PUERTO RICO Law and Practice Contributed by: Simón Carlo Valentín, Anthony O. Maceira Zayas and Carlos M. Fontán, Maceira Zayas
of US tax principles rather than any direct adoption of OECD or UN frameworks. 1.4 Multilateral Instrument Puerto Rico is not a signatory to the OECD Multilateral Instrument (MLI) and, as a US territory, lacks the legal capacity to become one. The United States has not signed the MLI. As a result, it does not apply to US tax treaties and, by extension, has no direct or indirect application to Puerto Rico at the time of writing.
under the PRIRC. This includes employment income, business income and passive income, subject to applicable deductions, credits and exemptions. Puerto Rico provides mechanisms to mitigate double taxation, including foreign tax credits for taxes paid to other jurisdictions. In addition, incentive regimes under Act 60 may provide preferential treatment for certain types of income, including interest, dividends and capital gains, subject to decree conditions. In practice, tax planning for resident individuals focus - es on accurate sourcing, proper characterisation of income, and compliance with both Puerto Rico and US federal rules. 2.4 Taxation of Non-Resident Individuals Non-resident individuals are taxed only on their Puerto Rico-source income. This includes compensation for services performed in Puerto Rico, rental income from Puerto Rico property, royalties, and certain fixed or determinable income items. Such income is generally subject to withholding at source, which serves as the primary collection mech - anism. Applicable withholding rates depend on the nature of the income and the status of the recipient. Non-residents may also be required to file Puerto Rico income tax returns if they are engaged in a trade or business in Puerto Rico or seek to claim deductions, credits or refunds. 2.5 Tax Residence of Legal Entities The tax residence of legal entities is determined pri - marily by place of organisation. Entities organised under the laws of Puerto Rico are treated as domestic entities and are generally subject to Puerto Rico taxa - tion on their worldwide income. Foreign entities may be subject to Puerto Rico tax - ation if they are engaged in a trade or business in Puerto Rico or derive Puerto Rico-source income. The analysis typically focuses on economic nexus, the nature of activities conducted in Puerto Rico, and the sourcing of income.
2. Territoriality, Residence and Permanent Establishment
2.1 General Principle of Territorial Taxation Puerto Rico operates a hybrid tax system combin - ing elements of residence-based and source-based taxation. Bona fide resident individuals are generally subject to Puerto Rico income tax on their worldwide income under the PRIRC, subject to available exemp - tions and credits. Non-resident individuals and foreign entities are taxed only on Puerto Rico-source income or income effec - tively connected with a Puerto Rico trade or business. The determination of source is therefore central to the Puerto Rico tax system. In practice, the interaction between Puerto Rico taxation and US federal taxation creates a unique framework. Under Internal Revenue Code Section 933, bona fide residents of Puerto Rico may exclude Puerto Rico-source income from US federal taxation, Physical presence in Puerto Rico during the taxable year of at least 183 days raises the presumption of local residence. Other criteria used are similar to those used by the IRS, including but not limited to data on driver’s licences, vehicle registrations, etc. Physical presence is also a criterion for individuals to benefit from certain tax incentives. 2.3 Taxation of Resident Individuals Bona fide resident individuals are generally subject to Puerto Rico income tax on their worldwide income subject to applicable requirements. 2.2 Tax Residence of Individuals
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