Puerto Rico’s international tax framework is primarily derived from domestic (US federal and state) law, reflecting its status as a territory of the United States without independent treaty-making authority. As a result, Puerto Rico does not enter into bilateral or multilateral income tax treaties, and its cross-border tax rules are governed by local legislation and administrative practice rather than international agreements.

The principal sources of law include the Puerto Rico Internal Revenue Code of 2011, as amended (PRIRC), Treasury Regulations, and administrative guidance issued by the Puerto Rico Department of Treasury, including circular letters, administrative determinations and published instructions. These sources govern key areas such as sourcing of income, withholding obligations, reporting requirements, and compliance with incentive regimes.

Judicial decisions also play an important role in interpreting statutory provisions, particularly in areas such as trade or business nexus, source of income, and anti-abuse doctrines. In practice, cross-border tax analysis frequently requires co-ordination with US federal tax rules, including sourcing provisions under Internal Revenue Code Sections 861–865 and the application of US tax treaties at the federal level.

Puerto Rico’s tax system operates under a domestic hierarchy of legal authority. Statutes enacted by the Puerto Rico legislature, including the PRIRC and incentive legislation such as Act 60-2019, also known as the Puerto Rico Incentives Code (“Act 60”), constitute the primary source of law and govern the taxation of income, deductions and credits.

Treasury Regulations and administrative guidance supplement these statutes by providing interpretative rules and procedural requirements. Judicial decisions further interpret these provisions and may shape the application of key concepts such as economic nexus, source of income, and substance-over-form principles.

Although US federal tax law does not automatically apply to Puerto Rico income tax, it is frequently used as an interpretative reference, particularly in cross-border contexts. International sources, including OECD materials, are not binding but may be considered persuasive in structuring transactions and analysing global tax developments.

Puerto Rico does not follow the OECD Model Tax Convention or the UN Model Double Taxation Convention as a matter of treaty practice, as it lacks authority to negotiate or enter into tax treaties. Accordingly, there is no formal alignment with model treaty provisions.

However, certain domestic concepts, particularly those relating to sourcing of income and business activity, may resemble internationally accepted standards. This similarity arises primarily from the influence of US tax principles rather than any direct adoption of OECD or UN frameworks.

Puerto Rico is not a signatory to the OECD Multilateral Instrument (MLI) and, as a US territory, lacks the legal capacity to become one. The United States has not signed the MLI. As a result, it does not apply to US tax treaties and, by extension, has no direct or indirect application to Puerto Rico at the time of writing.

Puerto Rico operates a hybrid tax system combining elements of residence-based and source-based taxation. Bona fide resident individuals are generally subject to Puerto Rico income tax on their worldwide income under the PRIRC, subject to available exemptions and credits.

Non-resident individuals and foreign entities are taxed only on Puerto Rico-source income or income effectively connected with a Puerto Rico trade or business. The determination of source is therefore central to the Puerto Rico tax system.

In practice, the interaction between Puerto Rico taxation and US federal taxation creates a unique framework. Under Internal Revenue Code Section 933, bona fide residents of Puerto Rico may exclude Puerto Rico-source income from US federal taxation, subject to applicable requirements.

Physical presence in Puerto Rico during the taxable year of at least 183 days raises the presumption of local residence. Other criteria used are similar to those used by the IRS, including but not limited to data on driver’s licences, vehicle registrations, etc. Physical presence is also a criterion for individuals to benefit from certain tax incentives. 

Bona fide resident individuals are generally subject to Puerto Rico income tax on their worldwide income under the PRIRC. This includes employment income, business income and passive income, subject to applicable deductions, credits and exemptions.

Puerto Rico provides mechanisms to mitigate double taxation, including foreign tax credits for taxes paid to other jurisdictions. In addition, incentive regimes under Act 60 may provide preferential treatment for certain types of income, including interest, dividends and capital gains, subject to decree conditions.

In practice, tax planning for resident individuals focuses on accurate sourcing, proper characterisation of income, and compliance with both Puerto Rico and US federal rules.

Non-resident individuals are taxed only on their Puerto Rico-source income. This includes compensation for services performed in Puerto Rico, rental income from Puerto Rico property, royalties, and certain fixed or determinable income items.

Such income is generally subject to withholding at source, which serves as the primary collection mechanism. Applicable withholding rates depend on the nature of the income and the status of the recipient.

Non-residents may also be required to file Puerto Rico income tax returns if they are engaged in a trade or business in Puerto Rico or seek to claim deductions, credits or refunds.

The tax residence of legal entities is determined primarily by place of organisation. Entities organised under the laws of Puerto Rico are treated as domestic entities and are generally subject to Puerto Rico taxation on their worldwide income.

Foreign entities may be subject to Puerto Rico taxation if they are engaged in a trade or business in Puerto Rico or derive Puerto Rico-source income. The analysis typically focuses on economic nexus, the nature of activities conducted in Puerto Rico, and the sourcing of income.

Puerto Rico does not adopt a formal concept of “permanent establishment” as used in tax treaties. Instead, it relies on domestic concepts of engagement in a trade or business within Puerto Rico.

This determination is based on the nature, continuity and extent of activities conducted within the jurisdiction. Unlike treaty-based permanent establishment definitions, there is no fixed threshold or standardised definition, and the analysis is fact-specific.

For multinational groups, US federal tax treaty concepts may be relevant at the US level but generally do not limit Puerto Rico’s taxing jurisdiction under local law.

Income derived from immovable property located in Puerto Rico is considered Puerto Rico-source income and taxable in Puerto Rico regardless of the owner’s residence. This includes rental income and gains attributable to Puerto Rico real property, subject to Puerto Rico’s rules on deductions, depreciation and gain characterisation.

Business profits are taxable in Puerto Rico if they are derived from Puerto Rico sources or connected to a trade or business conducted within Puerto Rico. 

Domestic entities are generally subject to taxation on their worldwide income, while foreign entities are taxed only on Puerto Rico-source income or income effectively connected with Puerto Rico activities.

Preferential regimes under Act 60 may significantly reduce the effective tax rate for qualifying activities, including export services and manufacturing, provided that statutory requirements and substance conditions are satisfied.

Passive income, including dividends, interest and royalties, is taxed based on source and the status of the recipient. Payments to non-residents are generally subject to withholding tax under Puerto Rico law.

Dividends paid by Puerto Rico corporations and interest or royalty payments sourced to Puerto Rico may be subject to withholding, with rates depending on statutory provisions and the nature of the payment.

Because Puerto Rico does not have its own treaty network, reductions in withholding tax generally are not a Puerto Rico income tax mechanism. Tax planning therefore tends to focus on domestic exemptions, structuring strategies or incentive regimes.

Capital gains are taxed based on both source and residence. Gains derived from the sale of Puerto Rico property or assets connected to Puerto Rico activities are generally treated as Puerto Rico-source income.

Bona fide resident individuals may benefit from preferential tax treatment under incentive regimes such as Act 60, which may provide reduced or exempt taxation on certain gains realised after establishing residence.

The sourcing of gains and timing of realisation are critical factors in determining the applicable tax treatment.

Employment income is generally sourced to the location where the services are performed. Compensation for services performed in Puerto Rico is treated as Puerto Rico-source income and is subject to Puerto Rico taxation.

Cross-border employment arrangements require careful allocation of income based on the location of services. Remote work arrangements have introduced additional complexity, particularly in determining whether the presence of employees in Puerto Rico creates a nexus for foreign employers.

Puerto Rico has adopted measures to facilitate remote work in certain contexts, allowing remote workers to not create a nexus for foreign employers as long as the employer is not otherwise engaged in a trade or business in Puerto Rico. 

Specifically, Act 27-2024 (the Remote Work Act), enacted on 17 January 2024, establishes a dedicated statutory framework governing remote work arrangements for employers with no business presence or taxable sales activity in Puerto Rico. For Puerto Rico-domiciled employees who are classified as exempt under the Fair Labor Standards Act (FLSA) – executives, administrators and professionals – and who work remotely for a covered employer, the employment relationship is governed exclusively by the parties’ contract and is exempt from Puerto Rico’s protective labour legislation, provided that the employer maintains insurance coverage at least equivalent to that required by Puerto Rico law. The nexus protection is codified in Act 52-2022, which amended the Puerto Rico Internal Revenue Code to provide that allowing employees to work remotely from Puerto Rico does not constitute an “economic nexus” with Puerto Rico, even where the employee’s home office is a condition of employment, the employer reimburses home office expenses, or the employee performs certain duties from an employer-designated location. Together, Act 27-2024 and Act 52-2022 remove the two principal deterrents – employment law exposure and tax nexus risk – that had led many mainland and international companies to prohibit employees from relocating to Puerto Rico.

For non-domiciled employees who voluntarily relocate to Puerto Rico on a temporary basis to work remotely for a covered employer, the exemption from Puerto Rico employment law is broader: it applies to both exempt and non-exempt employees, and the employment relationship is governed by the contract or the law of the employee’s domicile jurisdiction. This exemption ends if the non-domiciled employee decides to become domiciled in Puerto Rico – at which point the FLSA exempt-employee requirement applies, and a non-exempt employee who acquires Puerto Rico domicile loses the protection of Act 27-2024 entirely and becomes subject to Puerto Rico labour law.

The Department of Labor and Human Resources confirmed this framework in Opinion of the Secretary No. 2024-02, issued 10 September 2024, which also clarifies that tax treatment for all covered employees continues to be governed by the Puerto Rico Internal Revenue Code regardless of the labour law exemptions Act 27-2024 provides.

Puerto Rico applies special rules to certain categories of income, particularly:

• Intellectual property income
• Licensing arrangements
• Manufacturing income under incentive regimes

These rules are often governed by Act 60, which provides targeted incentives rather than relying on treaty-based relief.

Puerto Rico does not independently implement OECD initiatives, including Pillars One and Two. Any impact arises indirectly through US federal adoption or multinational group transfer pricing governance, rather than through incorporation of the OECD framework.

Puerto Rico does not have an independent position on Amount A, as it lacks sovereignty in international tax negotiations. Puerto Rico taxpayers may still be indirectly affected by Amount A outcomes through multinational group compliance, US federal rules and global changes to allocation of taxing rights.

Puerto Rico has not implemented the global minimum tax. A multinational group with Puerto Rico operations may nonetheless face Pillar Two exposure in other jurisdictions, potentially affecting the group’s effective tax rate calculations and placing practical pressure on Puerto Rico incentive modelling, intercompany pricing and documentation.

The global minimum tax framework has not been implemented in Puerto Rico. However, during 2024, then governor Pedro Pierluisi proposed legislation in anticipation of its impact on the island. Regarding implementation, in this case Puerto Rico’s deviation from the framework is structural due to its inability to implement. It is not a sovereign jurisdiction and therefore does not implement OECD reforms independently.

Puerto Rico has not implemented a digital services tax. Digital and technology-related income is taxed under general sourcing and business income rules. However, many digital and technology-related operations are eligible for tax incentives under Act 60.

Puerto Rico distinguishes between unlawful tax evasion or fraud and legitimate tax planning. Indicators of abusive arrangements include lack of economic substance, non-arm’s-length pricing, circular transactions, and inconsistencies between reported income and financial records.

Anti-avoidance enforcement relies on substance-over-form principles, withholding regimes, related-party scrutiny, and enforcement of incentive compliance requirements under Act 60.

Puerto Rico does not maintain a formal blacklist of non-cooperative jurisdictions comparable to those used by the European Union. However, transactions involving low-tax or opaque jurisdictions may be subject to heightened scrutiny, particularly where they raise concerns regarding substance, transfer pricing or withholding compliance.

Compliance is supported through withholding returns, information reporting, payroll filings, and decree-based reporting requirements for incentive recipients.

Decree-based compliance reporting for Act 60 grantees often requires annual compliance submissions, agreed-upon procedures, and documentation of eligible activity, headcount and local expenditure.

The Puerto Rico Department of Treasury has broad authority to conduct audits, request information, assess deficiencies and impose penalties. Cases involving fraud may be referred to other governmental authorities.

Penalties include:

• Interest (PRIRC §6040.01)
• Surcharges
• Penalties 

These are enforced by the Puerto Rico Department of Treasury.

Criminal sanctions may apply to wilful evasion, fraud, falsification of returns or records, and intentional failure to remit withheld taxes. Exposure can include monetary fines and imprisonment, often alongside civil assessments, interest and administrative penalties.

Puerto Rico tax matters that present fraud indicators may be referred to the Puerto Rico Department of Justice for criminal investigation and prosecution. Co-ordination typically occurs through information sharing and parallel processes, where the tax authority continues civil assessment work while prosecutors evaluate criminal elements such as wilfulness and intent.

Puerto Rico does not independently participate in OECD or treaty-based administrative co-operation frameworks. In practice, international exchange of information relevance is largely mediated through US federal mechanisms and compliance regimes (such as FATCA), while Puerto Rico focuses on domestic enforcement and reporting.

Puerto Rico does not maintain its own treaty exchange-of-information network. Information exchange affecting Puerto Rico taxpayers may occur indirectly through US federal exchange mechanisms, and through domestic information reporting and withholding documentation collected by the Puerto Rico Department of Treasury.

Puerto Rico does not independently participate in programmes such as the OECD International Compliance Assurance Programme, joint audits or treaty-based co-ordinated compliance programmes. Multinational taxpayers may still experience “practical co-ordination” pressures because global group audits and documentation (transfer pricing files, global minimum tax calculations) can drive the information Puerto Rico Department of Treasury requests during local examinations.

Puerto Rico does not independently administer a mutual agreement procedure (MAP) programme. Taxpayers generally must rely on US competent authority procedures where a US treaty is relevant to the taxpayer’s US federal position, recognising that Puerto Rico income tax is governed by local law.

Puerto Rico does not have a local MAP application deadline because it does not administer a MAP programme. Where a US treaty MAP is pursued for US federal purposes, the applicable treaty typically governs the MAP request timing. 

Puerto Rico does not provide mandatory binding arbitration as a local tax procedure.

Puerto Rico does not have an advance pricing agreement programme comparable to those of major treaty jurisdictions.

Puerto Rico taxpayers commonly pursue tax certainty through:

• incentive decrees under Act 60, which can lock in tax rates and agreed treatment for qualifying income streams, subject to compliance and substance;
• administrative consultations or rulings where available under Puerto Rico Department of Treasury practice; and
• robust transfer pricing documentation and intercompany agreements designed to withstand Puerto Rico audit scrutiny, especially for royalty, service and financing structures.