Withholding Rules Of Income And/Or Compensation Under The Current Provision Of The Puerto Rico Internal Revenue Code - Martino-Luna Attorneys and Counselors At Law
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Withholding Rules Of Income And/Or Compensation Under The Current Provision Of The Puerto Rico Internal Revenue Code
As a general rule, income taxes apply to each individual who is a bonafide resident of the Commonwealth of Puerto Rico. Nonresident individuals (U.S. citizens or aliens) are taxed on income coming from Puerto Rico, or for services performed there. Nonetheless, if the tax was fully paid by withholding of the tax at source (U.S. as example) there is no need to file a return for the year or to be liable for any income taxes.
On the other hand, as a general rule, withholding on payment, except by reason of compensation for services rendered by an individual, is not subject to withholding if:
1. Income is effectively connected with the nonresident alien’s PR trade or business and is includable intheir gross income, and2. The nonresident alien filed a withholding exemption statement with the withholding agent. §1147 (a)PRIRC
Withholding will be required if the taxpayer, U.S. citizens, alien or nonresident persons, have a tax base or nexus, or the income is connected to a PR trade or business.
Nonetheless, there will be certain cases in which depending on the form of the income or compensation, there will be a withholding, and the U.S. citizens, alien or nonresident person may take a credit for their US taxes vs. the taxes paid in PR, through section 901 et seq. of the US IRC.
Wages and certain other payments made to nonresident persons for services performed in PR are subject to withholding, as long as the wage or service is effectively connected to a PR trade or business. §8547 PRIRC. In addition, withholding may be required for certain periodic payments from PR sources. Withholding on these wages or periodic payments is at a 20% rate in the case of US citizens, 10% in the case of long term gains derived from property located in PR. Payments to nonresident aliens are subject to a withholding of 29% unless a tax treaty is applicable.
Withholding rate on dividends and partnership profit distributions are in 10%. §1147(a) PRIRC. Payments of interests to nonresident persons are exempt from withholding, except when paid to a nonresident alien who is related to the debtor of the obligations. §1123(a)(1)(G) PRIRC.
In addition to payments made as compensation for services rendered in PR, withholding may be required on fixed or determinable periodical income. This includes dividends, interests, rents, royalties, premiums, annuities, remuneration, emoluments and other income of this type. §1147 PRIRC. Withholding may also be required on the gross amount of certain items considered to be gain from the sale or exchange of a capital asset. §1147(g) PRIRC.
