For more information, please contact me at. Tourism has traditionally been an important source of income with estimated arrivals of more than 3.6 million tourists in 2008. Employment income is generally treated as Puerto Rican – sourced compensation when the individual performs the services while physically located in Puerto Rico. The rule is simple: only Puerto Rico sourced income can be attributed to the Act 20 business and qualifies for the 4% tax rate. The following items shall not be included in gross income and shall be exempt from taxation under this subtitle: Taxable year of change of residence from Puerto, Subchapter N. Tax Based on Income From Sources Within or Without the United States, Part III. In 2018, Puerto Rico had a population of 3.2M people with a median age of 42.9 and a median household income of $20,296. The services sector accounts for 37 percent of GDP and employs 291,000 people. Still, Puerto Rico hopes to lure American mainlanders with an income tax of only 4%. See the Instructions for Form 1040-NR. Likewise, income sourced to the United States is taxable in the United States at standard rates, even if you run it through a Puerto Rico Act 20 company. Dividends from US states are taxable where the company is formed. A partnership computes its gross income and deductions, to arrive at taxable income, in the same manner an individual would, with certain exceptions. If you're also a federal employee, the income you derive from that employment is deemed U.S. sourced for U.S. income tax purposes. If income was received from sources outside of Puerto Rico, a U.S. federal tax return must be filed if the amount of income earned outside of Puerto Rico is more than the taxpayer's filing threshold. Certain capital gains are sourced to Puerto Rico if derived by Puerto Rican residents (albeit with limitations). This only applies to wholesale operations based in Puerto Rico selling to a distributor in the United States. If you sell a physical good (inventory) in to the United States, you have US sourced income. Of course, there are many types of income that could be earned in Puerto Rico. The income you receive from Puerto Rican sources is not subject to U.S. income tax. Here’s how to maximize the value of your Puerto Rico Act 20 business using the income sourcing rules. Puerto Rico. Amendment by Pub. They will create a pricing model that will stand up to IRS scrutiny and remove any risk should you be audited. federal dollars received — tax contributions to the Federal Government After taxes, Puerto Rico received approximately $620 million ($177 per capita) from the federal government in 2016. Gain on the sale of partnership interests after December 31, 2018, will be treated as Puerto Rico-source income to the extent a deemed sale of all assets at fair market value, regardless of the residence of the selling partner, generates Puerto Rico-source income. residents of Puerto Rico during the entire taxable year, but who receive income from sources outside Puerto Rico and/or receive income as a civilian or military employee of the U.S. Government in Puerto Rico, must file a U.S. Federal income tax return. For this reason, all Puerto Rico Act 20 businesses must offer a SERVICE and not sell inventory. The balance can be held tax deferred if you live in the US or taken out as a tax free dividend if you live in Puerto Rico. Another reason all income in an Act 20 business will be Puerto Rico sourced income is the type of activities that qualify for Act 20. 1986—Pub. The portion of her gain attributable to Puerto Rico is $75,276 ($100,000 x (1,294 Puerto Rico days ÷ 1,719 total days)). Puerto Rico's merchandise trade surplus is exceptionally strong, with exports nearly 50% greater than imports, and its current account surplus about 10% of GDP. In the case of resident foreign corporations, these are only taxed on their PR-source income and on their effectively connected Puerto Rico income. Notably, dividend income would generally be considered Puerto Rican-source if paid by a Puerto Rican corporation from its Puerto Rican­-source income, subject to the rules in Regs. I’ve seen quotes of $6,000 to $65,000 by big name firms in California and New York, as smaller providers in Puerto Rico. During 2019 they received $15,000 of income from Puerto Rican sources not subject to U.S. income tax; $20,000 of federal wages subject to U.S. income tax and $6,000 interest income from a bank account in the U.S. (1) and (2). How to Maximize the Tax Benefits of Puerto Rico, I hope this information on what is Puerto Rico sourced income for an Act 20 business has been helpful. If you're a bona fide resident of Puerto Rico and can exclude your Puerto Rican source income on your U.S. income tax return, you must determine your return filing requirement based on the filing thresholds shown in the individual tax return instructions. L. 99–514 inserted “, or any credit,” in pars. However, if you become a “bona fide resident of Puerto Rico,” you’re no longer subject to US federal income tax on your Puerto Rico source income. Puerto Rico. For more information, please contact me at info@premieroffshore.com or call (619) 483-1708. Industry is the main source of income for Puerto Rico. Such a person will maximize Puerto Rico sourced income and thus minimize her total taxes. It doesn’t matter where the customer is located… only where you and your employees are when doing the work. do not operate in Puerto Rico and do not earn income from Puerto Rico sources other than the income received from the partnership that operates in Puerto Rico, the partnership can file Form 480.10(SC) and the combined Informative Returns – Pass-Through Entity (Form 480.60 EC), subject to the requirements established in Administrative The new rule treats income from the resale of PR affiliates by a nonresident business as PR source PR trade or business. In the case of a non-resident foreign corporation, a 29% withholding tax (WHT) rate is applicable on its Puerto Rico-source gross income not effectively connected with a Puerto Rico trade or business. Puerto Ricans are required to pay federal income taxes on income from federal sources outside of Puerto Rico; otherwise they are exempt from federal income taxes. Contributions: Where services were performed that earned the pension, Investment earnings: Where pension trust is located, Puerto Rico if you are a legal resident of the island under Act 22, Where corporation or LLC is incorporated. Note that wholesale distribution of products can qualify for Act 20. Under Spanish colonial rule the island was largely neglected because of its limited mineral resources. Median household income in Puerto Rico is $20,296. For more information, see: Puerto Rico Eliminates 5 Employee Requirement, To compare Puerto Rico to typical offshore tax plans, see: Puerto Rico Tax Deal vs Foreign Earned Income Exclusion. I will be happy to help you structure your business in Puerto Rico. In the case of an individual citizen of the United States who has been a bona fide resident of Puerto Rico for a period of at least 2 years before the date on which he changes his residence from Puerto Rico, income derived from sources therein (except amounts received for services performed as an employee of the United States or any agency thereof) which is attributable to that part of such period of Puerto Rican residence before such date; but such individual shall not be allowed as a deduction from his gross income any deductions (other than the deduction for personal exemptions under section 151), or any credit, properly allocable to or chargeable against amounts excluded from gross income under this paragraph. Many large accounting firms have groups specialized in producing transfer pricing studies between the territory and the US. Economy. The use of a partnership’s losses is limited by the partner’s basis in the partnership equity interest and can only be used against the distributable share of other partnerships’ in… If you're a bona fide resident of Puerto Rico, you'll be able to exclude income from Puerto Rican sources on your U.S. income tax return. You can also estimate the value of work done in Puerto Rico by how much you would be willing to pay an independent and unrelated firm to provide those services to your US company. • Debt - External: $70 billion (January 23, 2017 2010 est.) 937-2 (g)(1)(ii). Puerto Rico is classified as a high income country, high income countries are defined by the World Bank as countries with a Gross National Income (GNI) per capita of $11,116 or more. Income from personal services performed within Puerto Rico will not be considered from Puerto Rican sources if it is USD 3,000 or less and the individual was present in Puerto Rico for 90 days or less during the calendar year. Certain capital gains are sourced to Puerto Rico if derived by Puerto … There’s no telling when the party will be over. The current CIT rate is comprised of an 18.5% normal tax and a graduated surtax (computed on the 'surtax net income'). For such a simple statement, the Puerto Rico income sourcing rule sure causes a lot of questions. This is because all of the work to generate sales made after the move will have occurred in Puerto Rico. If you want to live in the United States and operate through a Puerto Rico company, determining Puerto Rico sourced income becomes much more difficult and contentious. 1.937-2(g)(1)(ii). Schedule a 30-minute consultation with Christian Reeves on your international tax or business matter. In 2018, the county with the highest Median Household Income in Puerto Rico was Guaynabo Municipio, PR with a value of $36,309, followed by Trujillo Alto Municipio, PR and Caguas Municipio, PR, with respective values of $31,078 and $27,714. 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