U. S. and Puerto Rican Tax Incentives for Bona Fide Residents

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U. S. and Puerto Rican Tax Incentives for Bona Fide Residents

By admin on June 16, 2014 Business & Finance

By:  Mark Leeds and Gabriel Hernández

Mark Leeds is a tax partner with New York office of Mayer Brown LLP and the editor-in-chief of Derivatives:  Financial Products Report, as well as a frequent writer on capital markets tax issues.

Gabriel Hernández is a tax partner with the San Juan office of BDO Puerto Rico and one of the framers of the Puerto Rican tax incentives.

The authors thank Anthony Tuths, a New York Tax Partner with Withum-Smith&Brown PC, for his helpful comments and suggestions.

In this article, Leeds and Hernández explore U. S. and Puerto Rican income tax considerations for individuals who may wish to consider relocating to Puerto Rico.

The play West Side Story focuses on the challenges occasioned by the mid-20th century migration of significant numbers of Puerto Rican families to New York City.  The plight depicted in the theater was real; the economic situation at the time in Puerto Rico was dire.  The government of Puerto Rico, seeking to stem mass emigration, responded with a mix of tax and economic incentives.¹ The response to these tax incentives over the next three decades was spectacular.  Puerto Rico was transformed from an impoverished agrarian economy to a technologically advanced industrial country.²

The federal income tax subsidies supporting Puerto Rico were repealed in 1994.  The impact on the economy of Puerto Rico was substantial.³  These changes, coupled with a rise in inexpensive labor elsewhere in the world, caused a prolonged recession in Puerto Rico and the emigration of some of Puerto Rico’s best and brightest young people began again. Today, La Isla del Encanto is making bold moves to attempt to reverse its negative economic trends and bring individuals (including Puerto Rican nationals who may have left many years before), families, and businesses back to its economy.⁴  The Puerto Rican Department of Economic Development and Commerce has been actively engaged in an information campaign extolling the benefits of relocation one’s business and residence to Puerto Rico.⁵  This articles explores U. S. federal and Puerto Rican income tax considerations for individuals who may wish to consider relocating to Puerto Rico.

The success of Puerto Rico’s new laws remains uncertain, but reports suggest that the opportunity is attracting attention.⁶ As analyzed below, however, the Puerto Rican tax incentives must be understood in light of existing U. S. rules, which are effective in ensuring the integrity of the U.S. tax systems on built-in gains and investment income.  Concomitantly, Congress has recognized the need for special tax incentives to assist U.S. possessions, including Puerto Rico, in obtaining jobs.⁷  The need for special tax incentives has been attributed to the additional costs imposed by possession status, such as the requirement to use U. S. flagships and the minimum wage standards. These policy statements were reaffirmed by Congress in May 2012.⁸

  1.  Overview of Tax Burdens on U. S. Individuals

At the end of 2012, the House followed the Senate in passing H.R. 8, the American Taxpayer Relief Act of 2012 (ATRA; P.L. 112-240).  President Obama signed this legislation into law on January 2.  Succinctly stated, the act imposed an income tax increase on top-earning U.S. taxpayers, nudged up the estate tax rate to a maximum of 40 percent (from 35 percent), and extended a variety of tax incentives that either had already expired or were set to expire.  Tax rates on top-earning individual U.S. taxpayers went up by a significant amount, but triggered beginning at $400,000.  For individuals with incomes exceeding $400,000, beginning in 2013, the highest marginal rate was permanently increased to 39.6 percent rate. Also, the act imposed stiff marriage penalty – married couples filing jointly with combined incomes of $450,000 are subject to the 39.6 percent rate. For low- and moderate-income tax payers, the act retained the existing rate structure.

ATRA, however, does not use the $400,000 ($450,000 for married taxpayers filing jointly) threshold for all purposes.  The phaseouts for itemized deductions and personal exemptions apply at adjusted gross incomes of $250,000 for individuals and $300,000 for married couples filing jointly.  Also, the Pease limitation on itemized deductions has been reinstated.  The Pease limitation reduces most itemized deductions by 3 percent of the amount by which AGI exceeds a specified threshold, up to a maximum reduction of 80 percent of itemized deductions.  The thresholds are also going to be adjusted for inflation beginning in 2014.  The federal income tax rate on long-term capital gains was increased from 15 to 20 percent for individuals with incomes of $400,000 or more ($450,000 for married couples filing jointly) beginning in 2013. Qualified dividend income remains taxable at the rates applicable to long-term capital gains and thus at the 20 percent rate applicable to taxpayers with income of at least $400,000 ($450,000 for married couples filing jointly).  Capital gains and other items of net investment income can also be subject to a 3.8 percent Medicare tax beginning in 2013.

Despite these substantial tax increases on individuals with incomes exceeding $400,000, Obama has been pressing Congress to consider additional “revenue options”.⁹  The 2013 federal income tax increases, coupled with the prospects for additional tax increases soon, has heightened the attractiveness of jurisdictions with more moderate tax burdens.  As discussed below, PUERTO RICO IS SUCH A PLACE.  Puerto Rico offers the additional advantage of U.S. citizens not being required to give up their U.S. citizenship.₁₀

  1.  The Puerto Rico Tax Rules

In January 2012 Puerto Rico passed Act No. 22 of 2012, which contains numerous incentives to encourage individuals to relocate to Puerto Rico.  The law provides the following benefits to new Puerto Rico bona fide residents (more on who qualifies as a new bona fide resident below):  100 percent tax exemption from Puerto Rican income taxes on all dividends; 100 percent tax exemption from Puerto Rican income on all interest; and 100 percent tax exemption from Puerto Rican income taxes on all capital gains accrued after the individual becomes a bona fide resident of Puerto Rico.  The new resident must not have been a resident of Puerto Rico at any time during the 15-year period preceding the effective date of Act No. 22, which period would be from January 16, 1997, through January 16, 2012.

Other complementary laws were enacted in 2012, mainly:

  • The Export Services Act (Act No. 20 of 2012), which provides for a 4 percent maximum tax rate on income related to services for exportation provided by new export services businesses in Puerto Rico; and
  • The International financial Center Regulatory Act (Act 273 of 2012), with the objective of making Puerto Rico an international banking and financial center by providing tax incentives (mainly, a 4 percent income tax rate) for new banking and financial activity in Puerto Rico that is done for clients outside of Puerto Rico.

There is a process in place whereby an individual files an application for a Puerto Rico tax decree before relocation, which would serve as a contract guaranteeing the incentives through 2035 from any subsequent changes in local legislation.  Note that these efforts are not dissimilar from the federal government allocating tax credits to stimulate specific types of economic activity (recent examples being renewable energy initiatives) or from what states have often done:  providing tax holidays to companies to move their factories.

  1.  Become Bona Fide Residents

In General, a U. S. individual remains subject to full federal income tax regardless of where he is domiciled. ₁₁  The code, however, provides special rules for an “individual who is a bona fide resident” of Puerto Rico.₁₂  Under those special rules, income from sources within Puerto Rico is not included in gross income and is not subject to U.S. federal income tax.₁₃  Thus, there are two levels of inquiries for U.S. individuals who relocate to Puerto Rico.  First, is the individual a bona fide resident of Puerto Rico?  If so, what items of income can be included from U. S. income?

  1. Bona fide residents of Puerto Rico.    An individual is considered a bona fide resident of Puerto Rico if three tests are met.  The first test is mostly mechanical.  The individual must be present for at least 183 days during the tax year in Puerto Rico (the presence test).₁₄ Second, the individual must not have a tax home outside Puerto Rico during the tax year.₁₅ Third, the individual must not have a “closer connection” to the United States or a foreign country that to Puerto Rico during the tax year.₁₆ Special rules are provided for the year of the move from the United Sates to Puerto Rico.
  2. The presence test.  The mechanical 183-day presence test is loosened by Treasury

regulations.  Under those regulations, an individual will be considered to meet the presence test if one of five tests is met.₁₇:

  1. the individual was present in Puerto Rico for at least 183 days during the tax year;
  2. the individual was present in Puerto Rico for at least 549 days during the three-year period consisting of the current tax year and  two immediately preceding tax years, as long as the individual was present in Puerto Rico for at least 60 days during each of those years₁₈;
  3. the individual was present in the United States for no more than 90 days during the tax year;
  4. during the tax year, the individual had earned income (meaning wages, salary, professional fees, and compensation for personal services actually rendered) of less than $3,000 and was present for more days in Puerto Rico than the United States; or
  5. the individual had no significant connection to the United States during the tax year.

The importance of keeping a diary to establish presence cannot be underestimated.₁₉ Also, a taxpayer should pay for personal items with a credit card.  The credit card statement can be used to establish his whereabouts on a given day.

Detailed rules are provided for undertaking the day count necessary to determine compliance with the presence test.  An individual is considered present on any day he is physically present in Puerto Rico (no minimum amount of time during that day must be satisfied).₂₀ An individual is considered present in Puerto Rico even if he is outside Puerto Rico to accompany “on a full-time basis” a parent, spouse, or child for specific medical treatment.₂₁  Concomitantly, if the individual is present in the United States because he accompanied a parent, spouse, or child to the United States for specified medical care, his presence in the United States for that purpose is not counted as a day spent in the United States.₂₂  Further, an individual is considered to be in Puerto Rico (1) if his ability to return to Puerto Rico is prevented due to a major disaster, or (2) during a period in which an evacuation order is in effect for the individual’s home.₂₃  Under a tie-breaker rule, if an individual is present in the United States and Puerto Rico on the same day, that day is counted as a day present in Puerto Rico.₂₄

As noted above, even if an individual fails each of the first four mechanical presence tests, he can still satisfy the presence test if he has no significant connection to the United Sates.  An individual is considered to have a significant connection to the United States if one of three tests is met₂₅.

  1. the individual has a permanent home in the United States;
  2. the individual has a current voter registration in any political subdivision of the United States;
  3. the individual has a spouse or child under the age of 18 whose principal place of residence is in the United States unless the child is living in the United States with a custodial parent under a custodial decree or the child is in the United Sates as a student.

A permanent home includes a furnished room or an apartment and may be either owned or rented.₂₆ If the place is available at all time to be occupied, as opposed to for short durations, it may be considered a permanent home.  Special rules are provided for properties that the individual owns but rents out.  Under those special rules, the rental property can be treated as a nonpermanent home if the taxpayer uses no portion of it as a residence during the tax year.₂₇

  1. the tax home test.  Applicable regulations provide that a person’s tax home is considered

to be located at his “regular or principal place of business.”₂₈  If, because of the nature of an individual’s occupation (or because the individual does not carry on a trade or business) the         individual does not have a regular or principal place of business, the person’s tax home is his regular place of residence.₂₉  A tax home must be maintained for the entire tax year.₃₀

As can readily be seen, for an individual to successfully establish that he is a bona fide resident of Puerto Rico, he must relocate a substantial portion of his business activities to Puerto Rico.  For investment management activities, it is likely that satisfaction of this test would require a migration of a substantial portion of the trading and research functions to Puerto Rico.  Because the test does not require all places of business to be located inside Puerto Rico, it should be possible to locate middle and back-office functions outside Puerto Rico and still satisfy the tax home test.  Also, if an individual wants to retain a U. S. residence following the move to Puerto Rico, the tax home test should not prohibit that retention, as long as the principal business office is related to Puerto Rico.  However, that choice may bear on whether the individual has satisfied the closer connection test.

  1. the closer connection test. The closer connection test is a facts and circumstance test.  An

individual is considered to have a closer connection to Puerto Rico than elsewhere in he maintains more significant contacts with Puerto Rico than the United States.₃₁ Nine nonexclusive factors are listed as relevant to the determination whether an individual maintains a closer connection to Puerto Rico than elsewhere₃₂:

  1. the location of the individual’s permanent home (determined in the same manner as under the presence test₃₃;
  2. the location of the individual’s family;
  3. the location of personal belongings, such as automobiles, furniture, clothing, and jewelry owned by the individual and his family;
  4. the location of social, political, cultural, or religious organizations with which the individual has a current relationship;
  5. the location where the individual conducts his routine personal banking activities;
  6. the location where the individual conducts business activities (other than those that constitute the individual’s tax home);
  7. the location of the jurisdiction in which the individual holds a driver’s license;
  8. the location of the jurisdiction in which the individual votes; and
  9. the country of residence designated by the individual on forms and documents.

Further, an individual must be considered to possess a closer connection to Puerto Rico than to the United States or a foreign country for the entire tax year.

An example illustrates the application of the closer connection test to an investment manager.₃₅   In the example, a fund manager with two teenage children in high school relocates to Puerto Rico, but his wife remains in the United States with their children until they can complete high school.₃₆  The manager regularly travels back to the United States to visit his wife and children, conduct business, and take vacations.  While he rents an apartment in Puerto Rico, he co-owns a home in the United States with his wife where she and their children live.  The manager joins the Puerto Rico Chamber of Commerce but has current social, political, cultural, and religious affiliations in the United States, and he receives personal correspondence in the United States, including brokerage and bank statements.  He also has substantial personal effects at the U.S. residence, remains registered to vote in the United States, and holds a U.S. driver’s license.  On those facts, the example concludes that the fund manager has a closer connection to the United States.

For individuals concerned about satisfying the closer connection test, there is an established body of law in an analogous area.   The question whether an individual has a closer connection to Puerto Rico that the United States bears a striking resemblance to the question whether an individual who has relocated from New York State remains subject to tax in New York on the basis that he is a New York domiciliary.  A person’s domicile is the principal establishment to which he intends to return whenever absent.₃₇  New York courts have addressed a substantial number or real-life issues presented by persons who seek to change their domicile that have direct resonance on the closer connection test:

  • Under New York law, an individual is not considered to have changed his domicile by establishing significant ties to a new location if he continues to maintain significant ties to New York.
  • If the individual retains the original home, he should make substantial efforts to sell that home because those efforts validate that the individual intends to abandon the prior home.₃₉  It may be possible to establish that a former primary residence has become a vacation home or hotel substitute, but this might be difficult to prove in a given case.₄₀
  • If a business is maintained in the United States, the individual may be considered to have a closer connection to the United States than Puerto Rico if he maintains considerable and continuous contact with that business through telephone and electronic / computer contact.₄₁

The New York State audit guidelines note additional factors that would support an individual’s assertion that he has a closer connection to Puerto Rico than the United States.  All invoices, financial data, and correspondence should be addressed to the Puerto Rico address.  Safe deposit boxes should not be maintained in the United States but should be maintained in Puerto Rico.  Automobile, boat and airplane registrations should show the Puerto Rico address.  Legal documents, such as wills and divorce decrees, should show the Puerto Rico address of the individual who has re-domiciled to Puerto Rico.  The New York State audit guidelines treat the following items as “nonfactors” of domicile:  where a will is probate; passive interests in partnerships; bank account locations; contributions to political causes; and where the individual’s tax return is prepared.

  1. Special rules for the year of the move to Puerto Rico.  Special rules apply to determine whether the tax home test and the closer connection test are satisfied during the tax year in which the individuals relocates to Puerto Rico.  An individual is eligible to take advantage of the special rules

If three tests are met.₄₂  First, the individual must not have been a bona fide resident of Puerto Rico during each of the three tax years preceding the year of the move.  Second, during the second half of the year of the move, the individual must not have a tax home in, or closer connection to, the United States or a foreign country than Puerto Rico.  Last, the individual must be a bona fide resident of Puerto Rico for each of the three years following the year of the move to Puerto Rico.  If each of those tests is met, the individual will be considered to have satisfied the tax home and closer connection requirements for the year of the relocation.

  1. Income eligible to be exempt from U. S. federal income tax.  There seems to be a common misperception that once an individual has become a bona fide resident of Puerto Rico, all income earned by that individual escapes U. S. federal income tax.  The exception is not that broad.  Section 933(1) limits the exemption to “income derived from sources with Puerto Rico.”  Applicable regulations provide detailed rules on when income will be considered derived from Puerto Rican sources.₄₃

As a starting point – and luckily for tax practitioners – the normal source rules in sections 861 through 865 apply mutatis mutandis in determining whether income is from sources within Puerto Rico.  Accordingly, the source of investment income, such as interest and dividends, retains its U.S.-source income status when paid by U.S. corporations to a bona fide resident of Puerto Rico.₄₄ Because this income is U.S.-source income, not Puerto Rican-source income, it remains subject to full Federal income tax in the hands of a bona fide resident of Puerto Rico.  Further, even if investment income is derived in connection with the conduct of a trade or business in the United States is treated as U.S.-source income as well.₄₆

The source rules applicable to determining when income is derived from sources within Puerto Rico also contain an antiabuse rule in the form of an “anti-conduit” rule.₄₇  Under the anti-conduit rule, if income is paid to a bona fide resident of Puerto Rico from Puerto Rican sources and the payer of the income(or another person) provides the same consideration to a third person in exchange for U.S.-source income, the income paid to the bona fide resident of Puerto Rico is not treated as Puerto Rican-source income.

While capital gains generally are not U.S.-source income when recognized by a nonresident not connected with the conduct of a U.S. trade or business, to the extent that those gains were built-in gains when the no-U.S. person became a bona fide resident of Puerto Rico and the disposition takes place within 10 years of the individual becoming a bona fide resident of Puerto Rico, those gains remain subject to U.S. federal income tax. ₄₈  In general, the portion of the gain that is treated as built-in gain is determined based on the relative holding, period of the property.₄₉ For marketable securities, however, the portion of the gain that is subject to U.S. federal income tax is determined by using the closing price of the securities on the first day of the possessions holding period (the date on which the individual became a bona fide resident of Puerto Rico).₅₀

Savvy investors may attempt to manipulate the source rules by creating a Puerto Rican corporation to hold investments.  The idea here is that the dividends and interest paid by the Puerto Rican corporation would be considered to be Puerto Rican-source income in the hands of the bona fide resident of Puerto Rico.  There are, however, substantial limitations on the ability to implement this strategy.  First, Puerto Rican corporations are treated as non-U.S. corporations for Federal income tax purposes.  As a result, dividends paid by U.S. corporations to Puerto Rican corporations are subject to a 10 percent (or 30 percent) withholding tax.₅₁  The higher withholding tax applies unless three conditions are satisfied:  foreign persons must hold less than 25 percent of the stock of the Puerto Rican corporation; at least 65 percent of the income of the Puerto Rican corporation must be derived from the conduct of a U.S. or possession trade or business; and no substantial part of the income of the Puerto Rican corporation can be used to satisfy obligations to persons who are not bona fide residents of Puerto Rico.₅₂

The U.S. subpart F rules are coordinated with the exclusion for amount paid to bona fide resident of Puerto Rico.  Under those coordination rules, a shareholder of a Puerto Rican corporation cannot be treated as a “United States shareholder” if the shareholder is a bona fide resident of Puerto Rico and a dividend paid by the corporation would be treated as an item of Puerto Rican-source income in the hands of the shareholder.₅₃  While dividends paid by a Puerto Rican corporation would be treated as Puerto Rican-source income under the normal source rule, special source of income rules apply when the shareholder holds at least 10 percent of the total voting stock of the Puerto Rican corporation.₅₄  Under a special source rule, the source of the dividend (and interest) if determined by reference to the source of income of the payer corporation.  For example, if only 50 percent of the income of the Puerto Rican corporation was derived from sources within Puerto Rico, only 50 percent of the dividends paid by the corporation would be Puerto Rican-source income.  The look-through source rules do not apply if 80 percent of the income of the corporation was derived from sources within Puerto Rico.₅₅

  1. The Expatriation Rules

Rules have been in place to present tax motivated expatriations since 1966, when section 877 was enacted.  Section 877 caused former U.S. taxpayers who expatriated for tax purposes to remain subject to U.S. tax for a 10-year period.  Over time, the rules have been modified several times to make it harder and more expensive for people to exit the U.S. tax net.  In 1996 Congress enacted what I now section 6039G, which requires expatriates to identify themselves and register with the IRS by filing Form 8854 or be subject to U.S. tax until they do so.  Finally, Congress enacted section 877 A in 2008.  This new section exact a toll charge at the time of expatriation.  Section 877 A requires marking to market of assets and tax paid on the mark-to-market gain upon expatriation.  Those rules do not apply to a U.S. individual who relocates to Puerto Rico.

  1. Conclusion

Puerto Rico Act No. 22 provides a clear Puerto Rican tax incentive for investor to consider the arduous process of relocating their personal life and business affairs to Puerto Rico.  The benefits or the new Puerto Rican tax regime, however, are substantially tempered by the existing U. S. rules which, except for income that is derived from Puerto Rican sources and capital gains economically attributable to the holding period during which the individual is a bona fide resident of Puerto Rico, continue to apply to bona fide residents of Puerto Rico.  It is hoped that these recent extraordinary measures will assist Puerto Rico in its efforts to attract investors and to rebuild the economy of La Isla del Encanto.

₁In response to the dire economic circumstances that led to massive emigration, the Puerto Rican government launched “Operation Bootstrap” in 1948.  The operation was designed to encourage private business investment, both local and foreign, to accelerate the island’s industrial development.  Local tax holidays were complemented by federal income tax exemptions for U.S. corporations operating in Puerto Rico.  Under section 931 of the 1954 IRC and successor section 936 of the 1986 IRC, a U.S. corporation that derived gross income from the active conduct of a trade or business in Puerto Rico received a federal income tax credit which, in most cases, eliminated the federal income tax otherwise due on those earnings.  Also, federal income tax rules allowed the expatriation of those earnings to the U.S. parent company without the imposition of federal income taxes.

₂By 1958 the gross product of Puerto

Rico more than doubled, similarly for per capita income, according to Werner Baer, “Puerto Rico:  An  Evaluation of a Successful Development Program, 73 Quarterly J. Econ. 645 (1959)

₃Section 936 was repealed in 1994.  Government Accounting Office, “Puerto Rico Fiscal Relations with the Federal Government and Economic Trends During the Phaseout of the Possessions Tax Credit,” GAO-06-541 (June 23, 2006).

₄Lynnley Browning and Julie Creswell, “Puerto Rico Creates Tax Shelters in Appeal to the Rich, “the New York Times Dealbook, Mar. 25, 2013.

₅John Marino, “Law 22 Attracting Millionaire Investors to Puerto Rico,”41 Caribbean Bus. PR. Mar. 28, 2013

₆See Marino, “Puerto Rico Attracting Wealthy Investors, Service Firms,” Caribbean Bus. PR, Mar. 14, 2013 (reporting that 10 wealthy individuals have moved to Puerto Rico since the law changes described herein.).

₇Joint committee on Taxation, “General Explanation of the Tax Reform Act of 1986, “JCS-10-87, at 999-1000 (May 4, 1987).

₈JCT, “Federal Tax Law and Issues Related to the United States Territories,” JCX-41-12, at 24 (May 14, 2012).

See generally section Johnathan D. Salant, “McCain Praising Obama Back Revenue Compromise on Budget,” Blommberg.com (Mar. 23, 2013).

₁₀Under section 933, a U.S. citizen who becomes a bona fide resident of Puerto Rico (i.e., changes domicile to Puerto Rico) is not subject to federal income tax on income from Puerto Rican sources.  By contrast, under section 877A, a U. S. citizen who relinquishes his U.S. citizenship could be subject to income tax on the unrealized appreciation of his assets.

₁₁The term “United States person” includes a citizen or resident of the United States.  Section 7701 (a)(30)(A).

₁₂the taxation of residents of Puerto Rico stems from Sub-chapter I of Chapter 4 of Title 48 of the U.S.C., known as the “Puerto Rico Federal Relations Act,” which governs the relationship between Puerto Rico and the United States and in viewed as a compact between both jurisdictions. Citizens of the United States that decide to reside in Puerto Rico constitute part of the body politic named “the People of Puerto Rico” (48 U.S.C. section 734).  The statutory laws of the United States, in general, have the same force and effect in Puerto

Rico as in the United States, except the internal revenue laws (48 U.S.C. section 734).

₁₃Id.

₁₄Section 937(a)(1)

₁₅Section 937(a)(2)

₁₆Id.

₁₇Reg. section 1.937-1(c)(1).

₁₈See reg. section 1.937-1(g), Example 1.

₁₉State of New York, Department of Taxation and Finance, Income Franchise Field Audit Bureau, Nonresident Audit Guideline, 26 (2009) (NYS audit guidelines).

₂₀Reg. section 1.937-1 (c)(3)(i)(A).

₂₁Reg. section 1.937-1(c)(3)(i)(B). Detailed documentation requirements apply for an individual to be able to take advantage of this rule.  See reg. section 1.937-1(c)(4)(iii).

₂₂Reg. section 1.937-1(c)(3)(ii)(A)

₂₃Reg. section 1.937-1(c)(3)(i)(C).

₂₄Reg. section 1.937-1(c)(3)(iii)(A). Under a similar rule, if an individual is present in Puerto Rico and another jurisdiction on the same day, the individual is considered to be present in the jurisdiction where his tax home is located.  Reg. section 1.937-1(c)(3)(iii)(B).

₂₅Reg. section 1.937-1(c)(5)(i)

₂₆Reg. section 301.7701(b)-2(d)(2).

₂₇Reg. section 1.937-1(c)(5)(ii)(B).

₂₈Reg. section 1.937-1(d)(1).  See also reg. section 301.7701-2(c)(1).

₂₉Id.

₃₀Reg. section 301.7701(b)-2(c)(2).

₃₁See reg. section 1.937-1€(1), incorporating the rules in reg. section 301.7701(b)-2(d).

₃₂Reg. section 301.7701(b)-2(d)(1).  This list contains 10 factors, but the 10th factor is not relevant vis-à-vis the relationship between the United States and Puerto Rico.

₃₃Reg. section 301.7701(b)-2(d)2.  Note that occasional use of U.S. business facilities should not cause an individual to have a closer connection to the United States.  NYS audit guidelines, supra note 19, at 36.

₃₄Special attention should be paid to specific items of value, such as jewelry, a rare book, art or an antiques collection.  NYS audit guidelines, supra note 19, at 29.  Also, insurance policies should be amended to state that those items have been moved to Puerto Rico.  Id.  See Matter of James & Helen Dittrich, DTA No. 811479.

₃₅Reg section 1.937-1(g), Example 7.

₃₆The fact that the children remain in the United States in boarding school should not be indicative of a closer connection to the United States.  NYS audit guidelines, supra note 19, at 32.

₃₇Id. At 9.

₃₈Matter of Rudolph & Loretta Zapka, DTA No. 804111.

₃₉Matter of Jack Silverman and Frances Silverman, DTA No. 802313; Matter of Minsky v. Tully, 433 N.Y.S.2d 276.

₄₀NYS audit guidelines, supra note 19, at 35.

₄₁Matter of Herbert L. Kartiganer, 599 N.Y. S. 2d 312; Matter of Richard & Jean Gray, 235 AD2D 641.

₄₂Reg. section 1.937-1(f)(1).

₄₃See reg. section 1.937-2.

₄₄Section 937(b)(1); see reg. section 1.861-2(a)(1)(interest paid by a U.S. resident to a non-U.S. person is treated as U.S.-source income); reg. section 1861-3(a)(2) (dividends paid by a U.S. corporation are U.S.-source income).

₄₅Reg. section 1.937-2(c)(1)(i)

₄₆Reg. section 1.937-2(c)(1)(ii).

₄₇Reg. section 1.937-2(c)-(2).

₄₈Reg. section 1.937-2(f)(1)(ii).

₄₉Reg. section 1.937-2(f)(1)(vi)(B).

₅₀Reg. section 1.937-2(f)(1)(vi)(A).

₅₁See section 881(b)(2).

₅₂Section 881(b)(2)(A)(ii)

₅₃Section 957(c)(1).

₅₄Reg. section 1.937-2(g)(1).

₅₅Re. section 1.937-2(g)(1)(ii)(A).

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