Working Remotely from Puerto Rico: How Can You Do It?
Companies that are not based in Puerto Rico, including but not limited to, mainland US businesses, but employ remote workers are now exempt from meeting the requirements of the definition of "engaged in trade or business within Puerto Rico" (ETBPR) according to the latest tax law amendment under Act 52-2022. This new legal provision allows non-Puerto Rico-based companies to continue the employment relationship with their employees even if or when they work remotely from Puerto Rico.
Previous to this law amendment, there was no way for US-based company employees to work remotely from Puerto Rico other than working as a freelancer, subcontractor, or self-employed person, or dividing their work time and tax year between Puerto Rico and a US state. For more information on these options, please visit our blog post: Tax Implications Of Remote Work Arrangements In Puerto Rico
Now, under Act 52-2022, if a nonresident employer employs a remote employee who works from Puerto Rico, then the employer is not regarded to be engaged in trade or business within Puerto Rico for tax years beginning after December 31, 2021, provided that all of the following requirements are met:
- The employer did not have an office or other permanent place of business in Puerto Rico at any point during the year.
- The employer does not have any kind of connection to Puerto Rico's economy in any way.
- For the purposes of the sales and use tax (SUT), the employer is not deemed to be a merchant.
- The remote worker employee is not an officer, director, or main stakeholder in the employer's business
- The remote worker renders services for the benefit of clients or the taxpayer's business that does not have nexus with Puerto Rico
- The income earned by a remote worker must be reported by the taxpayer using either a US Form W-2 or a PR Form 499R-2/W-2PR
If these requirements are satisfied, the nonresident employer is exempt from the requirement of withholding income tax from the payments that are provided to the remote worker employee in the capacity of wages. Instead, the employee working remotely is responsible for making projected tax payments in order to meet his or her individual tax liability. However, remote workers have the ability to claim a foreign tax credit for any income tax or excess profits tax that was paid or accrued during the tax year to any US possession or any state in the United States for services provided to a nonresident employer. This credit can be claimed for any income tax or excess profits tax paid or accrued to any US possession or state in the United States. The credit will only apply to the amount of taxes paid to those states or territories of the United States that use the residence of the employer as a factor in determining the origin of the income generated.
What are the Tax Requirements for Remote Workers in Puerto Rico?
According to the amended provisions under Act 52-2022, individuals working remotely are responsible for meeting all of Puerto Rico's individual income tax duties. Remote workers from Puerto Rico become subject to Puerto Rico tax and pay 0% in Federal Tax on their income. Instead of an annual tax return, remote workers should make required quarterly anticipated tax payments throughout the year in Puerto Rico, otherwise, penalties may be incurred for taxpayers who fail to comply with quarterly tax payments.
Although Act 52-2022 appears to provide a foreign tax credit for taxes paid to states located inside the United States or to territories of the United States, it does not appear to permit a foreign tax credit for income taxes paid to governments located in other countries. If you, as a remote worker in Puerto Rico, gain income from sources outside of Puerto Rico or any state of the United States, the best bet is to consult your case specifically to understand where you will pay taxes on that income and if you will be able to claim a tax credit for the tax paid.
What are the Implications of the Amendments to the Tax Law in Puerto Rico for Non-Puerto Rico Resident Employers?
Although the amendments appear to be aimed at making it easier for remote workers to relocate to Puerto Rico without causing tax reporting issues for their nonresident employers, certain aspects of the statute's wording may require either official interpretation by the Puerto Rico Treasury Department or technical amendments by the Legislative Assembly.
Although the amendments appear to be aimed at making it easier for remote workers to relocate to Puerto Rico without causing tax reporting issues for their nonresident employers, certain aspects of the statute's wording may require either official interpretation by the Puerto Rico Treasury Department or technical amendments by the Legislative Assembly. For instance, it is not yet clear how the exception to the definition of "engaged in trade or business within Puerto Rico" (ETBPR) applies, given that the mere fact that a non-Puerto Rico resident employer has employees in Puerto Rico would almost certainly result in the employer being regarded as a merchant for the purposes of sales and use tax (SUT) and that economic nexus is not defined in an appropriate manner in the amendment.
Another matter that needs to be further addressed is the obligation of the non-Puerto Rico resident employer to report the wages paid. According to Section 1062.01 of the PR Code, the employer is not required to withhold taxes on the wages paid or report the wages paid in Puerto Rico, but it would appear that the employer is required to report the wages paid in the US in order to avoid being considered an employer who is engaged in trade or business in Puerto Rico. It would appear that the PR reporting duty is not necessary if the employee in question has been provided with a US Form W-2.
Steps You Should Now Follow:
If you find yourself considering these options, or are already in the process of relocating to Puerto Rico or abroad to work remotely, get in contact with me for a personalized consultation. If you have more questions or need further guidance on planning your tax strategy to work remotely from Puerto Rico, let’s discuss. I'm always happy to provide detailed guidance through a 1:1 consultation with my clients. You may schedule the most convenient day and time for you to meet by contacting me to schedule your consultation.