On June 30, 2022, the governor of Puerto Rico signed into law Act No. 52 (Act 52-2022), which amended the concept of "engaged in trade or business" under the Puerto Rico Internal Revenue Code of 2011, to address the pandemic-related issue of employees working remotely from the Island for "out-of-state" employers with no business nexus to Puerto Rico.
Pursuant to Act 52-2022, for taxable years commencing after December 31, 2021, businesses with employees working remotely from Puerto Rico will not be deemed "engaged in trade or business," provided the following conditions are met:
- At no time during the taxable year, the business (i.e., the taxpayer) has an office or a fixed place of business in Puerto Rico;
- At no time during the taxable year, the taxpayer has an "economic nexus" with Puerto Rico;
- The taxpayer is not considered a merchant under the provisions of the Puerto Rico Internal Revenue Code ("Any person engaged in the business of sales of taxable items in Puerto Rico, including any wholesaler.");
- The remote worker is not an officer, director or majority shareholder of the taxpayer;
- The services provided by the remote worker are provided for the benefit of clients or businesses of the taxpayer that do not have a nexus with Puerto Rico; and
- The taxpayer reports the income paid to the remote worker on a Federal Form W-2 or on a Form 499R-2/W-2PR.
The statute further establishes that the taxpayer will not be considered to have an "economic nexus" with Puerto Rico even when:
- The remote worker's home office is necessary for, or is a condition of, employment;
- There is a business purpose of allowing the remote worker's home to be used as an office;
- The remote worker is required to perform at least some basic job duties from an employer's location; and
- The employer reimburses some of the remote worker's home office expenses.
It should be noted that while under this legislation the employer does not have to withhold Puerto Rico income taxes,1 companies still need to be cautious about allowing workers to telework from Puerto Rico inasmuch as Puerto Rico labor and employment laws may apply to the employment relationship. So, Act 52-2022 is just one piece in the "wandering worker" puzzle.
Notably, there is proposed legislation addressing this issue. Specifically, House Project 1356 proposes the enactment of the "Act to Facilitate the Implementation of Remote Work in Private Enterprises and Convert Puerto Rico into the Digital Center of the Americas." Among other things, this proposed statute would establish that the employment relationship between remote workers and their out-of-state employers would be governed by the terms and conditions of the employment contract and that those employers would be exempted from Puerto Rico labor and employment statutes pertaining to discrimination and workers' compensation. We will continue to monitor this legislation and report on any significant developments.
1. The remote workers, however, are responsible for reporting their income to the Puerto Rico Treasury Department and must make estimated tax payments on a quarterly basis.
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