Puerto Rico & FBAR: Who Has to Report

Puerto Rico & FBAR Reporting

Puerto Rico & FBAR Reporting

Puerto Rico & FBAR Reporting: Oftentimes, when people start to research ways to minimize or eliminate their tax liability — sure enough, Puerto Rico lands on their radar, and it has lots of tax benefits when structured correctly. When US Persons move to Puerto Rico  — even if for Incentives Code 60 (previously Acts 20/22) purposes — oftentimes the goal is to reduce “tax ties” to the IRS. For example, if you are a US citizen you do not have to formally expatriate to head over to Puerto Rico and enjoy the tax benefits. In addition — and with proper planning — some Taxpayers may be able to minimize their tax liability to the US government — including cryptocurrency taxes.

But, as with anything good in life — there are a few pitfalls to be aware of:

• FBAR is still required to report foreign accounts
• Previously held Capital Gains have tax-deferred limitations
• The Controlled Foreign Corporation rules are more complicated than meets the eye; and
• The Income sourcing rules very important

For purposes of this article, we are going to focus on the FBAR and Foreign Accounts Compliance.

Who Must File the FBAR

• • • Who is a United States Person?

      • A “United States person” means:

        • A citizen or resident of the United States;

          • An entity created or organized in the United States or under the laws of the United States.

            The term “entity” includes but is not limited to, a corporation, partnership, and limited liability company;

        • A trust formed under the laws of the United States; or

        • An estate formed under the laws of the United States.

Who is a Resident of the US?

While US Citizens and Legal Permanent Resident (absent a Form 8833 treaty position) are always US Persons, so are certain Residents. 

As defined by FinCEN For FBAR purposes:

• • • A United States resident is an alien residing in the United States.

    • To determine if the filer is a resident of the United States, apply the residency tests in 26 U.S.C. § 7701(b).

    • When applying the § 7701(b) residency tests use the following definition of United States:

      • United States includes the States, the District of Columbia, all United States territories and possessions (e.g., American Samoa, the Commonwealth of the Northern Mariana Islands, the Commonwealth of Puerto Rico, Guam, and the United States Virgin Islands), and the Indian lands as defined in the Indian Gaming Regulatory Act.

Therefore if a person is either a US Citizen, Legal Permanent Resident or Resident Alien of the United States (including Puerto Rico) under IRC 7701(b), then they may have an FBAR filing requirement.

Puerto Rico is NOT Considered a Foreign Country for FBAR

A financial account is foreign when it is located outside of the United States, which includes the following places:

• • • United States, including the District of Columbia; 

      • United States territories and possessions, such as:

      • Commonwealth Northern Mariana Islands

      • District of Columbia

      • American Samoa

      • Guam

      • Commonwealth of Puerto Rico

      • United States Virgin Islands Trust Territories of the Pacific Islands

    • Indian lands as defined in the Indian Gaming Regulatory Act

Therefore, since Puerto Rico is part of the United States, then accounts located in Puerto Rico are not required to be reported on the FBAR.

Tax vs Reporting vs Sourcing for Puerto Rico & FBAR

It is very important to keep in mind that even if a Taxpayer completely structures their Puerto Rico income to avoid US income tax — if the Taxpayer is still a US person then they still have an FBAR Reporting Requirement. In other words, while a Taxpayer may be able to legally circumvent much in the way of US tax implications, they are still on the hook for filing an FBAR.

But Puerto Rico is not a “Foreign Country”

Since Puerto Rico is not considered a foreign country, Taxpayers seeking to minimize US detection may want to consider moving their bank accounts to Puerto Rico.

Why?

Because if they do not have more than $10,000 in foreign accounts outside of Puerto Rico then they wouldn’t have an FBAR reporting requirement — because they wouldn’t have any foreign accounts.

Stated another way, while US Person residents of Puerto Rico are required to file an FBAR to report their foreign account, if they have less than $10,000 in annual aggregate total outside of Puerto Rico — they would not have foreign accounts sufficient to require an FBAR reporting requirement.

Puerto Rico Incentives Code Tax & FBAR Planning 

In conclusion, simply planning to avoid US tax by becoming a US resident of Puerto Rico and sourcing all of the Taxpayer’s income in Puerto Rico does not absolve them from having to file an FBAR. But, since Puerto Rico is considered a US territory for FBAR purposes, Taxpayer would not be required to disclose accounts they had in Puerto Rico on the FBAR.

About Our International FBAR & FATCA Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure. 

Contact our firm for assistance with getting compliant.