Yes, a Puerto Rico corporation is considered a foreign corporation for US tax purposes because Puerto Rico is a US territory but it is treated as a separate taxing jurisdiction from the United States.
And now, more specifically
A Puerto Rico corporation is indeed considered a foreign corporation for US tax purposes. While Puerto Rico is a US territory, it is treated as a separate taxing jurisdiction from the United States. This distinction carries important implications for tax obligations and benefits.
To delve deeper into this topic, let’s explore a quote from renowned tax expert and professor, Martin J. McMahon Jr., who stated, “Although a possession of the United States, Puerto Rico is not a state. It is a separate tax jurisdiction.” This quote emphasizes the separate tax treatment of Puerto Rico.
Interesting facts about Puerto Rico’s tax status and its implications for corporations include:
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Separate Tax Jurisdiction: Puerto Rico has its own tax laws, which differ from those of the United States. Income earned by a Puerto Rico corporation is subject to Puerto Rico tax laws, rather than US federal tax laws. This means that a Puerto Rico corporation is not subject to US federal income tax on its Puerto Rico sourced income.
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Tax Exemption: Puerto Rico has special tax incentives in place to attract businesses and investments. The most notable incentive is Act 20 and Act 22. Act 20 allows eligible businesses to benefit from a 4% corporate tax rate on Puerto Rico sourced income, while Act 22 exempts dividends, interest, and capital gains from Puerto Rico taxes.
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Foreign Corporation Status: From a US federal tax perspective, a Puerto Rico corporation is considered a foreign corporation. This means that for US tax purposes, a Puerto Rico corporation is subject to the same rules and regulations that apply to foreign corporations incorporated in other countries.
To illustrate the tax implications for a Puerto Rico corporation, let’s consider a simple table showcasing the comparison between a US corporation and a Puerto Rico corporation:
| US Corporation | Puerto Rico Corporation | |
|---|---|---|
| Federal Income Tax | Subject to US federal income | Not subject to US federal |
| tax on worldwide income | income tax on Puerto Rico | |
| sourced income | ||
| Puerto Rico Tax | Not subject to Puerto Rico tax | Subject to Puerto Rico tax |
| on Puerto Rico sourced | ||
| income | ||
| Incentives Available | Potential credits and deductions | Potential tax exemptions |
| for certain activities | and incentives under | |
| Act 20 and Act 22 |
In summary, a Puerto Rico corporation is considered a foreign corporation for US tax purposes due to Puerto Rico’s separate tax jurisdiction. Understanding this distinction is crucial for corporations operating in Puerto Rico or considering establishing a business on the island, as it determines their tax obligations and eligibility for tax incentives.
See a video about the subject.
In this YouTube video titled “[ Offshore Tax ] How are Puerto Rico companies treated under Federal Tax rules?”, the speaker discusses how Puerto Rico companies are treated under federal tax rules. They explain that Puerto Rico has a Corporation of Individuals that can be taxed as a disregarded entity or as an S-corp, but there is no S-corporation election. They also mention that starting from the 2022 tax year, an LLC with one member can be taxed as a pass-through or disregarded entity. However, they point out that from a US federal tax perspective, Puerto Rican entities are considered foreign companies, which means they may be subject to guilty, PFIC, and FBAR. This creates a paradox as individuals born in Puerto Rico are US citizens, but the entities created in Puerto Rico are seen as foreign. The tax system in Puerto Rico was designed to offer tax incentives to foreign corporations, including US entities.
Found more answers on the internet
Before conducting business locally, all corporations or limited liability companies must register at the Puerto Rico State Department. Puerto Rico corporations are treated as foreign corporations for U.S. income tax purposes.
Puerto Rico has been an unincorporated territory of the United States under the jurisdiction of the U.S. Congress since the Spanish-American War of 1898.1 Although major U.S. taxes apply in Puerto Rico as in the 50 states, e.g. Social Security taxes, for income tax purposes the U.S. Congress has excluded Puerto Rico since 1921 from the definition of “United States”.2 As a result, although Puerto Rico belongs to the United States and most of its residents are U.S. citizens, the income earned in Puerto Rico is considered “foreign-source income” and Puerto Rico corporations are considered “foreign”.
Puerto Rico corporations are treated as foreign corporations for U.S. income tax purposes.
Since as a general rule Puerto Rico is treated as a foreign country for federal income tax purposes, a Puerto Rico corporation is considered a foreign corporation under U.S. rules, and normally any transfer of intangible property to a P.R. corporation would be considered a taxable transaction.
A Puerto Rico LLC is a foreign eligible entity for U.S. federal income taxes.