U.S. International Tax Planning for Bona Fide Residents of Puerto Rico

If you are a U.S. taxpayer and a resident of Puerto Rico for the entire year, you may not have to pay U.S. federal income tax on interest, dividends, and possibly worldwide capital gains from Puerto Rico. To be considered a resident of Puerto Rico, you must pass a presence test, have your tax home in Puerto Rico, and have a closer connection to Puerto Rico than to the U.S. or another country.

If you become a resident of Puerto Rico during the year, you may still be considered a resident for the whole year if you meet certain conditions. As a resident of Puerto Rico, you may also have tax benefits when it comes to owning shares in Puerto Rican corporations.

Overall, if you are a U.S. taxpayer living in Puerto Rico, you might not have to pay as much U.S. federal income tax on certain income and investments from Puerto Rican companies. If a person from the U.S. moves to Puerto Rico and sets up a business there, they can take advantage of tax benefits. For example, they can set up a company in Puerto Rico and then have that company set up another company in a foreign country, like Ireland. The Puerto Rican company can then license its intellectual property to the foreign company, and the foreign company can then license it to the person’s U.S. business. This setup allows the person to pay lower taxes on the money they earn from the intellectual property. Hungarian Company should not have to pay U.S. tax on the royalties it receives from Irish Company, thanks to a tax treaty between the U.S. and Hungary. This means Hungarian Company will only have to pay a small amount of tax in Hungary. Even though the royalties are considered passive income, Hungarian Company shouldn’t be affected by certain tax rules because its foreign subsidiaries are treated as branches of a Puerto Rican company. If you are a resident of Puerto Rico, you can receive profits from a Puerto Rican corporation without paying U.S. federal income tax on them. This also applies to dividends from non-Puerto Rican corporations that have merged into a Puerto Rican one. This can be a good tax planning strategy if you own foreign corporations with untaxed earnings. Just make sure the Puerto Rican corporation earns some income in Puerto Rico. If a U.S. citizen owns businesses in the Cayman Islands and the Bahamas, they can merge them into a new company in Puerto Rico and become a resident there to avoid paying U.S. taxes on their earnings. This can result in significant tax savings. However, any profits earned before moving to Puerto Rico may still be taxed by the U.S. for up to 10 years. An individual has a significant connection to the U.S. if they have a permanent home, are registered to vote, or have a spouse or child under 18 living in the U.S. Certain tax rules apply to income from property in Puerto Rico for U.S. residents. If property is sold within 10 years of moving to Puerto Rico, there may be exceptions to tax exemptions. Hungarian Co and Ireland Co won’t be taxed by the US because they are disregarded for tax purposes. They can also benefit from tax treaties between the US and other countries. Hungarian Co will also be able to pay dividends to a Puerto Rican corporation without Hungarian withholding tax. The Puerto Rican corporation won’t be taxed on these dividends. The gain from these transactions will be exempt from US tax if the Puerto Rican corporation’s income comes mostly from business in Puerto Rico. The merger between the two companies needs to follow certain rules to be tax-free. The tax regulations should not make previously untaxed earnings taxable when a shareholder moves to Puerto Rico. This is because the shareholder still meets the requirements to avoid this tax.

Source: https://www.floridabar.org/the-florida-bar-journal/u-s-international-tax-planning-for-bona-fide-residents-of-puerto-rico/