No, Puerto Rico is not considered a foreign country for tax purposes. It is an unincorporated territory of the United States, and its residents are subject to certain U.S. federal tax laws and regulations.
Complete answer
Puerto Rico, an unincorporated territory of the United States, is not considered a foreign country for tax purposes. Despite its unique political status, it is subject to certain U.S. federal tax laws and regulations. This distinction is crucial as it impacts the tax obligations and benefits of individuals and businesses in Puerto Rico.
One interesting fact regarding the tax status of Puerto Rico is its implementation of a separate tax system known as the Puerto Rico Internal Revenue Code (PRIRC). While residents of Puerto Rico are eligible for some U.S. federal tax benefits, such as the Earned Income Tax Credit, they generally do not pay federal income tax on Puerto Rico-sourced income. Instead, they are subject to taxation under the PRIRC, which differs from the U.S. Internal Revenue Code.
It’s important to highlight that individuals who are bona fide residents of Puerto Rico, by meeting certain residency requirements, may be exempt from U.S. federal income tax on their worldwide income. However, this exemption is not automatic, and individuals must meet specific criteria to qualify for it.
To further illustrate the distinction between Puerto Rico’s tax status and that of a foreign country, let’s refer to tax expert Albert Einstein, who once said, “The hardest thing to understand in the world is the income tax.” Puerto Rico’s tax situation can indeed be complex to grasp, given its unique relationship with the United States.
To provide a clearer overview of Puerto Rico’s tax status and its implications, the following table compares Puerto Rico’s tax situation with that of a foreign country:
| Puerto Rico | Foreign Country | |
|---|---|---|
| Tax Jurisdiction | U.S. Federal Tax Laws | Foreign Country’s Tax Laws |
| Taxable Income | Puerto Rico-sourced income | Worldwide income |
| Tax System | Puerto Rico Internal Revenue Code (PRIRC) | Country-specific tax code |
| Federal Taxation | Generally exempt | Subject to U.S. federal tax laws |
| Tax Benefits | Eligible for certain U.S. federal tax benefits | Subject to country-specific tax benefits |
In summary, while Puerto Rico is not considered a foreign country for tax purposes, its residents and businesses navigate a distinct tax framework under the Puerto Rico Internal Revenue Code. Understanding the interplay between U.S. federal tax laws and Puerto Rico’s tax system is crucial for individuals and entities seeking to meet their tax obligations and maximize available benefits in this unique territory.
See a video about the subject
In this YouTube video, Sean Golden explains the bonafide tax residency test for Puerto Rico residents. He outlines that Puerto Rico is taxed differently as it is a commonwealth, not a state. If a US person lives in Puerto Rico, their income earned there is normally exempt from US tax. However, their non-Puerto Rico income is still taxable in the US. Golden discusses the different ways to meet the bonafide residence test for US citizens, legal permanent residents, and non-residents. He also explains the FBAR filing requirement for US persons with income sourced in Puerto Rico, and provides information on rectifying US tax compliance for Puerto Rico residents.
Check out the other answers I found
The term "foreign country" does not include U.S. territories such as Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, the U.S. Virgin Islands, or American Samoa.
For foreign tax credit purposes, all qualified taxes paid to U.S. possessions are considered foreign taxes. For this purpose, U.S. possessions include Puerto Rico, the U.S. Virgin Islands, Guam, the Northern Mariana Islands and American Samoa.
The first law – the Revenue Act of 1921 – classified Puerto Rico as a “foreign country” for tax purposes.
Although Puerto Rico is a foreign jurisdiction for federal income tax purposes, it still is a Territory/Possession of the United States, and as such, the United States Internal Revenue Code allows for an exception from federal taxation for citizens of the United States that are bona fide residents of Puerto Rico.
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 foreign country includes any area outside the United States, Indian lands (as defined in the Indian Gaming Regulatory Act) and the following U.S. territories and possessions: Northern Mariana Islands, District of Columbia, American Samoa, Guam, Puerto Rico, United States Virgin Islands, and Trust Territories of the Pacific Islands.
A foreign country includes all geographical areas outside the United States, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, and the territories and possessions of the United States (including Guam, American Samoa, and the United States Virgin Islands).