The determination of residency in Puerto Rico is important for federal and Puerto Rico income tax purposes. For taxable years beginning after October 22, 2004, Section 937 of the US Internal Revenue Code establishes new rules to determine residency in Puerto Rico (and the U S Virgin Islands) for US tax purposes.
Subsection One establishes that beginning in taxable year 2005, the individual must meet three tests that will determine whether the individual is a bona fide resident of Puerto Rico for income tax purposes.
The three tests to be met annually are the following:
* be present in Puerto Rico for at least 183 days during the taxable year
* not have a tax home outside Puerto Rico
* not show closer connection to the U S or any other foreign country.
Subsection Two establishes the sourcing rules to determine whether income is from Puerto Rico or US sources, or effectively connected with the conduct of a trade or business in the U S or Puerto Rico.
Subsection Three requires that any individual becoming a resident of Puerto Rico or ceasing to be a bonafide resident of Puerto Rico must notify the Treasury of the United States. Failure to notify conveys a penalty of $1,000.
The presence test requires that the individual meet any of the following tests:
a. Present in Puerto Rico (or the US Virgin Islands, as the case may be) for at least 183 days of the individual's taxable year.
b. Present in the United States or no more than 90 days of the taxable year.
c. Had no earned income in the United States and was present in Puerto Rico for more days than in the United States.
d. Had no permanent connection to the United States.
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