Territorial Economic Recovery Act

House Votes

This bill changes how some U.S. tax rules treat companies that mainly do business in U.S. territories. It says that if a company earns most of its money in a territory and runs an active business there, that local business income would not count toward a U.S. tax calculation on certain foreign profits. The goal is to support economic activity in places like Puerto Rico and the U.S. Virgin Islands by easing part of the tax burden tied to foreign income rules.

To qualify, a company must meet two tests over the prior three years: at least 80% of its total income must come from a U.S. territory, and at least 75% must come from actively doing business there. “U.S. territory” here means Puerto Rico, the Virgin Islands, and other specified possessions. The change applies to company tax years starting after December 31, 2023, and to the related tax years of U.S. shareholders that include those company years.

Key points

• Who is affected: Companies operating mostly in Puerto Rico, the U.S. Virgin Islands, and certain other U.S. possessions, and their U.S. shareholders.
• What changes: Active business income earned in those territories would be left out of a U.S. “tested income” calculation used for taxing some foreign profits, which can reduce tax bills and encourage local investment.
• When: Applies to company tax years beginning after December 31, 2023, and the matching U.S. shareholder years.