An image of Puerto Rico's breathtaking beach, showcasing the allure of Act 60 tax incentives.

Puerto Rico: where the sun, sand, and, in recent times, a dash of American millionaires and billionaires liven up the scene, thanks to the enticing Act 60 tax incentive.

With its stunning beaches, lush forests teeming with wildlife, and a relaxed lifestyle epitomized by cities like San Juan, Puerto Rico truly offers a slice of paradise for residents.

Yet, what truly sets Puerto Rico apart are its unique tax incentives. US citizens can maintain their citizenship while legally enjoying a mere 4% corporate tax rate, along with zero capital gains and dividends taxes.

Of course, this program comes with strings attached. So, before diving in headfirst, it’s wise to weigh the pros and cons and ensure they align with your business and lifestyle goals.

The Appeal Of Puerto Rico’s Act 60

Contrary to popular belief, simply obtaining a Golden Visa in sought-after locales like Portugal or gaining citizenship in a Caribbean island like St Kitts & Nevis doesn’t automatically alleviate an American’s tax burden. Even with a second passport or residency permit, US citizens still remain liable for taxes on their worldwide income.

And yes, there are strategies to significantly reduce tax liabilities while living abroad. Measures like the Foreign Earned Income Exclusion (FEIE), Foreign Tax Credit (FTC), and Foreign Housing Exclusion can help. But even then, individuals are still required to fulfill tax obligations in their new country of residence while maintaining ties to the US tax system, making matters more complex.

For those seeking to entirely sever ties with the US tax system, like Facebook co-founder Eduardo Saverin, renouncing citizenship may seem appealing. However, for Americans hesitant to take such a drastic step, Puerto Rico’s Act 60 offers a viable alternative to significantly lower tax liabilities.

But how does it work?

Puerto Rico is a US territory with a degree of autonomy in creating its tax laws, separate from US federal and state tax regulations.

As it is a US territory, US citizens can relocate to Puerto Rico freely without the need of obtaining a residency permit and benefit from Puerto Rico´s tax system.

Furthermore, by becoming a bona fide resident of Puerto Rico, individuals are exempt from US federal and state income tax on income sourced from Puerto Rico.  Another great advantage? Americans can still maintain their benefits such as Medicare and Social Security.

What is Act 60?

Act 60 is a tax incentive program introduced by the government of Puerto Rico to attract individuals, investors, and businesses to the island. It offers significant tax benefits to those who become residents of Puerto Rico and meet certain requirements.

Also known as the Tax Incentive Code, Act 60 consolidated and expanded upon the provisions of Act 20 and Act 22, two previous tax incentive programs in Puerto Rico.

Act 20: Export Services Act

Act 20, enacted in 2012, targeted service-based businesses, offering tax incentives to eligible entities that exported services from Puerto Rico to clients outside of the island. Benefits included a flat 4% corporate tax rate and exemptions on income derived from exported services, such as consulting, marketing, and research and development.

Act 22: Individual Investors Act

Introduced alongside Act 20 in 2012, Act 22 aimed to attract individual investors to Puerto Rico. It granted full exemption from Puerto Rican capital gains tax and complete exemption from US federal taxes on capital gains accrued after becoming a resident of the island.

Act 60: Consolidation and Expansion

In 2019, Puerto Rico Governor Ricardo Rosselló signed Act 60 into law, consolidating and expanding upon the provisions of Act 20 and Act 22. Act 60 broadened the scope of benefits beyond export services and individual investors, offering a comprehensive range of tax incentives for both businesses and individuals relocating to Puerto Rico. It introduced new criteria and requirements to ensure the program’s effectiveness and sustainability.

The consolidation of these incentives under Act 60 aimed to streamline Puerto Rico’s tax incentive offerings, enhance its competitiveness as an investment destination, and attract a wider range of businesses and individuals to the island. The Code was designed to create a simple, streamlined, and efficient process, earning the trust of the people and the private sector through transparent incentive granting procedures.

US Recognition of Act 60

Under the US tax code (Section 933), a bona fide resident of Puerto Rico can exclude Puerto Rico-source income from his or her US gross income for US tax purposes.

According to the IRS: “If you’re a bona fide resident of Puerto Rico, you generally aren’t required to file a US. federal income tax return if your only income is from sources within Puerto Rico. However, if you have income from sources outside of Puerto Rico, including from US. sources, you’re required to file a US. federal income tax return if such amount is above the US. filing threshold.”

What does this mean?

Once you qualify under the Act 60 tax incentive, you can breathe a sigh of relief knowing you only need to deal with taxes in Puerto Rico for most types of income. However, if your earnings venture beyond Puerto Rico’s shores, be prepared to file that US federal tax return if it crosses the threshold.

Seems like quite a few savvy Americans are catching on to these perks, as evidenced by the migration trend: between 2021 and 2022, 27,000 individuals made the leap from the US mainland to Puerto Rico, according to an article published in Business Insider.

Criteria for Establishing Bona Fide Residence In Puerto Rico

Meeting the criteria for establishing Bona Fide residency in Puerto Rico is essential as it underscores a genuine commitment to the territory and its tax system. By adhering to these criteria, individuals demonstrate their serious intent to make Puerto Rico their primary place of residence and benefit from its favorable tax incentives under Act 60.

Physical Presence Test

  • Option 1: spend at least 183 days in Puerto Rico during the tax year (these days do not need to be consecutive).
  • Option 2: spend at least 549 days in Puerto Rico during the tax year plus the 2 preceding years (with at least 60 days each year).

Presence Test

  • You must not have been a resident of Puerto Rico within the past 10 years.
  • You must fully relocate you life, including family, business, banking, and social ties, to Puerto Rico.You cannot have a tax home outside of Puerto Rico during any part of the taxable year.You cannot maintain a closer connection to the US or a foreign country than to Puerto Rico during any part of the taxable year.
  • Limited presence in the United States during the tax year (no more than 90 days)

Real Property Requirement

  • Within 2 years of residency, you must purchase real property in Puerto Rico to use as your permanent residence.

Annual Donation Requirement

  • Make an annual donation of $10,000 to local nonprofits, with 50% of the donation directed to organizations working to end child poverty.

Earned Income

  • Earned income in the United States does not exceed a total of $3,000. Earned income is pay for personal services performed, such as wages, salaries, or professional fees.

Filing Requirements

  • An individual who begins or ends bona fide residence in Puerto Rico is obligated to fill out the I.R.S. Form 8898 – Statement for Individuals Who Begin or End Bona Fide Residence in a US. Possession. A separate file with instructions is provided with the form.

Tax Benefits Under Act 60

Act 60 offers a range of benefits including reduced tax rates for most forms of income. In general, the benefits include:

  • 4% income tax rate on eligible activities
  • 75% exemption on real and personal property
  • 50% exemption on patents and other municipal contributions
  • 100% exemption on dividend and interest income
  • 100% tax exemption on certain capital gains realized and accrued

The exemption period is for 15 years, however, it may be extended for an additional 15 years if certain criteria is met.

Additional Benefits

Under Act 60, additional benefits are extended to various categories, each with its own eligibility criteria and advantages. From individual resident investors to export activities, creative industries, young entrepreneurs, and real estate ventures, Act 60 offers tailored incentives for diverse sectors. For detailed information on eligibility requirements and benefits, you can download a PDF issued by the Office of Incentives for Business in Puerto Rico.


Is It Worth Moving To Puerto Rico

Considering a move to Puerto Rico involves weighing various factors to determine if it aligns with your lifestyle, goals, and priorities. The island offers unique advantages, but it also presents challenges that prospective residents should consider carefully.

An image of a vibrant street in Puerto Rico, lined with colorful apartments and lush trees, capturing the essence of the island's charm

Benefits Of Living In Puerto Rico

  • Location: Puerto Rico is located in the North East Caribbean Sea, only 1000 miles South East of Miami, Florida. It is officially a territory of the United States of America, and people born in Puerto Rico are considered to be US citizens.
  • Political structure: Puerto Rico was a Spanish Colony for many centuries before it was ceded to the US in 1899. Puerto Rico is not a US state, it is a commonwealth territory. This means it does maintain a certain degree of autonomy but is not a separate country to the US. As such, its primary political structure is the same as the US, and its president is the US president. However, the island does have its own executive political branch which governs the island
  • Type of law: Puerto Rico was originally a Spanish Colony for over 400 years, which meant its legal system was historically based on Spanish Civil Law. After becoming a US territory, Puerto Rico adopted the Common Law system. Its legal system still sees historical influences from both of these types of laws, which has created a mixed legal system.
  • Principal corporate legislation: Puerto Rico corporations are governed by the Puerto Rico General Corporations Act of 2009. Regulations from the Internal Revenue Code of 2011 are also applicable to corporations.
  • Tax incentives: Puerto Rico’s tax incentives, including low corporate and personal income tax rates, as well as exemptions on certain types of income, can provide significant financial advantages for residents.
  • Exchange control: Puerto Rico’s currency is the US dollar, and there are no additional exchange controls. If you visit or move to Puerto Rico from the mainland US, you will not need to exchange any currency.
  • Natural beauty: with its warm climate, stunning beaches, and diverse landscapes, Puerto Rico offers residents opportunities for outdoor recreation and relaxation in a picturesque setting.
  • Cultural richness: Puerto Rico boasts a rich cultural heritage blending Spanish, Caribbean, and US influences, providing residents with a unique and vibrant cultural experience.
  • Infrastructure: despite challenges, Puerto Rico boasts some well-developed infrastructure, including healthcare facilities, schools, transportation networks, and public services.

Disadvantages Of Living In Puerto Rico

  • Economic challenges: Puerto Rico has faced economic difficulties in recent years, including high unemployment rates, poverty, and a significant debt crisis, which may impact job opportunities and overall economic stability.
  • Natural disasters: the island is prone to natural disasters such as hurricanes, which can cause significant damage to infrastructure, disrupt daily life, and pose risks to residents’ safety.
  • Healthcare access: while there are quality healthcare facilities available, access to healthcare services may be limited in some areas, particularly in rural or remote regions of the island.
  • Educational system: despite the presence of schools and educational institutions, the educational system may face challenges such as underfunding, overcrowding, and disparities in quality across different regions.
  • Language barrier: English is widely spoken, but Spanish is the predominant language in Puerto Rico, which may pose challenges for individuals who are not fluent in Spanish.

IRS Scrutiny And Compliance

Applying for benefits under the Puerto Rico Act 60 might attract scrutiny from the IRS. If selected for a tax audit and found ineligible for the Puerto Rico tax incentive, you could face significant liabilities, including back taxes, interest, and penalties.

In a statement by the IRS, “We recently identified about 100 high-income individuals claiming benefits in Puerto Rico without meeting the residence and source rules involving US. possessions. These wealthy individuals are attempting to avoid US. taxation on US. source income, and we expect many of these cases to proceed to criminal investigation.”

However, Act 60 offers a legitimate means of reducing tax liability in the US. By adhering to the law and complying with all regulations, you can enjoy the benefits of your new life in Puerto Rico without facing legal repercussions.

FAQs

What Is Act 60?

Act 60, also known as the Puerto Rico Tax Incentives Code, offers a range of tax benefits introduced by the Puerto Rican government to attract individuals, investors, and businesses to the island.

Who Is Eligible For Act 60 Benefits?

Generally, individuals, investors, and businesses may be eligible if they relocate to Puerto Rico and meet the residency and activity requirements outlined in the law.

What Types Of Tax Incentives Does Act 60 Offer?

Act 60 offers a range of tax incentives, including reduced corporate and individual tax rates, exemptions from certain taxes, and tax credits for eligible activities. These incentives are designed to attract investment, promote economic growth, and stimulate job creation in Puerto Rico.

Can I Still Maintain My US. Citizenship If I Benefit From Act 60?

Yes, you can maintain your US. citizenship while benefiting from Act 60. Puerto Rico is a territory of the United States, and individuals born in Puerto Rico are considered US. citizens. However, it’s essential to understand and comply with US. tax laws, as well as any reporting requirements related to your activities in Puerto Rico.

Are There Any Risks Associated With Applying For Act 60 Benefits?

While Act 60 offers significant tax benefits, there are potential risks, particularly regarding compliance with US. tax laws. The IRS closely monitors tax filings and may audit individuals or businesses claiming Act 60 benefits to ensure they meet eligibility criteria. Non-compliance could result in penalties, back taxes, and legal consequences.

How Can I Ensure Compliance With Act 60 And US. Tax Laws?

To ensure compliance, it’s essential to consult with tax professionals who are knowledgeable about both Puerto Rico and US. tax laws. They can help you understand your obligations, navigate the application process for Act 60 benefits, and ensure that you meet all reporting requirements to the IRS and other relevant authorities.

Are Puerto Ricans American Citizens?

Yes, Puerto Ricans by birth are US Citizens. However, they have different rights from those on the mainland and can’t, for example, vote in US elections.

Do Wealthy People Move To Puerto Rico?

Yes, many affluent individuals are relocating to Puerto Rico for its tax benefits, lower cost of living, and high quality of life.

Does Puerto Rico Have An Income Tax?

Yes, Puerto Rico does have an income tax. However, you can enjoy exemptions on income tax under Act 60.

Michelle Hammond

Meet Michelle, a dynamic and passionate writer specializing in global immigration investment. With an extensive background as an advisor in the industry, Michelle brings six years of invaluable experience to the table, making her a true expert in her field.

What sets Michelle apart is not just her expertise on paper but her hands-on experience that goes beyond borders. Having lived and worked on four continents, Michelle has a unique and global perspective that enriches her understanding of the intricacies of immigration and investment.

Beyond her professional achievements, Michelle is driven by a compassionate approach. She believes in inspiring others to embrace the concept of global citizenship, understanding its profound impact on personal and professional growth. Michelle’s writing not only informs but also encourages individuals to explore the possibilities of becoming global citizens and reaping the numerous benefits that come with it.