Puerto Rico, often referred to as the “Island of Enchantment,” has emerged as a compelling destination for individuals and businesses seeking significant tax advantages. For years, the island’s unique tax incentive programs, notably Acts 20 and 22, attracted a wave of investors and entrepreneurs. These incentives have since been consolidated and enhanced under the Puerto Rico Incentives Code, commonly known as Act 60 of 2019. This comprehensive guide delves into the intricacies of Act 60, exploring its profound benefits for both individual investors and export services businesses, outlining eligibility criteria, and detailing the application process. As of January 2025, understanding these provisions is crucial for anyone considering a strategic relocation or business expansion to the island.

Key Tax Benefits for Individual Resident Investors (Act 60, formerly Act 22)

Thinking about relocating to Puerto Rico for its tax incentives? The Individual Resident Investor rules under Act 60 can be powerful, but only if you understand what’s exempt in Puerto Rico versus what may still be taxed by the U.S. The overview below separates Puerto Rico tax benefits from U.S. federal rules and calls out the most important eligibility and compliance requirements.

How the 0% works

• Interest & dividends: For holders of an Act 60 Individual Resident Investor decree, interest and dividends from all sources are 100% exempt from Puerto Rico income tax through December 31, 2035. That’s a Puerto Rico tax result; it does not automatically eliminate U.S. federal tax on U.S.-source items.
  U.S. citizens who are bona fide residents of Puerto Rico generally exclude Puerto Rico-source income from their U.S. return under IRC §933; non-Puerto-Rico-source income (e.g., dividends from U.S. corporations) remains within U.S. taxing jurisdiction.
• Capital gains: Puerto Rico taxes 0% on gains attributable to post-move appreciation recognized before January 1, 2036. Pre-move appreciation recognized 10+ years after becoming a resident (and before 2036) is 5% Puerto Rico tax; otherwise, regular Puerto Rico rules apply.
  For U.S. purposes, there’s a special “tainted property” rule: gains on investment property you owned before moving are generally not Puerto Rico-source if sold within 10 years—so they don’t get the §933 U.S. exclusion. A limited split-sourcing election lets you allocate a portion of the gain to the Puerto Rico holding period (mark-to-market for marketable securities, time-based for other property).

Bottom line: after you move and meet bona fide residency, new appreciation on personal property (like publicly traded stock) is typically Puerto Rico-source and can be 0% in Puerto Rico and excluded from U.S. tax under §933—but pre-move appreciation and other U.S.-source items are different.

Simplified Example: Post-move stock sale

You move to Puerto Rico, become a bona fide resident, and later sell stock that appreciated only after your move. That post-move gain is 0% in Puerto Rico, and under §933 it’s generally excluded from U.S. federal tax because it’s Puerto Rico-source. If the stock had appreciated before your move and you sell it within 10 years, the U.S. may still tax the pre-move portion under the tainted-property rule (even though Puerto Rico may still exempt the post-move slice). Eligibility & ongoing obligations (Individual Resident Investor)

To use the Individual Resident Investor regime, you must:

• Obtain a decree (the contract guaranteeing your terms) and become a bona fide resident (presence, tax-home, and closer-connection tests).
• Timing/eligibility window: As stated in Act 60, the incentive applies to individuals who become residents no later than the tax year ending December 31, 2035, and who were not bona fide residents of Puerto Rico at any time between January 17, 2006, and January 17, 2012. (Confirm current text at application—law has been amended multiple times.)
• Annual donation: Contribute $10,000 per year to approved Puerto Rico nonprofits, at least $5,000 of which must go to organizations combating child poverty.
• Home purchase: Buy a Puerto Rico primary residence within two years of receiving your decree.
• Annual report & fee: File the annual report and pay the $5,000 filing fee.

U.S. federal backdrop you can’t ignore

Being a bona fide Puerto Rico resident generally lets you exclude Puerto Rico-source income from your U.S. return (IRC §933). But U.S.-source items (e.g., U.S. dividends, U.S. real-property gains) remain subject to U.S. tax, and the NIIT can still apply to non-territory-source investment income if you have a filing obligation.

Exceptional Tax Rates for Export Services Businesses under Act 60 (formerly Act 20)

If you run a business that exports services from Puerto Rico to clients outside the island (e.g., consulting, software, design, marketing, investment management back office), Act 60’s Chapter 3 can dramatically lower Puerto Rico-level taxes:

• 4% corporate income tax on eligible export services net income (some small businesses qualify for 2% for the first five years).
• 100% Puerto Rico tax exemption on dividends or profit distributions from the exempt operation.
• 75% property tax exemption (real & personal) during the decree term; 100% for first 5 years for qualifying small/medium businesses, then 75%.
• 50% municipal license (gross receipts) tax exemption (often 100% for first 5 years for qualifying small/medium businesses, then 50%).

Employment rule: If your exempt operation exceeds $3M in annual volume, you must have at least one (1) full-time employee who is a Puerto Rico resident (the owner may fill that position if they actually perform the role and receive a bona fide salary). Below $3M, there is no minimum. The decree functions as a contract with the Government: it locks in your terms for 15 years (typically extendable) as long as you remain in compliance.

Quick compliance checklist

• Bona fide residency in Puerto Rico every year (presence, tax home, closer connections).
• Decree maintenance: donation, home purchase, annual report/$5k fee, and any business-side employment/operations terms if you also hold an export services decree.
• U.S. rules still apply to non-Puerto-Rico-source income (and special sourcing/anti-abuse rules for pre-move assets). Plan before you move and before you sell.

Is Act 60 Right for You?

Act 60 presents an unparalleled opportunity for individual investors and export services businesses to significantly reduce their tax liabilities and enhance their financial growth. The combination of 0% capital gains tax for individuals and a 4% corporate tax rate for export services businesses, coupled with other exemptions, creates a highly attractive environment. However, the decision to relocate or establish a business in Puerto Rico under Act 60 should be made after careful consideration of all personal and business circumstances, including the commitment to establishing bona fide residency and adhering to ongoing compliance requirements. Tax laws are complex and subject to change.

The information provided herein is for general informational purposes only and does not constitute legal or tax advice. As of January 2025, the provisions of Act 60 are in effect, but legislative amendments or interpretations can occur. Therefore, it is imperative to consult with a qualified tax professional specializing in Puerto Rico tax law for personalized advice tailored to your unique situation.

We specialize in helping U.S. expats, business owners, and high-net-worth individuals navigate their tax responsibilities while maximizing their financial opportunities. From strategic planning to ensuring compliance with both U.S. and Puerto Rico tax laws, we offer personalized guidance tailored to your unique situation. If you’d like to discuss your tax needs or explore how Act 60 could benefit you, we invite you to schedule a consultation today. Click here to book your session and let’s explore how these provisions can work in your favor!