Some FAQs

 

What’s the difference between BFR-PR and local residency requirements?

BFR-PR (a construct defined by the IRS) is actually not required by most if not all act Act 20 / 22 / 60 decrees. For most decrees, only local PR residency status (defined by PR government) is required. locally-defined PR residency is automatically achieved by meeting BFR-PR requirements. BFR-PR is NOT automatically achieved by meeting locally-defined PR residency requirements.

The key thing to note here is that in order to qualify for act 60, you must be in compliance with 2 overlapping and distinct systems and requirements: the IRS and the Puerto Rican government. The IRS requires that you are a BFR-PR to not pay them taxes. The govt of PR (through your decree) requires that you satisfy the much more lenient PR residency requirements.

If you satisfy the Bona Fide Residency (BFR) requirements, then you are automatically a resident in the eyes of PR. The converse is not true, i.e. you can satisfy PR residency requirements while failing Bona Fide residency requirements.

The reason one might care about PR residency requirements per se (short of meeting BFR-PR), is that for some (all?) of us, our Act 22 / Act 60 decrees merely require PR residency to be valid, not BFR-PR. I believe there are other benefits that only require PR residency as well.

Just to be crystal clear, if you qualify for PR residency but not BFR-PR, you will still owe Federal taxation on your global income. BFR status is necessary to avoid the US Federal tax net. But even if you have an Act 22 / Act 60 and it is valid for the year by (via being a PR resident for that year), then you will not enjoy the tax reductions of the Acts on the types of income they cover.

 

Do I need to be a bona fide resident of PR to benefit from act 60?

In order to avoid federal taxation, you need to be a BFR-PR.

BFR is also important because you can use that status to gain Act 60 benefits in the year of your move if you meet certain requirements as laid out in the year of the move exception

 

what’s the bona-fide residency test?

BFR status is determined by the IRS via 3 tests. You must pass all to qualify as a BFR of a territory:

• the presence test
• the tax home test
• the closer connections test

the presence test

This test pertains to how many days you spent in PR, which counts as any day you spent any amount of time on the ground in PR. You will want to add a cushion beyond the minimum requirement of days as a safety factor in case of emergency, accidental misreporting, etc

If you are a U.S. citizen or resident alien, you will satisfy the presence test for the tax year if you meet one of the following conditions:

1. You were present in the relevant territory for at least 183 days during the tax year.
2. You were present in the relevant territory for at least 549 days during the 3-year period that includes the current tax year and the 2 immediately preceding tax years. During each year of the 3-year period, you must be present in the relevant territory for at least 60 days.
3. You were present in the United States for no more than 90 days during the tax year.
4. You had earned income in the United States of no more than a total of $3,000 and were present for more days in the relevant territory than in the United States during the tax year. Earned income is pay for personal services performed, such as wages, salaries, or professional fees.
5. You had no significant connection to the United States during the tax year.

the tax home test

Your tax home is your regular or main place of business, employment, or post of duty regardless of where you maintain your family home. If you do not have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live. If you do not fit either of these categories, you are considered an itinerant and your tax home is wherever you work.

 

closer connections test

this test estimates where the “center of gravity” of your life is. are you actually living in PR, or are you there mainly as a tourist?

if you continue to have significant connections to the mainland like a house(s), cars, businesses, kids going to school, bank accounts, insurance, doctors, and professional services, then you may not pass this test. This test is a bit more subjective and looks at your connections in aggregate, so there are few hard and fast rules. having any one of the above (house, car, kids, etc) will not necessarily cause you to fail. in aggregate, however, they can combine to show you are not making a good faith effort at earnestly moving to PR. establishing many substitute connections in PR and severing mainland ones is your best bet here.

From pub 570:

You will have met the closer connection test if, during any part of the tax year, you do not have a closer connection to the United States or a foreign country than to the relevant U.S. territory. You will be considered to have a closer connection to a territory than to the United States or to a foreign country if you have maintained more significant contacts with the territories than with the United States or foreign country. In determining if you have maintained more significant contacts with the relevant territory, the facts and circumstances to be considered include, but are not limited to, the following.

• The location of your permanent home.
• The location of your family.
• The location of personal belongings, such as automobiles, furniture, clothing, and jewelry owned by you and your family.
• The location of social, political, cultural, professional, or religious organizations with which you have a current relationship.
• The location where you conduct your routine personal banking activities.
• The location where you conduct business activities (other than those that go into determining your tax home).
• The location of the jurisdiction in which you hold a driver’s license.
• The location of the jurisdiction in which you vote.
• The location of charitable organizations to which you contribute.
• The country of residence you designate on forms and documents.
• The types of official forms and documents you file, such as Form W-8BEN or Form W-9.

Your connections to the relevant territory will be compared to the total of your connections with the United States and foreign countries.Your answers to the questions on Form 8898,
Part III, will help establish the jurisdiction to which you have a closer connection.