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.
An individual who relocates to Puerto Rico during a given year is generally not considered a bona fide resident for that year. This is because their tax home was elsewhere for part of the year, and they maintained stronger ties 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) provides a special rule for individuals moving to Puerto Rico, offering exceptions to the tax home and closer connection requirements in the year of relocation. To qualify under this rule, three criteria must be met:
- The individual must maintain bona fide residency in Puerto Rico for the three consecutive tax years following the year of their move.
- The individual must not have been a bona fide resident of Puerto Rico during the three tax years preceding their move.
- They must establish a tax home in Puerto Rico and show a stronger connection to Puerto Rico than to any other location for at least the final 183 days of the relocation year.
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 leave the island. Generally, a person may be treated as a bona fide resident of Puerto Rico for part of the year they relocate, provided they satisfy specific criteria.
Treas. Reg. §1.937-1(f)(1)(iii) references “the 3 taxable years” rather than explicitly requiring “full” taxable years. This wording may suggest the possibility of maintaining bona fide residency in Puerto Rico for only part of 2024.
However, due to the unclear nature of the law in this area, we strongly recommend remaining a bona fide resident of Puerto Rico for the entire year and postponing the termination of residency until well into the following year to avoid potential complications.