Puerto Rico: Taxation as a US Territory

As a US territory, Puerto Rico is part of the United States of America, but without the same legal status as one of the States. Federal laws apply and can override local laws, much as the legal system works in any State. However, Puerto Rico residents are subject only to local taxation for work performed on-island.

For US citizens, who are usually subject to double-taxation when living abroad, Puerto Rico offers a unique and very attractive situation for those that qualify for Puerto Rico’s tax breaks. Some US citizens can pay single-digit tax rates on much of their Puerto Rico income!

Obtaining these benefits can be somewhat complex, and that is where we come in. We can help you to analyze whether the Puerto Rico tax incentives can work for you, and estimate what kind of tax savings you might expect from a Puerto Rico relocation. Then, we can help you every step of the way to check out Puerto Rico living, set up your business here, apply for whatever tax grants are appropriate for your situation, and even manage your business ongoing, if you require that.

 

Taxation for US Citizens

Under the US’ section 933 exemption, Puerto Rico residents are exempt from paying some types of tax to the US federal government. On an individual level, a resident of Puerto Rico who is a US citizen is exempt from paying personal income tax for work performed in Puerto Rico, but would be required to pay US federal payroll taxes on any salary that they draw (Social Security, Medicare, etc.).

A US citizen who is a legal resident of Puerto Rico and earns part of their income outside of Puerto Rico would pay US federal income tax on that income only, and would need to file with the IRS only regarding that income. If a US citizen who is a legal resident of Puerto Rico earns all of their income on-island, they may not need to file with the IRS at all.

 

Other Taxes in Puerto Rico

Most municipalities impose an additional 1% tax, with some exceptions. This is similar to paying a city tax in the States.

Puerto Rico has an estate tax of 10%, which applies to those born or naturalized in Puerto Rico. US citizens who have relocated to Puerto Rico but were not born or naturalized here must pay the normal 40% US estate tax rate.

The sales and use tax rate in Puerto Rico was recently raised to 11.5%.

Contact us with any other Puerto Rico tax-related questions you may have.