All U.S. citizens are subject to U.S. Internal Revenue Code provisions, regardless of their place of residence or the source of their income. All people born in Puerto Rico are U.S. citizens. Thus, as a general rule, all “puertorriqueños” are subject to U.S. income taxation under the provisions of the Code.
Notwithstanding the above, U.S. citizens who reside in Puerto Rico generally do not file a U.S. income tax return as a result of one particular section of the Code, Section 933(1), which basically provides that a bona-fide resident of Puerto Rico for the entire taxable year may exclude from U.S. income taxation their income from sources within Puerto Rico.
Note, however, that this exclusion is not extensive to income from sources outside of Puerto Rico. Thus, a U.S. citizen resident of Puerto Rico who derives income from sources outside of Puerto Rico in excess of the applicable filing requirement may have to file a U.S. income tax return (and pay the corresponding tax) even if a bona-fide resident of Puerto Rico for the entire taxable year.
Such U.S. individual income tax return would report all non-Puerto Rico source income and must exclude all income from sources within Puerto Rico. As a result, for purposes of claiming either the standard or itemized deductions, the same must be allocated based on the proportion that each type of income (includable vs. excludable) bears to total income. The personal exemption, as well as the exemption for dependents, is not subject to allocation.
For these purposes, the general sourcing rules are as follows:
- Compensation — where the services are rendered
- Interest and dividends — place of residence or incorporation of the payer
- Rents and royalties — location of the property from which the income is derived
- Sale of personal property — place of residence of the seller
- Sale of real property — location of the real property
Furthermore, being a bona-fide resident of Puerto Rico for purposes of Code Section 933 is a factual determination to be made on a case by case basis taking into consideration the criteria established on Section 937 of the Code. These include, among others:
- Number of days of physical presence in Puerto Rico
- Location of permanent home and personal belongings
- Location of the individual’s family
- Jurisdiction in which person is registered to vote
- Location of banking activities
- Jurisdiction issuing driver’s license
Thus, any “puertorriqueño” who derives income from sources outside of Puerto Rico in excess of the applicable filing requirements under the Code, must file a U.S. individual income tax return and pay the corresponding income tax.
Undoubtedly, such individual Puerto Rico resident also files an income tax return with the Puerto Rico Treasury Department reporting income from all sources pursuant to the provisions of the Puerto Rico Internal Revenue Code. So, to avoid double taxation on any income also reported in the U.S. income tax return, the local Code would allow a foreign tax credit against the Puerto Rico tax liability (subject to limitations) for taxes paid to the U.S. on such income from sources outside of Puerto Rico.