Act 60 Puerto Rico Requeriments

In recent years, Puerto Rico has become an increasingly attractive destination for investors, entrepreneurs, and individuals seeking to reduce their tax burdens while living in a U.S. territory with a tropical climate. A key reason behind this growing interest is Puerto Rico’s Act 60, also known as the Puerto Rico Tax Incentives Code, which offers a wide range of tax benefits. This code, enacted in 2019, consolidates and updates several older tax incentive laws designed to boost the island's economy by attracting individuals and businesses to move to Puerto Rico.

For those considering taking advantage of the provisions of Act 60, it’s essential to understand what the requirements are, who qualifies, and what specific benefits are offered. This post will provide a comprehensive guide to Act 60’s requirements, benefits, and how to qualify.

What Is Act 60?

Act 60 is a tax incentive law passed by the Puerto Rican government to provide preferential tax treatment to new residents and businesses in Puerto Rico. It encompasses and streamlines various previous tax laws, most notably Acts 20 and 22, which were designed to attract businesses and high-net-worth individuals, respectively. The ultimate goal of Act 60 is to revitalize the Puerto Rican economy by drawing in new capital, stimulating local businesses, and creating job opportunities.

Under Act 60, there are two main tax incentive programs: the Individual Investors Act (formerly Act 22) and the Export Services Act (formerly Act 20). These programs offer significant tax advantages for eligible individuals and businesses.

Key Benefits of Act 60

1. Individual Investors Act (Formerly Act 22)

The Individual Investors Act primarily targets individuals who become residents of Puerto Rico. Those who qualify can enjoy a 100% tax exemption on all capital gains realized after becoming a resident of Puerto Rico. This is an incredibly attractive feature for individuals with substantial investments, as U.S. federal tax laws typically tax capital gains at a rate of up to 20%, depending on the amount. By moving to Puerto Rico, an individual can significantly reduce their tax liability.

2. Export Services Act (Formerly Act 20)

The Export Services Act benefits businesses that provide services from Puerto Rico to customers outside the island. This program is ideal for entrepreneurs and businesses that operate in fields like finance, consulting, marketing, and software development. Qualifying businesses can enjoy a fixed 4% corporate tax rate on income generated from services rendered to customers outside Puerto Rico. This is a significant advantage when compared to the U.S. corporate tax rate, which can be as high as 21%.

3. Other Tax Benefits

Act 60 also provides various other tax incentives, including exemptions on:

• Dividends paid to Puerto Rican residents from Puerto Rican companies.
• Interest income generated from certain investments, such as government bonds.
• Property taxes for individuals and businesses that make investments in Puerto Rican real estate.
• Exemptions for business owners who relocate their operations to Puerto Rico and create jobs.

The combination of these incentives makes Puerto Rico a tax-friendly jurisdiction for many individuals and businesses, provided they meet the necessary requirements.

Eligibility Requirements for Act 60

While Act 60 offers appealing tax incentives, not everyone can benefit from them. To qualify for these programs, applicants must meet specific requirements.

1. Residency Requirements

To qualify for tax benefits under Act 60, individuals must establish bona fide residency in Puerto Rico. This means:

• Physical Presence: The individual must reside in Puerto Rico for at least 183 days during the taxable year. This is the primary factor in determining residency.
• Tax Home: The individual’s primary place of business must be in Puerto Rico.
• Closer Connection: Individuals must prove that they have a closer connection to Puerto Rico than to any other place. This is evaluated based on factors such as where the person’s family lives, where they vote, and where they maintain financial accounts.

It’s important to note that meeting the physical presence requirement alone is not enough. The IRS will also assess whether the person has established a bona fide residence on the island.

2. Business Qualification under Act 20

For businesses to qualify under the Export Services Act (formerly Act 20), they must meet the following conditions:

• Export Services: The business must be providing services to clients outside of Puerto Rico. Examples of qualifying services include consulting, legal services, software development, marketing, and financial services.
• New Puerto Rico Operation: The business must establish a new operation in Puerto Rico, with the intention of exporting services. This could be through opening a new office, hiring local employees, or setting up a company structure that complies with Puerto Rican regulations.
• Compliance with Puerto Rican Laws: The business must comply with Puerto Rico’s local laws, including the filing of tax returns and maintaining proper business records.

3. Minimum Employment Requirements

For businesses, there may also be a minimum employment requirement, depending on the nature and size of the business. Generally, businesses applying under Act 20 are expected to create local jobs to contribute to the Puerto Rican economy.

4. Investment Requirement for Act 22

For individuals seeking benefits under the Individual Investors Act (formerly Act 22), there is no specific monetary investment requirement. However, they must demonstrate their intention to reside in Puerto Rico and contribute to the local economy. The focus is on the individual’s long-term commitment to living in Puerto Rico and integrating into the community.

Application Process

The application process for Act 60 benefits typically involves several key steps. Here’s an overview of what applicants can expect:

1. Submit an Application to the Puerto Rican Government

Both individuals and businesses must submit an application to the Puerto Rico Department of Economic Development and Commerce (DDEC) to apply for Act 60 benefits. The application requires the submission of various personal and business documents, as well as a description of the applicant’s intended activities on the island.

2. Residency Certification for Individuals

For individual applicants, the DDEC will evaluate their residency status, ensuring they meet the bona fide residency requirements. Applicants may also be required to submit proof of physical presence and other documentation to support their application.

3. Approval and Issuance of Tax Incentive Grant

Once an application is reviewed and approved, the individual or business will receive a tax incentive grant, which outlines the specific benefits they are entitled to under Act 60. This grant serves as the official recognition of the tax incentives available.

4. Ongoing Compliance

Once approved, individuals and businesses must continue to comply with Puerto Rican laws and tax regulations to maintain their eligibility for the benefits under Act 60. Failure to maintain residency or compliance could result in the loss of the tax benefits.

Key Considerations Before Moving to Puerto Rico

While the tax incentives offered by Act 60 are compelling, there are several important factors to consider before relocating to Puerto Rico:

1. U.S. Federal Taxes Still Apply: Even though Puerto Rico is a U.S. territory, U.S. citizens must still file federal income taxes. However, the income earned in Puerto Rico may not be subject to federal income tax, depending on the specifics of the individual’s situation. It’s crucial to consult a tax professional to understand how the U.S. tax code applies to Puerto Rican residents.

2. Cost of Living: While Puerto Rico offers a lower tax burden, it’s important to consider the local cost of living. In some areas, particularly in major cities like San Juan, living costs can be high. Additionally, some goods and services may be more expensive than in the mainland U.S.

3. Commitment to Relocation: To take full advantage of Act 60’s benefits, individuals and businesses need to establish a strong, long-term connection to Puerto Rico. This includes committing to becoming a bona fide resident and fulfilling any employment or business requirements.

Conclusion

Puerto Rico’s Act 60 offers a unique opportunity for individuals and businesses looking to reduce their tax burden while enjoying the benefits of living or operating in a U.S. territory. With significant incentives for both investors and businesses, the law has attracted a diverse group of entrepreneurs, professionals, and retirees.

However, it’s important to be fully aware of the residency requirements, tax obligations, and local considerations before making the move. If done correctly, the benefits of Act 60 can be a powerful tool for financial freedom and growth in a vibrant Caribbean setting.

If you're considering relocating to Puerto Rico or starting a business there, consulting with tax professionals and legal experts familiar with Act 60 is highly recommended to ensure compliance and maximize the benefits of this unique tax program.