I will be happy to help you structure your business 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. A U.S. tax return (Form 1040-NR) according to the rules for a nonresident alien. It is not where the wages are paid from that determines the source, but rather where the services are performed. 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. In 2010, for example, Vermont’s tax liability was only $3.2 billion, while Puerto Rico’s was nearly $3.6 billion. As a result, for 2010, Puerto Rico filers' adjusted gross income for federal tax purposes would have been higher than that for Puerto Rico tax purposes. : Where property is used. While tax rates in the United States are not as high as in many other developed countries, they continue to create a substantial tax burden for US citizens. Individuals can exclude any distributions from a retirement plan from income for U.S. tax purposes if the income is derived from Puerto Rican sources. Especially for those who want to live in the United States and operate a business based in Puerto Rico. 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. For more information on who is considered a bona fide resident of Puerto Rico and how to determine the amount of income that … includes such things as cars, trucks, money, stocks, bonds, furniture, clothing, bank accounts, money market funds, certificates of deposit, jewels, art, antiques, pensions, insurance, etc. The new rule treats income from the resale of PR affiliates by a nonresident business as PR source PR trade or business. The services sector accounts for 37 percent of GDP and employs 291,000 people. When income sourcing between Puerto Rico and the US is a major issue ($1 million or more), then you need to hire a professional. However, Act 257 provided a change in sourcing rule for revenue earned on contracts with the Puerto Rico government. Where labor or services are performed. Retail sales, such as selling online to buyers in the US, is not Act 20 income and will be fully taxed in both the United States and in Puerto Rico. This is because you are performing the service of sourcing, manufacturing, and/or importing goods that will be sold outside of Puerto Rico. For more on this topic, see: How to Maximize the Tax Benefits of Puerto Rico. The current CIT rate is comprised of an 18.5% normal tax and a graduated surtax (computed on the 'surtax net income'). 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. There’s no telling when the party will be over. For such a simple statement, the Puerto Rico income sourcing rule sure causes a lot of questions. 1. Still, Puerto Rico hopes to lure American mainlanders with an income tax of only 4%. There are numerous tax benefits for expats like the Foreign Earned Income Exclusion, tax credits, and foreign corporation… 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. Employment income is generally treated as Puerto Rican – sourced compensation when the individual performs the services while physically located in Puerto Rico. This is because all of the work to generate sales made after the move will have occurred in Puerto Rico. Service based income is profit from work done in Puerto Rico. Compensation for labor is always taxed where the work is performed. your business to Puerto Rico, and break all ties with the United States, all business income will be Puerto Rico sourced income. Here’s how to maximize the value of your Puerto Rico Act 20 business using the income sourcing rules. In the case of an individual who is a bona fide resident of Puerto Rico during the entire taxable year, income derived from sources within Puerto Rico (except amounts received for services performed as an employee of the United States or any agency thereof); but such individual shall not be allowed as a deduction from his gross income any deductions (other than the deduction under section 151, relating to personal exemptions), or any credit, properly allocable to or chargeable against amounts excluded from gross income under this paragraph. 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 applicable to taxable years beginning after Dec. 31, 1986, with certain exceptions and qualifications, see section 1277 of Pub. Special benefits can apply to intellectual property. This only applies to wholesale operations based in Puerto Rico selling to a distributor in the United States. For more information, please contact me at info@premieroffshore.com or call (619) 483-1708. (A) Gain that is considered to be derived from sources outside of the United States under section 865(g)(3) will be considered income from sources within Puerto Rico; and (B) Gain that is considered to be derived from sources outside of the United States under section 865(h)(2)(B) will be considered income from sources within the possession in which the liquidating corporation is created or organized. • Debt - External: $70 billion (January 23, 2017 2010 est.) Under Spanish colonial rule the island was largely neglected because of its limited mineral resources. The source-of-income rules apply to income realized after December 31, 2010, regardless of the taxpayer’s taxable year, making the first year of applicability 2011. 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. They will create a pricing model that will stand up to IRS scrutiny and remove any risk should you be audited. 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. All suggestions for corrections of any errors about Puerto Rico Economy 2020 should be addressed to the CIA or the source cited on each page. Use the worksheet found in IRS Publication 1321 to determine if a federal tax return must be filed. Personal income tax rates The following regular tax rates remain in … Note that wholesale distribution of products can qualify for Act 20. Many large accounting firms have groups specialized in producing transfer pricing studies between the territory and the US. This is because all of the work to generate sales made after the move will have occurred in Puerto Rico. Legally avoiding the 37% federal rate and the 13.3% California (or other state) rate sounds pretty good. If you’re new to Puerto Rico Act 20, the basics are this: set up a business on the island that employees at least 5 people and pay only 4% in tax on your corporate profits. By reporting $75,276 of her $100,000 gain as Puerto Rico source income on her 2019 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat $75,276 as Puerto Rico source income. Use the worksheet found in IRS Publication 1321 to determine if a federal tax return must be filed. The special rules in Puerto Rico are simply a matter of … The cost for a transfer pricing study will vary widely the the firm selected and the type of business you are operating. Federal law requires payment of federal income tax from the following residents and corporations only: federal government employees in Puerto Rico, residents who are members of the United States military, those with income sources outside of Puerto Rico, those individuals or corporations who do business with the federal government, and those Puerto Rico-based corporations that intend to send funds to … Then, Puerto Rico has enacted several … 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. Allocation if produced and sold in different locations. L. 99–514 inserted “, or any credit,” in pars. A qualifying business will offer services from Puerto Rico to businesses and persons outside of Puerto Rico. Puerto Rico is expected to receive $13 billion in Covid-related federal funds, according to the Financial Oversight and Management Board, the agency that … Puerto Rico. 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 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. You can now set up an Act 20 company with only 1 employee (you, the business owner). The same goes for US companies that open divisions in Puerto Rico to get that 4% corporate tax rate on a portion of their profits. 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. 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. See the Instructions for Form 1040-NR. 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. Corporations not engaged in a trade or business in Puerto Rico are subject to a 29% WHT at source on certain gross income items (considered fixed or determinable, annual or … Still, Puerto Rico hopes to lure American mainlanders with an income tax of only 4%. So, if you’re selling an online service for $50, and $25 of the value of that service comes from your 5 employees in Puerto Rico, then half your net profits can be attributed to Puerto Rico. 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. I will be happy to help you structure your business in Puerto Rico. No claims are made regarding the accuracy of Puerto Rico Economy 2020 information contained here. 1.937-2(g)(1)(ii). I hope this information on what is Puerto Rico sourced income for an Act 20 business has been helpful. In the case of an individual who is a bona fide resident of Puerto Rico during the entire taxable year, income derived from sources within Puerto Rico (except amounts received for services performed as an employee of the United States or any agency thereof); but such individual shall not be allowed as a deduction from his gross income any deductions (other than the deduction under section 151, relating … To compare Puerto Rico to typical offshore tax plans, see: Puerto Rico Tax Deal vs Foreign Earned Income Exclusion. EDITORS NOTE: On July 11, 2017, the government of Puerto Rico did away with the requirement to hire 5 employees to qualify for Act 20. Generally, elections affecting the partnership's net income must be made by the partnership. 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. Dividends from an Act 20 corporation will be tax free in Puerto Rico to a resident of the territory who. This is the heart of Puerto Rico’s Act 20 for businesses. INCOME FROM SOURCES WITHOUT THE UNITED STATES, Subpart D. Possessions of the United States, Section 933. Also, some sources of income, such as pension income, are taxed differently in Puerto Rico than in the states. The larger burden is that, unlike citizens from almost every other country on earth, US persons are subject to US tax on their worldwide incomeregardless of where they live. Other income is recorded in the catch-all Schedule F. Up to $2000 of interest per taxpayer from Puerto Rico sources may be excluded from taxation (Part 1, line 2). Here is a list of the various types of income and where they are sourced. Only service based income will qualify for Act 20. Generally, foreign income won't be taxable for Puerto Rico purposes. 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 resident foreign corporations, these are only taxed on their PR-source income and on their effectively connected Puerto Rico income. Under Spanish colonial rule the island was largely neglected because of its limited mineral resources. Schedule a 30-minute consultation with Christian Reeves on your international tax or business matter. (1) An individual (whether a United States citizen or an alien), who is a bona fide resident of Puerto Rico during the entire taxable year, will exclude from gross income the income derived from sources within Puerto Rico, except amounts received for services performed as an employee of … If you move you and your business to Puerto Rico, and break all ties with the United States, all business income will be Puerto Rico sourced income. The source-of-income rules apply to income realized after December 31, 2010, regardless of the taxpayer’s taxable year, making the first year of applicability 2011. Wages for services performed in Puerto Rico, whether for a private employer, the U.S. government, or otherwise, is income from Puerto Rico sources. 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. Sec. 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. 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. If you sell a physical good (inventory) in to the United States, you have US sourced income. Maximizing Puerto Rico sourced income in an Act 20 business, and thus minimizing US sourced income, is the key to unlocking the 4% tax rate offered in Puerto Rico. Dividends from US states are taxable where the company is formed. When you’re attributing income between the US with its 35% Federal + state taxes and Puerto Rico at 4%, you will want to maximize the perceived value of the work done in Puerto Rico. Economy. But, only service based income will qualify for Act 20 tax benefits. L. 99–514, set out as a note under section 931 of this title. Rico is betting to surpass the current economic challenges by promoting Puerto Rico as an international services center with high concentration on technology and novel industries. Industry is the main source of income for Puerto Rico. 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. 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. 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. 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. The rule is simple: only Puerto Rico sourced income can be attributed to the Act 20 business and qualifies for the 4% tax rate. To make matters worse, Puerto Rico's unemployment rate is above 15%, more than double the 7.3% in the mainland, per the Bureau of Labor Statistics. 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. The portion of her gain attributable to Puerto Rico is $75,276 ($100,000 x (1,294 Puerto Rico days ÷ 1,719 total days)). 1986—Pub. INTERNATIONAL TAX & BUSINESS GUIDE, 2020 – 10TH EDITION, Puerto Rico Eliminates 5 Employee Requirement, How to Open an Offshore Bank Account in Cayman Islands – Cayman Banking Guide, Move to Puerto Rico and Pay Zero Capital Gains Tax, 10 Best Second Passports and Citizenship by Investment Programs For 2016, How to report a foreign salary or international business income. Puerto Rico - Puerto Rico - The economy: Puerto Rico’s economy, now based on services and manufacturing, was dominated by agriculture until the mid-20th century. Above, I gave you the example of the perfect client – someone who moves herself and her business to Puerto Rico, breaking all ties with the United States. Tourism has traditionally been an important source of income with estimated arrivals of more than 3.6 million tourists in 2008. 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. An individual who is a Bona Fide Resident of Puerto Rico for the entire taxable year, generally, may exclude Puerto Rico source income from gross income (IRC 933(1)). It doesn’t matter where the customer is located… only where you and your employees are when doing the work. A partnership computes its gross income and deductions, to arrive at taxable income, in the same manner an individual would, with certain exceptions. Certain capital gains are sourced to Puerto Rico if derived by Puerto Rican residents (albeit with limitations). 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. 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. Salaries, wages, and other compensation for labor or personal services. 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. Royalties on patents, copyrights, trademarks, etc. or call (619) 483-1708. The rule is simple enough: Any value added in Puerto Rico is Puerto Rico sourced income and any value added in the United States is US sourced income. Between 2017 and 2018 the population of Puerto Rico declined from 3.34M to 3.2M, a -4.26% decrease and its median household income grew from $19,343 to $20,296, a 4.93% increase. Puerto Rico. 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. 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