At my firm, I always get the question from my clients “Do I really need to stay for 3 years?” The answer is yes, you must be in Puerto Rico for at least 3 years in order to reap the benefits of Act 60 and minimize your risk. This article will walk you through the three year residency requirement.
General Rules for Bona Fide Residency
To qualify as a bona fide resident of Puerto Rico, an individual must typically satisfy three tests: the presence test, the tax home test, and the closer connection test.
- Presence Test: Generally requires the individual to spend at least 183 days in Puerto Rico each year.
- Tax Home Test: Requires that the individual does not have a tax home outside Puerto Rico at any time during the taxable year.
- Closer Connection Test: Requires that the individual does not have a closer connection to the United States or any foreign country than to Puerto Rico at any point in the taxable year.
In the year an individual relocates to Puerto Rico, they cannot generally be considered a bona fide resident under these rules. This is because, for part of that year, their tax home was not in Puerto Rico, and they had a closer connection to a different location.
For instance, even if someone moved to Puerto Rico in January 2022 and spent over 330 days there in that year, they still would not qualify as a bona fide resident for 2022.
Special Rules for the Year You Move to Puerto Rico
Treas. Reg. §1.937-1(f)(1) outlines a special provision for individuals relocating to Puerto Rico, allowing for flexibility with the tax home and closer connection requirements in the year they move. To qualify for this provision, three conditions must be met.
First, the individual must not have been a bona fide resident of Puerto Rico during the three tax years prior to their relocation. Second, they must establish their tax home in Puerto Rico and demonstrate a closer connection to Puerto Rico than to any other location for at least the last 183 days of the year in which they move. Lastly, they must maintain bona fide residency in Puerto Rico for each of the three tax years immediately following their year of relocation.
Special Rules for the Year You Move from Puerto Rico to US
Special rules apply not only to the year an individual moves to Puerto Rico but also to the year they relocate away from the island. Generally, a person can be considered a bona fide resident of Puerto Rico for part of the year they move, provided they meet specific requirements.
Treas. Reg. §1.937-1(f)(1)(iii) does not explicitly mention “full” taxable years but instead refers to “the 3 taxable years.” The absence of this specification could provide an opportunity to argue that he only needs to maintain bona fide residency in Puerto Rico for part of 2024.
However, given the ambiguity of the law in this area, we strongly advise that you remain a bona fide resident of Puerto Rico for the entire year and wait until sometime into the next year to terminate residency status.