Act 60: Income, Capital Gains, and Dividends Tax Rates Explained

Puerto Rico’s Act 60, also known as the Puerto Rico Incentives Code, has become a major point of interest for U.S. citizens seeking to reduce their tax liability legally while living in a tropical setting. This law consolidates and refines a series of prior tax incentive laws (notably Acts 20 and 22) into a single code aimed at stimulating economic growth by attracting entrepreneurs, investors, and professionals to the island.

Among the most attractive features of Act 60 are the favorable tax rates on income, capital gains, and dividends. These benefits make Puerto Rico one of the most tax-advantaged jurisdictions under U.S. sovereignty—especially for those who can establish bona fide residency.

Overview: How Act 60 Works

Act 60 offers tax incentives to individuals and businesses that relocate to Puerto Rico and engage in eligible economic activities, such as exporting services or investing capital locally. For individuals, the most significant benefits apply to:

• Puerto Rico-sourced income (e.g., from local businesses or services rendered from Puerto Rico to foreign clients),

• Capital gains realized after becoming a resident,

• Dividends paid from Puerto Rican corporations.

Let’s break down each of these in detail.

1. Income Tax Rate Under Act 60

If you are a service provider, consultant, freelancer, or entrepreneur who renders services from Puerto Rico to clients outside of Puerto Rico, you may qualify for Act 60’s Export Services tax incentives.

Export Services (formerly Act 20)

• Corporate income tax rate: 4% flat rate on eligible Puerto Rico-sourced business income.

• Dividends from the business: 100% tax-exempt if distributed to Puerto Rico residents.

• Services must be exported: Your clients must be located outside of Puerto Rico.

To qualify, you must operate a business in Puerto Rico that provides services such as:

• Legal or tax consulting

• Investment and asset management

• Software development

• Marketing and public relations

• Graphic design, accounting, call centers, and more

This benefit applies for a 15-year term and can be renewed for an additional period if conditions are met.

Employee Compensation

If you pay yourself a salary as an employee of your Act 60 business, that salary is taxed under the regular Puerto Rico individual tax brackets (up to 33%). However, profit distributions (dividends) from the business are often more favorable (see dividends section below).

2. Capital Gains Tax Rate Under Act 60

One of the most appealing aspects of Act 60—especially for traders, investors, and cryptocurrency holders—is the tax treatment of capital gains.

Capital Gains Realized After Becoming a Resident

• Tax rate: 0% on gains from assets acquired after becoming a bona fide resident of Puerto Rico.

This applies to the sale of stocks, bonds, real estate, crypto, and other capital assets. If you move to Puerto Rico and buy assets afterward, any appreciation is completely tax-free in Puerto Rico and exempt from U.S. federal taxation (if you meet the residency requirements).

Capital Gains on Assets Acquired Before Residency

If you acquired the asset before moving to Puerto Rico, the gain is apportioned as follows:

• Gain accrued before moving: Subject to U.S. federal capital gains tax when sold.

• Gain accrued after moving: May be subject to Puerto Rico tax (generally 5%–10%) if held for at least 10 years post-relocation.

• If sold within 10 years of becoming a resident, the portion of gain accrued while living in Puerto Rico may be taxed at 10%.

This means that pre-existing investments can still benefit from Puerto Rico’s lower tax rates, though they are not completely exempt like post-relocation gains.

3. Dividend Tax Rate Under Act 60

Dividends are treated differently depending on the source and residency of the individual.

Dividends from Puerto Rico Entities

• 100% tax-exempt for bona fide residents of Puerto Rico who receive dividends from Puerto Rican corporations operating under Act 60.

• If the company qualifies under the Export Services provision and pays dividends to its Puerto Rico-resident owners, those distributions are not taxed locally.

This allows individuals to operate a business at a 4% tax rate and then receive distributions of after-tax profits tax-free.

Dividends from U.S. or Foreign Entities

• U.S. citizens residing in Puerto Rico are still subject to U.S. federal tax on dividends from U.S. corporations.

• Foreign-source dividend income may be partially or fully exempt depending on specific tax treaties and local laws.

• Therefore, only dividends from Puerto Rican corporations receive the full Act 60 exemption.

Summary of Tax Rates Under Act 60 for Individuals

Requirements for Individuals to Qualify

To access these tax benefits, you must:

1. Become a Bona Fide Resident of Puerto Rico, meeting all three tests:

   • Physical Presence: At least 183 days per year on the island.

   • Tax Home: Primary place of business or employment in Puerto Rico.

   • Closer Connection: Strong personal, social, and financial ties to Puerto Rico.

2. Apply for and obtain a Tax Decree under Act 60:

   • This is a legal contract between you and the government of Puerto Rico.

   • Once granted, it locks in your tax rates and terms for 15 years.

3. Comply with annual requirements, including:

   • Filing a report with Puerto Rico’s Department of Economic Development and Commerce.

   • Paying a $5,000 annual fee to maintain your decree.

   • Donating at least $10,000 per year to approved Puerto Rican charities.

   • Purchasing residential property in Puerto Rico within two years of the decree.

Final Thoughts

Act 60 offers one of the most favorable tax regimes in any U.S.-controlled jurisdiction. With a 0% tax on new capital gains, 4% business income tax, and tax-free dividends from Puerto Rican entities, the financial advantages for eligible individuals are clear.

However, these benefits are not automatic or loopholes. You must commit to relocating, integrating, and fully complying with Puerto Rican and U.S. tax laws. The IRS monitors these arrangements closely, and failure to meet residency tests or filing obligations can result in loss of benefits or unexpected liabilities.

That said, for entrepreneurs, traders, investors, and remote professionals willing to embrace the island lifestyle and navigate the legal requirements, Act 60 can offer unmatched long-term tax savings.