Puerto Rico, a vibrant U.S. territory with a rich cultural heritage and an idyllic tropical environment, has become a magnet for investors, entrepreneurs, and high-net-worth individuals seeking to benefit from the island's attractive tax incentives. At the heart of this movement is Puerto Rico’s Act 60, a key piece of legislation aimed at fostering economic development by offering a variety of tax benefits to eligible individuals and businesses.
Passed in 2019, Act 60 consolidated several previous tax incentive programs into a single, streamlined code, making it easier for people and businesses to take advantage of Puerto Rico’s favorable tax policies. Whether you are an investor looking to lower your tax burden, a business owner seeking to expand operations, or an individual considering relocation to the island, understanding how Act 60 works can open the door to numerous financial advantages.
In this blog post, we’ll explain what Act 60 is, how it works, and outline the benefits and requirements for both individuals and businesses seeking to take advantage of this unique opportunity.
What is Puerto Rico Act 60?
Puerto Rico Act 60, officially known as the Puerto Rico Tax Incentives Code, is a comprehensive tax law that offers a series of tax incentives aimed at encouraging investment, job creation, and economic growth on the island. The law consolidates and replaces earlier laws like Act 20 (the Export Services Act) and Act 22 (the Individual Investors Act), which were designed to attract businesses and wealthy individuals to Puerto Rico with substantial tax benefits.
Act 60 is an effort to boost Puerto Rico's economy by attracting residents, entrepreneurs, and companies to the island, and it serves as a powerful tool for improving Puerto Rico's financial and employment landscape. The law provides benefits in the form of tax exemptions and reduced tax rates for individuals and businesses that qualify under its provisions.
How Does Act 60 Work?
Act 60 works by offering tax incentives to individuals and companies that either relocate to Puerto Rico or set up operations on the island. The goal is to incentivize new investments, attract skilled professionals, create jobs, and stimulate economic activity. In return, qualified individuals and businesses receive significant tax breaks, ranging from exemptions on capital gains to reduced corporate tax rates.
Since Puerto Rico is a U.S. territory, individuals who establish residency on the island are not subject to U.S. federal income taxes on income derived from Puerto Rico. This gives U.S. citizens a unique opportunity to reduce their overall tax liability by relocating to the island and benefiting from Act 60’s various provisions.
Key Benefits of Act 60 for Individuals
For individuals, Act 60 offers a range of tax incentives designed to reduce the financial burden and make Puerto Rico an attractive place to live and invest. Below are some of the most notable benefits for individuals under Act 60:
1. 100% Exemption on Long-Term Capital Gains
One of the biggest advantages of Act 60 for individuals is the 100% exemption on long-term capital gains. This means that individuals who establish bona fide residency in Puerto Rico are not taxed on capital gains that are realized from the sale of assets (such as stocks, bonds, or real estate) after they become residents of the island.
For example, if you sell investments that you held for over a year, and the sale occurs after you’ve moved to Puerto Rico, the capital gains generated from the sale are completely tax-free in Puerto Rico. This makes Puerto Rico a prime location for investors seeking to minimize taxes on investment income.
2. Exemption on Dividends
Another major benefit under Act 60 is the tax exemption on dividends. Individuals who become residents of Puerto Rico and invest in local Puerto Rican businesses can receive tax-free dividends from those companies. This incentive is especially beneficial for those who own stocks in Puerto Rican corporations, as it allows them to enjoy the income from those investments without facing a tax burden.
3. Exemption on Interest Income
Under Act 60, interest income derived from certain Puerto Rican investments is also exempt from taxation. For instance, interest earned on bonds issued by the Puerto Rican government or certain local businesses is not subject to Puerto Rican taxes. This makes Puerto Rico an attractive option for those seeking to invest in bonds and earn interest income without the usual tax implications.
4. Real Estate Tax Benefits
For individuals looking to invest in real estate, Puerto Rico offers favorable tax treatment for real estate transactions. Capital gains from the sale of Puerto Rican property may be exempt from taxes, provided specific conditions are met. In addition, Puerto Rican property owners may benefit from property tax exemptions depending on the type of real estate investment.
This makes Puerto Rico an attractive market for real estate investors, as they can take advantage of lower taxes on both rental income and property sales.
Key Benefits of Act 60 for Businesses
For businesses, Act 60 provides several attractive tax incentives designed to foster economic development, create jobs, and stimulate growth in various sectors. Below are some of the most significant benefits for businesses:
1. 4% Corporate Tax Rate for Export Services
One of the most appealing incentives for businesses under Act 60 is the 4% corporate tax rate for businesses that provide export services. Businesses that qualify under this provision must provide services to clients outside Puerto Rico (i.e., export services). This category includes industries like consulting, technology, financial services, legal services, and more.
The 4% corporate tax rate is drastically lower than the standard U.S. corporate tax rate (21%), making Puerto Rico a highly attractive location for businesses looking to reduce their tax liability and maximize profits.
2. Exemption on Dividends for Businesses
Businesses that qualify under Act 60 can distribute their earnings as dividends to their shareholders without paying taxes on those dividends. This exemption can result in significant tax savings, as businesses typically face double taxation on profits: once at the corporate level and again when dividends are distributed to shareholders.
By relocating to Puerto Rico and qualifying for Act 60, companies can avoid this double taxation and benefit from a more favorable tax structure.
3. Exemption from Sales and Use Taxes
Businesses operating under Act 60 may be eligible for exemptions from sales and use taxes on goods and services purchased for business operations. This can substantially reduce the cost of doing business in Puerto Rico, particularly for companies that rely on imported goods or services for their operations.
These tax exemptions provide a significant financial advantage for businesses that are seeking to minimize their operational costs.
4. Incentives for Job Creation
Under Act 60, businesses that engage in certain activities that contribute to Puerto Rico’s economic growth, such as job creation or investment in local industries, may qualify for additional tax credits and incentives. These incentives can vary depending on the type of business and its contribution to local employment.
For example, businesses that establish manufacturing plants, tech startups, or other enterprises that create jobs for Puerto Rican residents may receive government support in the form of grants, credits, and further tax reductions.
Requirements to Qualify 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 Act 60’s individual tax incentives, you must establish bona fide residency in Puerto Rico. The key requirements for residency are:
- Physical Presence: You must be physically present in Puerto Rico for at least 183 days during the calendar year.
- Tax Home: Your primary tax home (i.e., your main place of business or employment) must be in Puerto Rico.
- Closer Connection: You must demonstrate a closer connection to Puerto Rico than to any other location, including the U.S. mainland.
2. New or Relocated Businesses
For businesses to qualify for Act 60, they must either be newly established in Puerto Rico or substantially relocated to the island. Additionally, the business must provide services or products that are exported outside Puerto Rico, which typically means offering services to clients or customers based outside the island.
3. Application Process
Both individuals and businesses must go through an application process to receive the tax benefits under Act 60. This involves submitting an application to the Puerto Rico Department of Economic Development and Commerce (DDEC) and providing documentation to demonstrate compliance with the requirements.
Once approved, individuals and businesses receive a tax exemption decree that outlines the specific benefits they are entitled to.
Conclusion: Is Act 60 Right for You?
Puerto Rico’s Act 60 offers a wealth of opportunities for individuals and businesses looking to reduce their tax liabilities and enjoy the benefits of a U.S. territory with a tax-friendly environment. Whether you’re seeking to take advantage of tax exemptions on capital gains, dividends, and interest income, or you’re looking to relocate or expand your business to benefit from lower corporate tax rates, Act 60 offers a range of advantages that can significantly improve your financial situation.
If you’re considering taking advantage of Act 60’s benefits, it’s crucial to work with tax professionals and legal advisors who specialize in Puerto Rican tax law. They can guide you through the application process, ensure that you meet all the eligibility requirements, and help you maximize the tax savings that Act 60 offers.
By understanding how Act 60 works and the benefits it provides, you can make informed decisions about whether Puerto Rico is the right place for your personal or business goals.
