Puerto Rico: Q&As on the Application of the New Effectively Connected Income Source Rules

Puerto Rico’s Treasury Department has released Informative Bulletin From Internal Revenue No. 11-08 (March 31, 2011)—providing a list of commonly asked questions and answers (Q&As) regarding application of the new effectively connected income source rules (as enacted in Puerto Rico’s tax law in October 2010 and generally effective in 2011).

For an electronic version of the Puerto Rico Treasury’s Q&As: Informative Bulletin No. 11-08

Background

Legislation enacted in Puerto Rico in 2010 (that generally is effective for income accruing and acquisitions occurring after December 31, 2010), includes a change to the effectively connected income sourcing rules. See TaxNewsFlash 2010-478.

The legislation expanded the definition of “engaged in a trade or business in Puerto Rico” to include situations in which a nonresident conducts business in Puerto Rico through a resident company engaged in manufacturing or providing services in Puerto Rico.

This change potentially increases the amount of income effectively connected with a Puerto Rican trade or business and subject to tax in Puerto Rico. More specifically, the legislation treats a portion of gains, profits, and income of a nonresident individual, partnership or corporation engaged or deemed to be engaged in a trade or business in Puerto Rico as effectively connected income.

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