August 2022: Puerto Rico Enacts New Legislation on Remote Workers of “Out-of-State” Employers

Update Applicable to: 
All employers with employees working remotely out of Puerto Rico.

What happened?
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.

What are the details? 
According 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 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.

While under this legislation, the employer does not have to withhold Puerto Rico income taxes, companies still need to be cautious about allowing workers to telework from Puerto Rico since Puerto Rico’s labor, and employment laws may apply to the employment relationship. 

Currently, no online document of Act 52-2022 is available to the public.

Act 52-2022 will go into effect on January 1, 2023.

For more information, please see the links below:

Article 1 – Article 2 – Article 3

What do employers need to do?
Employers should review the links above and be aware of additional news regarding this law.