H.R. 364 — Territorial Tax Equity and Economic Growth Act of 2025

This section modifies the bona fide residency and income sourcing rules applicable to certain U.S. possessions (Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands) under IRC §§937 and 865. Specifically, it (1) revises the physical presence test for bona fide residency under §937(a) by striking the prior 183-day weighted presence requirement and replacing it with a substantial presence test determined under the principles of §7701(b)(3)(A) that requires at least 122 days (in lieu of 31 days) in the current taxable year and 183 weighted days over three years, without regard to exceptions under §7701(b)(3)(B)-(D); (2) amends the sourcing rules under §937(b) to (a) limit U.S.-source compensation income to amounts attributable to an office or other fixed place of business in the United States (per §864(c)(5)), (b) apply §864(c)(2) principles (instead of rules similar to §864(c)(4)) to determine if non-possession source income is effectively connected with a possession trade or business, and (c) exclude income from U.S. preparatory or auxiliary activities from U.S. sourcing or effective connection with a U.S. trade or business; and (3) extends the personal property sales sourcing rules of §865(j)(3) to §932 (coordination provisions for Puerto Rico residents, in addition to §§931 and 933). The amendments apply to taxable years beginning after December 31, 2024. (As background, §§931-937 generally allow bona fide residents of possessions to exclude possession-source income from U.S. gross income and instead be subject to possession-level taxation; these changes generally tighten residency requirements and narrow U.S.-source income attribution.)