contribute to the cultural richness of the island. To ignite the interest of these new investors, Act 22 provides a total exemption from Puerto Rico income taxes on all passive income attained or accrued after the individual establishes residency in Puerto Rico.
The Act permits bona fide residents of Puerto Rico the following benefits on qualified investments:
- 100-percent tax exemption from Puerto Rico income taxes on all dividends;
- 100-percent tax exemption from Puerto Rico income taxes on all interest; and
- 100-percent tax exemption from Puerto Rico income taxes on all long-term capital gains accrued after the individual becomes a bona fide resident of Puerto Rico.
With this being said, it is no surprise why so many hardworking individuals are looking at Puerto Rico as an interesting destination to establish themselves, grow, and help grow the economy of the island in the most positive way. If this sounds like you, let's jump right in to an overview of the requirements for becoming a bona fide resident of Puerto Rico!
First, there are some simpler requirements to becoming a bona fide resident. In addition to those requirements, you can achieve the exalted tax status if you satisfy three tests. Fortunately for you, I have provided a brief overview of both components. Continue reading to find out more!
Bona Fide Overview Resident Requirements
- Citizenship: The most straightforward qualification is the requirement to be a citizen of the United States, living in Puerto Rico.
- Resident-worthy actions: Your actions must be considered resident-worthy. The IRS will determine if you are establishing residency in Puerto Rico through your actions, seeming intentions, nature of your stay, and length of your stay.
- There to stay: You must not have any plans of returning to the mainland United States.
How to Satisfy the Residency Tests
- Presence Test
There are multiple ways to satisfy the requirements for the Presence Test. You must demonstrate presence for at least 183 days during the taxable year in Puerto Rico OR satisfy one of the other presence tests. You can also satisfy this test if you are present in Puerto Rico for at least 549 days in the 3-year period of the current tax year and the two previous tax years, and were in Puerto Rico for at least 60 days in each tax year during that period. You were in the US for less than 90 days or not at all during the tax year. You did not have more than $3,000 in earned income in the US during the tax year and were present in Puerto Rico for more days than in the US.
- Tax Home Test
This is the most straightforward of the three tests. You must not have a tax home outside of Puerto Rico during any part of the taxable year. But what is a tax home? Your tax home is considered to be where your primary place of employment is, regardless of where you live. If you do not have a regular place of employment, then your tax home is considered to be your primary place of residence. There is an exception for the year of your move only.
- Closer Connection Test
You must have a closer connection to Puerto Rico than to mainland United States or a foreign country during the taxable year. You are considered to have a closer connection to Puerto Rico than the rest of the United States if you maintain more significant contacts with Puerto Rico. Some of the factors relevant include the location of:
- your family
- your permanent home and belongings
- your current social, political, cultural, or religious organizations
- your business activities and banking activities
- jurisdiction in which you hold a driver's license
- your voting activity
- your place of residence that you choose to include on forms and documents
I would be happy to help
If you're a taxpayer that is seeking to establish that you are a bona fide resident of Puerto Rico, you should show intent to making a permanent move. Contact me here to learn more about factors that will help you become a bona fide resident and avoid giving the impression of a transient decision or that your move to Puerto Rico was made predominantly to obtain tax benefits. I can also help you qualify through the exemptions provided so that you can achieve bona fide residency even in the year of your move. I'm here for you as guidance and support as you embark on this exciting journey!