For decades, Puerto Rico has drawn investors, entrepreneurs, and professionals seeking a combination of tropical lifestyle and strategic financial advantages. At the center of this appeal is Act 60 Puerto Rico, a tax incentive framework that consolidates and expands prior legislation to make the island one of the most attractive tax jurisdictions for U.S. citizens. By offering tax benefits that dramatically reduce burdens on income taxes, capital gains, and property tax, the island has positioned itself as a global hub for investors, businesses, and individual professionals.
This article explains how Act 60 works, who qualifies, what obligations come with it, and why Puerto Rico is becoming a preferred destination for those seeking favorable tax treatment without surrendering U.S. citizenship.
What Is Act 60 Puerto Rico?
Act 60, enacted in 2019, combined two earlier laws: the Export Services Act (Act 20) and the Individual Investors Act (Act 22). Together, they created one comprehensive system of tax incentives designed to stimulate economic development in Puerto Rico. These measures encourage businesses to relocate operations, create exempt businesses, and attract individual investors looking for lower income tax rates and tax exemptions on investment income.
Unlike a foreign country that requires expatriation for tax purposes, Puerto Rico is a U.S. territory. Under Section 933 of the U.S. Internal Revenue Code, qualifying residents do not pay U.S. federal taxes on Puerto Rico source income. This unique legal position enables U.S. citizens to live on the island, maintain citizenship, and yet enjoy a significantly lower tax burden.
The Tax Benefits of Act 60
The tax benefits offered by Act 60 Puerto Rico are broad and compelling. According to the official provisions and supporting materials:
- 0% Tax on Passive Income – This includes dividends, interest, and capital gains for qualifying bona fide residents.
- 4% Income Tax – Businesses engaged in eligible activities such as export services and professional services pay only a 4% income tax rate on profits.
- 75% Property Tax Exemption – Substantial reductions apply to business real property taxes.
- 50% Municipal Taxes Exemption – Businesses benefit from reduced municipal taxes, including municipal license tax obligations.
- Dividend Distributions – Corporate dividends can be withdrawn tax-free in Puerto Rico.
- Total Exemption – For certain exempt operations, there is a total exemption from Puerto Rico income taxes on dividends and long-term capital gains realized.
Compared with U.S. federal income taxes and state taxes, these rates are significantly lower, providing enormous savings for high-income professionals, traders, and investors.
Who Should Consider Act 60?
Individuals who benefit most are those with substantial capital gains or Puerto Rico income. If you:
- Pay more than $15,000 annually in U.S. taxes,
- Expect large capital gains from assets such as crypto or stocks,
- Want to reduce income derived from self-employment or corporate activities, and
- Are willing to establish bona fide residency in Puerto Rico,
then Act 60 may be a strategic move. Individual investors, crypto traders, entrepreneurs in creative industries, and companies offering other financial services or data telecommunications often find the program particularly advantageous.
Residency Requirements: Becoming a Bona Fide Resident
The most critical step is establishing bona fide residency. To qualify, an applicant must satisfy the IRS-defined physical presence test and relocate their tax home and social connections to Puerto Rico. The requirements include:
- Physical Presence – At least 183 days in Puerto Rico during a taxable year, or meeting alternate multi-year presence rules.
- Purchase Real Property – Within two years of relocating, applicants must purchase real property and use it as a permanent home.
- Closer Connections – Family, financial ties, and business operations must shift to Puerto Rico, not remain with another jurisdiction.
- No Prior Residency – Applicants must not have been a resident of Puerto Rico within the previous 10 years.
Meeting these standards establishes not only residency but also aligns with tax purposes under the internal revenue code.
Annual Obligations: The Donation Requirement
Another distinctive feature of Act 60 Puerto Rico is the annual donation. Participants must contribute $10,000 each year to approved nonprofits, with at least half going to organizations combating child poverty. This ensures that while participants benefit from tax exemptions, the local community shares in the prosperity.
How Many Days Do You Need for Act 60?
To qualify under the physical presence test, you generally need 183 days in Puerto Rico each year. However, alternative methods include spending 549 days over a three-year period, provided a minimum of 60 days are spent annually on the island. These special rules ensure flexibility for those managing international obligations but still seeking bona fide residency.
Federal Income Taxes and Puerto Rico
A common question is: Can you avoid federal taxes by moving to Puerto Rico? The answer is nuanced. Once a person becomes a bona fide resident of Puerto Rico, they are exempt from paying U.S. federal income taxes on Puerto Rico source income. However, U.S. taxes may still apply to income sourced from the mainland or other jurisdictions. This makes careful planning essential.
The Role of Exempt Businesses and Export Services
Exempt businesses are central to Act 60’s framework. Companies engaged in export services—including consulting, marketing centers, public relations, and laboratory services—are taxed at only 4% of net income. They also enjoy substantial tax exemptions, including municipal license tax exemption and reductions on property tax.
This legal framework has attracted firms in technology, finance, digital assets, and intellectual property. By leveraging exempt operations, companies can achieve net income derived at a fraction of typical U.S. rates.
Capital Gains: The Biggest Incentive
Perhaps the most celebrated aspect of Act 60 is the treatment of capital gains. Under Puerto Rico’s tax laws, capital gains realized after establishing residency are completely exempt. This is a game changer for cryptocurrency traders and investors in stocks, real estate, and intangible property.
For example, an investor with $100,000 in capital gains would owe no Puerto Rico tax, compared to as much as $20,000 in U.S. federal income taxes. Over time, this savings multiplies, especially for those with consistent trading activity.
Important Considerations
- Pre-Move Gains – Only capital gains incurred after becoming a resident qualify for exemptions. Gains before the move remain taxable under U.S. tax rules.
- Audit Risks – If the IRS determines you failed to meet bona fide residency requirements, you may owe back taxes, penalties up to 25%, and interest.
- Additional Local Taxes – Businesses may still face municipal license tax on gross income, as well as certain property tax assessments on business assets.
- Tax Exemption Decrees – Applicants must file through the Single Business Portal to obtain tax exemption decrees that certify their eligibility.
Why Puerto Rico Over a Foreign Country?
Unlike relocating to a foreign country, moving to Puerto Rico allows you to retain U.S. citizenship while benefiting from significantly lower tax rates. This makes compliance easier under the U.S. tax code and provides stability within a U.S. legal and financial system.
At 1040 Abroad, we specialize in U.S. expat taxation and offer free tax advice to all U.S. expats. If you are exploring the opportunities of Act 60 Puerto Rico or seeking ways to lower your income taxes and manage capital gains while living abroad, our team provides the expert guidance you need to make informed decisions with confidence.
