How to Officially Become A Resident of Puerto Rico
As I’ve mentioned so many times in my previous posts, I was initially drawn to Puerto Rico when I heard of the amazing tax incentives the island has to offer business owners and entrepreneurs. When my friend first told me about them, they honestly sounded too good to be true. However, upon moving to Puerto Rico, becoming a Puerto Rican citizen and then reaping the benefits of these tax incentives, I can tell you that they really are as good as they sound. However, in order to get these incentives, you have to do a bit more than just pack your bags and fly over to the beautiful island. To receive the tax incentives and truly benefit from moving to Puerto Rico, you have to officially become a resident of the island. And, out of all the questions I get asked about my life in paradise, the most frequent one is: how do I become a resident of Puerto Rico? In order to answer this question, I am going to outline exactly what’s needed to secure residency in one of the most beautiful places on Earth.
The Background of Puerto Rico’s Tax Incentives:
Interestingly, although Puerto Rico is a commonwealth of the United States, and most things fall under US federal law, Puerto Rico’s tax system is independent from the US. It actually has its own tax agency that is similar to the IRS. However, despite their similarities, Puerto Rico’s tax system is different from the US tax system. This is how the commonwealth is able to provide residents with different tax incentives. The specific tax laws, known as Act 20 and Act 22, make it so that Americans who live in Puerto Rico only have to pay an income tax of 4%. Additionally, there is no tax on dividends and no capital gains tax. Today, Act 20 and Act 22 have been combined into one new inclusive act called Act 60.
The tax incentives have been around since 2012, but have been re-invigorated following the commonwealth’s incredibly strict lockdown policies that started in March 2020. Due to the lockdowns, Puerto Rico’s tourism and hospitality industries were crushed. That, on top of the economic disaster that ensued from Hurricane Maria in 2017, left Puerto Rico struggling with serious economic issues. In order to re-invigorate the economy, local government added to the already unbelievable tax incentives that they had in place. Puerto Rico’s hope has been to lure productive people and their successful businesses to the island.
What Defines A Puerto Rican Resident
According to Puerto Rico’s Government website, in order to be “defined as a bona fide resident of Puerto Rico, an individual must be able to demonstrate that he/she satisfies 3 key residency requirements relating to the individual’s ‘presence' in Puerto Rico, having a ‘tax home’ in Puerto Rico and having ‘closer connections’ to the territory than anywhere else” (residencies.io).
How To Become A Resident:
In short, becoming a resident of Puerto Rico is a three year process, during which you need to spend 183 days in Puerto Rico during the tax year or be present in Puerto Rico for at least 539 days during a three year period. You also can have no significant connection to the USA and can spend no more than 90 consecutive days in the USA.
The easiest way to think about it is making sure you satisfy the 3 key residency requirements, as mentioned above. Those include: Presence, Tax Home and Closer Connections.
This stipulation says that an individual must be “present” in Puerto Rico for a defined period. According to the Puerto Rican Official Government Website, in order to pass this test, an individual should be able to satisfy 1 of the following conditions:
Be present in Puerto Rico for a minimum of 183 days in the tax year.
Spend at least 549 days in Puerto Rico during the 3-year period of the current tax year and the 2 preceding years, including at least 60 days in Puerto Rico during each tax year.
Not be present in the USA for more than 90 days during the tax year
Not earn more than $3,000 in earned income in the USA during the tax year and be present in Puerto Rico for more days than in the USA.
Have no significant connection to the USA during the tax year.
2. Tax Home:
According to property website 7th Heaven Properties, an individual should not have a “tax home” outside of Puerto Rico. This means that Puerto Rico should be your primary place or residence or your primary place of employment. To benefit from the tax advantages under Act 60, an individual must purchase property in Puerto Rico within 2 years. This property must be the individual’s primary residence and not rented out.
3. Closer Connections
This one is a bit fuzzy, only because it leaves a lot up to interpretation. However, in short, this means that a resident should not have a “closer connection” to the USA or to a foreign country other than Puerto Rico.
“Various factors such as the presence of an individual’s permanent home, family, belongings, principal bank and business in Puerto Rico, as well as the existence of professional, cultural, religious, social and political affiliations and links in Puerto Rico, may help to demonstrate a closer connection to Puerto Rico than to anywhere else” (7thheavenproperties.com).
Overall, it really isn’t that difficult to become a resident of Puerto Rico. However, I always emphasize the fact that when it comes to this process, play it safe and don’t test your boundaries. If you have a home in the states, I would definitely suggest selling it before you move and not just renting it out while you’re gone. Things like this will definitely inhibit you from securing the residency that you deserve.