When Are Puerto Rico Accounts & Assets Reported as Foreign Accounts?

When Are Puerto Rico Accounts & Assets Reported as Foreign Accounts?

When Are Puerto Rico Accounts & Assets Reported as Foreign Accounts?

When it comes to Puerto Rico and US Person tax filing and international reporting requirements, it can get very (unnecessarily) complicated. On the one hand, Puerto Rico is a territory, and when US Persons reside in Puerto Rico — unless they qualify as Bona-Fide Residents — they are still subject to US tax on their worldwide income. On the other hand, if they do qualify as a Bona-Ride resident of PR — they are usually exempt from tax on Puerto Rico sourced income. In addition to the different tax labyrinths Taxpayers have to work through, are the ever complex international reporting requirements. Since residents of Puerto Rico are still US Persons, when a person resides in Puerto Rico, they are generally still required to file forms such as the FBAR and Form 8938 (if a tax return is required). Let’s go through the basics of the reporting requirements for taxpayers in Puerto Rico:

Worldwide Income Excluding Puerto Rico Sources

In general, when a US person resides in Puerto Rico and qualifies as a Bona-Fide Resident, they still have to report their worldwide income to the US government, except for Puerto Rico sourced income. If the person does not have any income other than Puerto Rico sourced income, they may not have to file a US tax return. As to assets in Puerto Rico, some assets are reportable as foreign (Form 3520/3520-A Trusts) and some are not (Accounts & Investments).

Form 8938 If A Return Is Filed

Unlike some of the other international information reporting forms, such as the FBAR, Form 8938 is only required by the taxpayers required to file a US Tax Return. Thus, when a taxpayer does not have to file a US tax in the current year — they do not have to file the tax return just so that they can report Form 8938, if they happen to exceed the threshold. Therefore, if a taxpayer resides in Puerto Rico, meets the Bona-Fide Residence requirements, and does not have any income other than Puerto Rico sourced income, they may not need to file the form 8938 if no US tax return is due.

FBAR for Puerto Rico Residents 

Whether or not a taxpayer has to file a US tax return, they are still required to file it an FBAR if they are a US person. Therefore, US persons residing in Puerto Rico will still file an FBAR — although accounts located in Puerto Rico are not generally considered “foreign.”

Forms 3520/3520-A

Form 3520-A is used to report US ownership of a foreign trust. Here’s where it gets complicated: When a person refers to a foreign financial account — such as an account that is reported on the FBAR — an account located in Puerto Rico is not considered a foreign account (exceptions, exclusions, and limitations can apply). But, for Form 3520/3520-A purposes, a trust located in Puerto Rico is considered a foreign trust. Therefore, ownership of a foreign trust that is located in Puerto Rico will typically require the filing of a form 3520A. In addition, this form is required whether or not a taxpayer has to file a tax return or not. *Elections can be made to treat a Puerto Rico Trust as a Domestic Trust, which may impact 3520/3520-A reporting.

Form 8621

For form 8621 purposes, even if a taxpayer qualifies as a Bona-Fide Resident of Puerto Rico, they are still required to file Form 8621 to report their Passive Foreign Investment Companies. If the only potential PFIC is an investment business located in Puerto Rico then depending on whether all the boxes can be checked properly — and the taxpayer qualifies as a Bona-Fide Resident of Puerto Rico, then the PFIC in Puerto Rico may not qualify as a PFIC (if all the owners qualify as Bona Fide Residents of Puerto Rico, then it would not be a foreign-owned investment company) – and the same rule may hold true with a CFC.

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