Puerto Rico, a U.S. territory known for its vibrant culture and stunning landscapes, has long been a popular destination for tourists. But in recent years, the island has gained significant attention from entrepreneurs, investors, and high-net-worth individuals seeking to take advantage of its tax incentives. Central to this opportunity is Act 60, the Puerto Rico Tax Incentives Code, which was enacted in 2019 to consolidate various tax benefit programs. Act 60 offers substantial advantages for individuals and businesses that relocate to Puerto Rico or conduct significant economic activities on the island.
Whether you’re considering relocating to Puerto Rico to reduce your tax liabilities, or you’re a business owner exploring expansion opportunities, Act 60 offers compelling financial benefits. In this blog post, we’ll explore the key benefits of Act 60 for both individuals and businesses, and how it can provide a significant economic advantage for those who qualify.
What is Act 60?
Act 60, also known as the Puerto Rico Tax Incentives Code, is legislation that provides a range of tax incentives to attract people and businesses to Puerto Rico. This law replaced earlier tax incentive programs like Act 20 (the Export Services Act) and Act 22 (the Individual Investors Act), which were originally designed to stimulate the island’s economy by providing tax breaks to investors and businesses relocating to Puerto Rico.
Act 60 consolidates these programs into a single, unified code with the aim of making Puerto Rico an attractive location for economic development, job creation, and investment. The law grants individuals and companies substantial tax breaks, including exemptions on capital gains, dividends, and interest income, as well as reduced corporate tax rates for qualifying businesses.
Key Benefits of Act 60 for Individuals
For individuals, Act 60 offers a wide array of tax benefits designed to attract high-net-worth investors, retirees, and entrepreneurs to the island. These incentives make Puerto Rico an appealing destination for those looking to significantly reduce their tax liabilities while enjoying the tropical lifestyle and unique cultural atmosphere.
1. 100% Tax Exemption on Long-Term Capital Gains
One of the most compelling benefits of Act 60 is the 100% tax exemption on long-term capital gains for residents of Puerto Rico. Under the law, individuals who become bona fide residents of Puerto Rico and meet the requirements for residency are completely exempt from Puerto Rican taxes on capital gains from assets acquired after moving to the island.
For example, if you invest in stocks, real estate, or other assets, and then sell those assets after holding them for more than one year (long-term capital gains), the proceeds are not subject to local taxes. This is a significant benefit for investors and entrepreneurs looking to reduce the tax burden on their gains.
2. Tax Exemption on Dividends
Another major incentive under Act 60 is the tax exemption on dividends received from Puerto Rican corporations. For individuals who establish residency in Puerto Rico, any dividends paid by Puerto Rican businesses to those individuals are exempt from taxes. This includes dividends derived from investments in local corporations, making it an attractive opportunity for investors seeking a tax-efficient way to generate income.
This exemption is a major incentive for wealthy individuals looking to invest in Puerto Rican companies and other local assets while avoiding the tax burden that comes with dividends in other jurisdictions.
3. Exemption on Interest Income
Puerto Rico also provides tax benefits on interest income for bona fide residents. Under Act 60, interest earned from certain Puerto Rican investments, such as government bonds and other debt instruments issued by Puerto Rican entities, is exempt from Puerto Rican taxes. This means that individuals who hold investments in local bonds or other qualifying instruments can earn interest income without being subject to local taxation.
This exemption makes Puerto Rican bonds and other fixed-income investments a more attractive option for individuals seeking tax-free interest income.
4. Real Estate Tax Benefits
For individuals interested in real estate investment, Act 60 offers tax exemptions on real estate transactions under certain conditions. These include exemptions from property taxes and capital gains tax on the sale of Puerto Rican real estate, provided certain requirements are met. This tax-friendly environment makes Puerto Rico an appealing location for real estate investors who are looking to maximize their returns.
Additionally, real estate development projects that create jobs and economic activity in Puerto Rico may qualify for special incentives under Act 60, further boosting the appeal of real estate investment on the island.
Key Benefits of Act 60 for Businesses
Act 60 also provides significant tax benefits for businesses that either relocate to Puerto Rico or establish operations on the island. These benefits are designed to encourage companies to bring their operations to Puerto Rico, create jobs, and contribute to the local economy. Let’s dive into the key benefits for businesses under Act 60.
1. 4% Corporate Tax Rate for Export Services
One of the most attractive incentives for businesses under Act 60 is the 4% corporate tax rate for qualifying businesses that provide export services. This provision applies to companies that offer services to clients outside of Puerto Rico. Qualifying businesses can include a wide range of industries such as consulting, software development, financial services, legal services, and more.
The 4% tax rate is significantly lower than the standard corporate tax rate in the U.S., which can reach up to 21%. For businesses seeking to maximize their profits and reduce their tax obligations, this provision of Act 60 can result in substantial savings.
2. Exemption from Puerto Rico Taxes on Dividends
In addition to the tax incentives for businesses themselves, Act 60 also provides tax exemptions for dividends that Puerto Rican businesses distribute to their shareholders. This exemption is especially valuable for business owners and investors who may be looking to reinvest earnings or distribute profits among shareholders without facing double taxation, which is common in other jurisdictions.
For companies seeking to grow and attract investment, the ability to distribute tax-free dividends to investors and stakeholders adds to the attractiveness of doing business in Puerto Rico.
3. Exemption from Sales and Use Taxes
Another benefit for businesses under Act 60 is the potential exemption from sales and use taxes on business-related purchases. Businesses that qualify under Act 60 may be eligible to purchase goods and services without being subject to Puerto Rico’s sales tax, which can lower the cost of doing business on the island.
These exemptions can apply to both local purchases and imports, reducing overhead costs for businesses that rely on purchasing materials and services for their operations.
4. Tax Incentives for Job Creation and Economic Development
Act 60 includes provisions for businesses that create jobs and stimulate economic growth in Puerto Rico. For example, businesses that invest in Puerto Rico and contribute to the island’s economic development may be eligible for additional tax credits and exemptions.
These incentives are designed to foster innovation, job creation, and economic diversification in Puerto Rico, making it an ideal location for businesses that seek to expand or relocate operations while benefiting from favorable tax policies.
5. Government Grants and Funding
Certain businesses that qualify for Act 60 may also be eligible for grants and funding from the Puerto Rican government. These funds are aimed at supporting the development of specific sectors, such as technology, manufacturing, and research and development. By securing government support, businesses can further reduce their operating costs and fuel their growth.
Eligibility and Requirements for Act 60
While the benefits of Act 60 are enticing, individuals and businesses must meet certain eligibility criteria to qualify for the tax incentives. Here are the key requirements:
1. Bona Fide Residency for Individuals
To benefit from the individual tax incentives, you must establish bona fide residency in Puerto Rico. This requires meeting the following criteria:
- Physical Presence: Spend at least 183 days per year in Puerto Rico.
- Tax Home: Your primary tax home must be in Puerto Rico.
- Closer Connection: You must have a closer connection to Puerto Rico than to any other location (including the U.S. mainland), which includes factors like where you live, work, and maintain personal and financial ties.
2. New or Relocated Businesses
To qualify for the business incentives, companies must either be newly established in Puerto Rico or relocated from outside the island. The business must engage in activities that generate income from services provided outside Puerto Rico (export services).
3. Application Process
Both individuals and businesses must submit an application to the Puerto Rican Department of Economic Development and Commerce (DDEC). This application includes documentation that demonstrates compliance with the criteria set forth in Act 60.
Once approved, individuals and businesses receive a tax exemption decree, outlining the specific benefits they are entitled to.
Conclusion: Is Act 60 Right for You?
Act 60 provides a range of financial benefits for individuals and businesses looking to reduce their tax liabilities and take advantage of Puerto Rico’s favorable tax environment. Whether you’re a high-net-worth individual seeking to benefit from capital gains and dividend exemptions, or a business owner looking to expand operations with a 4% corporate tax rate, Act 60 offers significant opportunities for those who qualify.
If you’re considering relocating to Puerto Rico or establishing a business on the island, it’s important to consult with tax and legal professionals who can guide you through the application process and ensure you meet all the requirements. By doing so, you can unlock the financial advantages that Act 60 offers and maximize your wealth-building opportunities in one of the most tax-friendly environments in the world.
