This bill amends the Internal Revenue Code to exclude certain income of qualified possession corporations in U.S. territories from being treated as tested income, incentivizing business activity within these territories. It applies to Puerto Rico, the Virgin Islands, and other specified U.S. possessions, aiming to stimulate their economic recovery.
Stacey Plaskett
Representative
VI
The "Territorial Economic Recovery Act" amends the Internal Revenue Code to exclude certain income of qualified possession corporations from tested income, specifically income connected with active trade or business within U.S. possessions like Puerto Rico and the Virgin Islands. This applies to foreign corporations meeting specific criteria for income derivation and business activity within these possessions. This change is applicable for taxable years of foreign corporations starting after December 31, 2023, and to the taxable years of their United States shareholders accordingly.
Territorial Economic Recovery Act: Tax Break for Businesses in U.S. Territories Kicks Off in 2024
The "Territorial Economic Recovery Act" aims to boost business in U.S. territories like Puerto Rico and the Virgin Islands by offering some serious tax breaks. Starting in 2024, the bill changes the tax code to let certain companies, called "qualified possession corporations", exclude some of their income from being taxed as "tested income." (SEC. 2)
Island Income: What's the Deal?
This bill is all about encouraging companies to set up shop and do business in U.S. territories. Basically, if a company makes most of its money and actively operates within a territory like Puerto Rico or the Virgin Islands, some of that income won't be counted as "tested income" for tax purposes. This could mean a lower tax bill for those companies. (SEC. 2)
To qualify, a company needs to meet two main criteria over a three-year period: (SEC. 2)
- At least 80% of its gross income must come from sources within a U.S. territory.
- At least 75% of its gross income must be tied to the active conduct of a trade or business within that territory.
For example, if a manufacturing company sets up a factory in Puerto Rico, hires local workers, and sells its products primarily within the territory, it's likely to meet these requirements and benefit from the tax break.
Real-World Ripple Effects
While the goal is to help these territories' economies, there are a few things to keep an eye on. On one hand, this could attract businesses, create jobs, and potentially increase tax revenue for local governments. Imagine a tech company opening a new office in the Virgin Islands, bringing in new jobs and investment.
On the other hand, there's a chance some companies might try to game the system. They could shift profits to these territories just to lower their taxes, even if their main business isn't really there. The 80% and 75% income rules are meant to prevent this, but it's something to watch. Also, the definition of 'active conduct of a trade or business' is very important here, and it's not 100% clear how broadly that will be interpreted. (SEC. 2) It's also worth noting that the bill mostly benefits larger corporations that can set up operations in these territories. Smaller, local businesses might not see as much of a direct impact.