Act 60 in Puerto Rico is the island’s Incentives Code, signed into law in July 2019, which offers U.S. citizens who relocate and become bona fide Puerto Rico residents a package of aggressive tax reductions: currently a 0% Puerto Rico rate on qualifying investment income for individual investors with a tax decree, and a 4% corporate rate on income from eligible export service businesses.1Office of Management and Budget of Puerto Rico. Puerto Rico Incentives Code The code folded dozens of older programs, including the well-known Acts 20 and 22, into a single framework. The savings are genuine. So are the residency rules, the ongoing obligations, the IRS scrutiny, and a rate increase scheduled to take effect in 2027.
Investor Benefits Under an Individual Decree
An individual investor who obtains a tax decree and establishes bona fide residency can currently exempt 100% of interest, dividends, and capital gains from Puerto Rico income tax. Interest and dividends qualify regardless of whether they come from Puerto Rico, the U.S. mainland, or foreign sources.2Worldwide Tax Summaries. Puerto Rico – Individual – Other Tax Credits and Incentives The capital gains exemption is narrower: it covers appreciation that accrues after you become a bona fide resident and during the term of your decree.3InvestPR. Tax Benefits and Policy
The decree operates as a binding contract between you and the Puerto Rico government, locking in your tax treatment for 15 years. If you’ve stayed compliant, you can apply for a 15-year extension.1Office of Management and Budget of Puerto Rico. Puerto Rico Incentives Code
The 0% rates will not last. Beginning January 2027, a new law raises the Puerto Rico rate on individual investor capital gains, dividends, and interest to 4%. That is still far below mainland federal rates, but if you’re evaluating the move now, run your projections at 4% rather than zero.
Gains That Accrued Before You Moved
The most expensive mistake people make with Act 60 involves selling appreciated assets they already owned before relocating. The exemption applies only to appreciation that occurs after you become a bona fide Puerto Rico resident. Any gain that built up while you were living on the mainland stays subject to U.S. federal tax.4Internal Revenue Service. Introduction to Puerto Rico Acts 20 and 22
When you sell such an asset, the gain is split into pre-move and post-move portions. The pre-move portion is taxed at 5% or 15% depending on circumstances and holding period. After 10 years of bona fide residency, pre-move appreciation on certain investment assets can become eligible for U.S. tax exemption.4Internal Revenue Service. Introduction to Puerto Rico Acts 20 and 22 You can also elect a mark-to-market valuation on the date of your move, which resets the cost basis for that pre-move portion.
Selling large positions in year three or four of Puerto Rico residency and treating the whole gain as exempt is exactly the pattern the IRS looks for. The interaction between federal rules and your decree is complex enough that any significant asset sale warrants professional tax advice on timing.
Benefits for Export Service Businesses
Businesses that provide services from Puerto Rico to clients located outside the island qualify for a separate track under Act 60. The headline is a fixed 4% income tax rate on net income from eligible export operations. Businesses with annual revenue of $3 million or less pay 2% for the first five years, then 4%.3InvestPR. Tax Benefits and Policy A “novel pioneer activity” can qualify for a 1% rate.
Eligible services include consulting, advertising, centralized management, technology development, and similar professional work. The service must be delivered to clients outside Puerto Rico. Dividends the business pays from its exempt earnings and profits are fully exempt from Puerto Rico income tax.3InvestPR. Tax Benefits and Policy
Local tax relief comes on top of the income tax rate:
- 75% exemption on real and personal property used in the exempt operation during the first 15 years.5Worldwide Tax Summaries. Puerto Rico – Corporate – Tax Credits and Incentives
- 50% exemption on the municipal license tax during the first 15 years.5Worldwide Tax Summaries. Puerto Rico – Corporate – Tax Credits and Incentives
Employment requirements are lighter than most people assume. Businesses generating more than $3 million in annual revenue must have at least one full-time Puerto Rico resident employee, and that employee can be an owner. At $3 million or less, there is no minimum employee requirement for export services.
What Federal Tax Still Applies
Moving to Puerto Rico does not end your relationship with the IRS. Under Section 933 of the Internal Revenue Code, bona fide residents of Puerto Rico can exclude Puerto Rico source income from federal gross income.6Office of the Law Revision Counsel. 26 USC 933 – Income From Sources Within Puerto Rico Income from U.S. mainland sources, such as rent from stateside property, a pension from a former mainland employer, or gains on U.S.-source investments, generally remains federally taxable.
Federal employees are explicitly carved out: if you work for the U.S. government or one of its agencies, your compensation stays federally taxable no matter where you live.7eCFR. 26 CFR 1.933-1 – Exclusion of Certain Income From Sources Within Puerto Rico Employees of the Puerto Rico government are not treated as federal employees for this purpose.
You must also file IRS Form 8898 for the year you become (or later cease to be) a bona fide Puerto Rico resident, if your worldwide gross income is $75,000 or more. For married individuals, that threshold applies to each spouse separately.8Internal Revenue Service. Residents of U.S. Territories – Form 8898 Bona Fide Residence Skipping this form is a red flag the IRS watches for.
Bona Fide Residency: The Three Tests
Every year you claim Act 60 benefits, you must satisfy three separate IRS tests for bona fide Puerto Rico residency.9Internal Revenue Service. Publication 1321 – Special Instructions for Bona Fide Residents of Puerto Rico
Presence Test
The straightforward way to pass is spending at least 183 days in Puerto Rico during the tax year. Alternatively, you can qualify by being present for at least 549 days over a three-year period made up of the current year plus the two preceding years, provided you’re on the island at least 60 days in each of those three years.10Internal Revenue Service. Publication 570 – Tax Guide for Individuals With Income From U.S. Territories The three-year option gives some flexibility for travel, but the 60-day annual floor is not negotiable.
Tax Home Test
Your tax home, meaning your primary place of business or employment, must be in Puerto Rico for the entire tax year. If your work isn’t tied to a fixed location, the IRS looks at where you maintain a regular home in a “real and substantial sense.”10Internal Revenue Service. Publication 570 – Tax Guide for Individuals With Income From U.S. Territories Keeping an active office or business address on the mainland while claiming Puerto Rico as your tax home invites an audit.
Closer Connection Test
You fail this test if the IRS finds you have stronger ties to the mainland or a foreign country than to Puerto Rico. Factors include where your permanent home is, where your family lives, where your personal belongings are, where you’re registered to vote, where you hold a driver’s license, and where you participate in social and professional organizations.10Internal Revenue Service. Publication 570 – Tax Guide for Individuals With Income From U.S. Territories It is a totality-of-circumstances analysis, not a checklist. Keeping a fully furnished home in Miami while renting a small unit in San Juan tells the IRS where your real life is.
Required Donations and Real Estate Purchase
Two ongoing obligations sit on top of residency. Starting in your second year as a decree holder, you must donate at least $10,000 annually to approved Puerto Rico nonprofits. At least $5,000 must go to an organization on the government’s CECFL list of certified child-poverty charities. The other $5,000 can go to any Puerto Rico nonprofit with tax-exempt status equivalent to a mainland 501(c)(3), or the full $10,000 can go to a CECFL organization. Donations must be completed by December 31.
You must also purchase residential real estate in Puerto Rico within two years of receiving your decree. The property has to serve as your primary residence and be owned by you individually or jointly with a spouse. Renting does not satisfy this requirement, and the two-year clock runs from the date the decree is granted, not from your physical move.
How the Application Works
Applications go through Puerto Rico’s Single Business Portal, the digital platform operated by the Department of Economic Development and Commerce.11Department of Economic Development and Commerce. Applicant Manual – External Act 20 Annual Report for Export Services The non-refundable filing fee for individual investors is $750. The government runs a background check and reviews your documentation. If approved, the Secretary of the Department of Economic Development and Commerce signs the decree.
Three to six months is a reasonable expectation for approval, depending on volume and the complexity of your file. The decree is not retroactive. Your benefits begin when the decree is granted, not when you applied or when you arrived on the island. Approval is not automatic; the government can and does deny applications that fall short of the statutory criteria.
Annual Compliance
Holding a decree requires an annual compliance report, due within 30 days of your income tax filing deadline. The annual report filing fee for individual investors is $5,000. For taxable years beginning after December 31, 2024, these reports go to the Puerto Rico Department of the Treasury rather than the Department of Economic Development and Commerce. Missing the deadline can trigger administrative penalties or cancellation of the decree.
Documentation matters as much as the filing itself. Keep organized records of your property deed, utility bills, donation receipts with CECFL certification for the child-poverty portion, bank statements showing Puerto Rico financial activity, flight records, and credit card statements that establish physical presence on the island. The IRS pulls commercial flight manifests from the Department of Homeland Security and reviews credit card charge locations during Act 60 audits. Records that don’t support 183 days of presence, or the 549-day alternative, will be a serious problem.
IRS Audit Risk
Anyone weighing Act 60 needs to know that the IRS is auditing this program aggressively. In January 2021, the IRS added Act 22, now folded into Act 60, to its formal audit campaign under the Large Business and International division. The agency has deployed additional agents specifically to examine individuals claiming Act 60 benefits and has expanded information-sharing with Puerto Rico’s Hacienda.
The pattern is consistent: agents pull financial records and commercial flight history, then reconstruct how many days the taxpayer actually spent on the island. The IRS has publicly identified roughly 100 high-net-worth individuals suspected of improperly claiming Act 60 benefits, with many cases expected to move to criminal investigation. Once you are selected for audit, you lose access to the IRS voluntary disclosure programs that would otherwise let you correct errors without prosecution. If your compliance is borderline, fixing it before an audit begins is dramatically better than fixing it afterward.