Compliance
Compliance Essentials for Caribbean Entities in a U.S. Possession or Working with U.S. Sources
Understanding U.S. territory rules, economic substance, and recent regulatory expansions is critical for entities tied to U.S. sources or operating in the Caribbean.
By NomadicTax Research Team • 5-8 min read • August 14, 2026
## U.S. Territories and Bona Fide Residence Rules
Individuals in Puerto Rico, Guam, USVI, Northern Mariana Islands, or American Samoa can be **bona fide residents**—a status that determines whether their income is taxed by the U.S. federal government or by the territory. Under Publication 570, to qualify you must satisfy presence, tax home, and closer-connection tests. Puerto Rico has unique rules—residents pay Puerto Rico tax on worldwide income if bona fide and generally do **not** report Puerto Rico-source income on U.S. returns unless U.S. source income is involved. ([irs.gov](https://www.irs.gov/pub/irs-dft/p570--dft.pdf?utm_source=openai))
## Regulatory Developments to Watch
- The IRS’s **Internal Revenue Bulletin 2026-28** introduces proposed regulations under IRS §§ 1400Z-1 and 1400Z-2 following the One, Big, Beautiful Bill Act (OBBBA). These affect **Qualified Opportunity Zones (QOZs)** and include transitional guidance for qualifying investments. ([irs.gov](https://www.irs.gov/irb/2026-28_irb?utm_source=openai))
- The **IRS’s Business Tax Account (BTA)** platform has been expanded. Caribbean entities or those with U.S. exposure may now access features like digital notices (e.g. CP081B, CP211A), download EIN verification, schedule payments, view transcripts, and manage payments through multiple bank accounts. ([irs.gov](https://www.irs.gov/newsroom/summer-2026-expanded-features-for-business-tax-account?utm_source=openai))
## Key Compliance Triggers & Risks
- **Misreporting source of income**: Reporting U.S-source or services as Puerto Rico-source incorrectly can result in U.S. tax exposure. Advisory campaigns such as for Act 20/22 highlight audits in this area. ([irs.gov](https://www.irs.gov/pub/irs-pgld/introduction-to-puerto-rico-acts-20-and-22.pdf?utm_source=openai))
- **Missed BTA functionality**: Not using the Business Tax Account asks you to rely on paper notices, which delays responses, leads to missed deadlines, and potential fines. Utilize the enhanced features to stay ahead. ([irs.gov](https://www.irs.gov/newsroom/summer-2026-expanded-features-for-business-tax-account?utm_source=openai))
- **Economic substance compliance**: For BVI entities, failure to meet office, staffing, or operational substance can mean loss of benefits, fines, or dissolution. Monitor evolving fee schedules and system transitions (e.g. to VIRRGIN). ([bvifsc.vg](https://www.bvifsc.vg/news/industry-updates/industry-update-6-2026-economic-substance-filing-fees?utm_source=openai))
## Practical Compliance Checklist
- Confirm your **residency status** under IRS Publication 570 (for Puerto Rico or U.S. territories); file Form 8898 if you begin or cease bona fide residency. ([irs.gov](https://www.irs.gov/individuals/tax-credits-and-bona-fide-residents-of-united-states-territories?utm_source=openai))
- Review whether your income is correctly sourced (U.S. vs Puerto Rico vs other Caribbean jurisdictions).
- Register with local regulators (BVI FSC, CIMA, Puerto Rico Hacienda) and ensure substance and licensing compliance where applicable.
- Use the IRS Business Tax Account for:
* Viewing and managing notices and EIN verification ([irs.gov](https://www.irs.gov/newsroom/summer-2026-expanded-features-for-business-tax-account?utm_source=openai))
* Scheduling payments
* Accessing transcripts and tax history
- Stay current with proposed regulations—e.g. those affecting QOZs in Puerto Rico under the OBBBA. ([irs.gov](https://www.irs.gov/irb/2026-28_irb?utm_source=openai))
## Example Compliance Scenario
A tech startup in Puerto Rico under Act 20 has U.S. clients and earns U.S.-source royalties. They believed all income was Puerto Rico-source and didn’t file U.S. return. When IRS proposed new QOZ regulations, adjustments in definitions meant some royalties were now treated differently. Through audits, they owed U.S. taxes and penalties. They could have avoided this by engaging tax advisors early, maintaining clear documentation of sources, and staying ahead of regulatory changes.
By aligning residence, source, regulatory, and reporting requirements, entities and individuals operating within Caribbean or U.S. territory jurisdictions can maintain compliance and avoid costly surprises.