Territorial Tax Equity and Economic Growth Act of 2025
The Territorial Tax Equity and Economic Growth Act of 2025 (H.R. 364) would revise the Internal Revenue Code’s residence and source rules for individuals living in U.S. territories (Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands) with the goal of supporting economic recovery in those possessions. The core changes center on (1) redefining what counts as a Bona Fide Resident in these territories, using a territory-specific substantial presence test, and (2) restructuring how income is sourced between the U.S. and the territories so that income tied to activity in or related to a possession is treated more consistently with that possession’s tax rules. The bill also expands the rules about the sourcing of personal property sales and clarifies that certain U.S.-based preparatory or auxiliary activities do not count as U.S.-sourced income. The amendments would apply to tax years beginning after December 31, 2024. In short, the bill attempts to give territories clearer, more territory-focused guidelines for who is considered a resident and where income is sourced, in hopes of encouraging investment and economic growth within the possessions.
Key Points
- 1Bona Fide Resident criteria in possessions updated: A person will be treated as having substantial presence in a territory if they meet a threshold adapted from the general substantial presence test, substituting 122 days (instead of 31 days) for a portion of the test, to determine residency in Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, or the Virgin Islands.
- 2Source rules reorganized for possessions: The rules determining where income is sourced (and thus taxed) are amended to tie certain income to the possession more clearly, including an adjustment that looks to where a trade or business is conducted within the possession. The new framework uses a standard similar to Section 864(c)(2) rather than relying on the older 864(c)(4)-style rules.
- 3Clarifications on income from activities outside possessions: For purposes of determining income is effectively connected with a possession’s trade or business, the bill specifies using the 864(c)(2) approach. It also clarifies that income from U.S. activities that are preparatory or auxiliary (i.e., incidental activities) is not treated as U.S.-sourced or as connected to a U.S. trade or business.
- 4Personal property sale sourcing expanded: The sourcing rules for sales of personal property would now reference an additional provision (932) alongside 931, broadening how such sales are treated in relation to possessions.
- 5Effective date: Changes apply to taxable years beginning after December 31, 2024, meaning tax years starting in 2025 and onward would be subject to these rules.