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If during tax year 2020 you moved to or from Puerto Rico, you should know that there are several factors that determine whether the move will imply that you will become a resident or if you will no longer be a resident of Puerto Rico for tax purposes.
The definition of residence in the Puerto Rico tax laws is very concise and reads as follows: “The term resident individual means an individual who is domiciled in Puerto Rico. An individual will be presumed to be a resident of Puerto Rico if he or she has been present in Puerto Rico for a period of 183 days during the calendar year.”
Residence and domicile, although these terms tend to be used as synonyms, they are not. The term residence could be where we live in a particular moment. Domicile involves not only being physically in a place but intending to reside there indefinitely.
Each jurisdiction has its own definition of residence and not all relates that definition to domicile. Depending on the tax laws of each jurisdiction, we could have individuals that will be considered residents of more than one jurisdiction. Domicile is only one.
We will limit our discussion to the implications of Puerto Rico’s law. However, if you moved to, or from Puerto Rico from a, or to a state in the United States, there could also be tax implications at federal and state levels.
Since Puerto Rico law requires you to be domiciled in Puerto Rico for you to be considered a resident of Puerto Rico, it is necessary to analyze the facts and circumstances of each case. If the intention regarding the length of your stay in Puerto Rico is temporary and meets other criteria, even when you have been in Puerto Rico for 183 days or more, you will not be considered a resident of Puerto Rico.
If you leave Puerto Rico for a period with the intention of returning and continuing to be domiciled in Puerto Rico, you will still be a resident of Puerto Rico even for the period outside Puerto Rico.
Individual non-residents of Puerto Rico will only be taxed on income from Puerto Rico sources. If you were a resident of another country, and during the tax year you moved to Puerto Rico, you will be reporting in Puerto Rico all income received from the date of move until the end of the tax year, as well as any income from Puerto Rico sources while not residing in Puerto Rico.
If you moved from Puerto Rico to another country, you will be taxed in Puerto Rico for all income received up to the date you changed your residence to another country, as well as any income from Puerto Rico sources after you moved.
There may be income items that, by their nature, must be reported in more than one jurisdiction. The law provides a mechanism to avoid double taxation. It is important to understand source of income rules to correctly report the items on each jurisdiction and claim the corresponding credit. In addition, the deductions to which you will be entitled vary according to residence status and the income reported on each jurisdiction.
A case that exemplifies a move to Puerto Rico without change of residence are employees who temporarily come to Puerto Rico to work on a particular project. The temporary nature of these assignments does not support a change of residence. Even if the period extends for years, there will be no change of residence unless the individual intends to remain indefinitely or permanently in Puerto Rico.
Therefore, these individuals are only taxed on their income generated from Puerto Rico sources which in most cases corresponds to wages received or payments received for professional services.
The number of tax returns and how you will be taxed will depend on each jurisdiction or country and varies on a case-by-case basis, so it is advisable to consult your CPA or trusted tax advisor that will be able to guide you appropriately.
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