In recent years, Puerto Rico has emerged as an increasingly popular destination for investors, business owners, and high-net-worth individuals seeking to reduce their tax burdens while enjoying the benefits of living in a U.S. territory. One of the most attractive aspects of Puerto Rico’s tax incentives is Act 60, which provides significant tax exemptions and incentives for individuals and businesses that become residents of the island.
However, to take advantage of these benefits, individuals must meet specific residency requirements under Act 60. This blog post will break down the key residency requirements for Act 60, the process of establishing residency, and important considerations for anyone thinking about relocating to Puerto Rico.
What Is Act 60?
Act 60, also known as the Puerto Rico Tax Incentives Code, was enacted in 2019 to streamline and consolidate Puerto Rico’s tax incentive programs. The act encompasses the Individual Investors Act (formerly Act 22) and the Export Services Act (formerly Act 20), two of the most popular tax incentive programs for individuals and businesses.
The primary goal of Act 60 is to attract new residents and businesses to Puerto Rico, stimulate the local economy, and provide significant tax advantages. These benefits include exemptions on income, dividends, and capital gains, among others. However, to qualify for these benefits, individuals must meet the Puerto Rico residency requirements outlined in the law.
Puerto Rico Residency Requirements for Act 60
For individuals to qualify for the tax incentives offered under Act 60, they must establish bona fide residency in Puerto Rico. The residency requirements are designed to ensure that applicants are not only physically present on the island but also have the intent to make Puerto Rico their primary place of residence. The U.S. Internal Revenue Service (IRS) has specific criteria for determining whether an individual is a bona fide resident of Puerto Rico. Meeting these requirements is critical for securing the tax benefits available under Act 60.
1. Physical Presence Requirement
The first and most important requirement is the physical presence test. To be considered a bona fide resident of Puerto Rico, an individual must spend at least 183 days in Puerto Rico during the taxable year. This means that the person must be physically present on the island for more than half of the year.
However, this is not the only criterion for establishing bona fide residency. The IRS considers a combination of factors, and physical presence is just one part of the overall evaluation.
2. Tax Home Requirement
The tax home test is another important element in determining residency. An individual’s tax home refers to their primary place of business or employment. Under Act 60, the individual must establish that their tax home is in Puerto Rico. This means that the individual’s primary place of employment, business activities, or economic interests must be located in Puerto Rico.
For example, if an individual works remotely or owns a business that operates primarily in Puerto Rico, they are more likely to meet the tax home requirement. Simply spending time in Puerto Rico without engaging in significant economic activity on the island will not be enough to qualify for the tax incentives under Act 60.
3. Closer Connection to Puerto Rico
In addition to meeting the physical presence and tax home tests, the IRS will evaluate an individual’s closer connection to Puerto Rico. This test involves assessing an individual’s ties to Puerto Rico in comparison to their connections with any other place, such as the mainland U.S. or another foreign country. Factors considered in this evaluation include:
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Family ties: Where does the individual’s family live? Are their spouse and children residents of Puerto Rico?
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Social and community ties: Does the individual participate in local activities or belong to local organizations in Puerto Rico?
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Financial ties: Where does the individual maintain their bank accounts, insurance policies, and other financial assets?
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Voting: In Puerto Rico, residents are not eligible to vote in federal elections, but they can vote in local elections. The individual’s voting behavior and political ties may be considered.
To meet the closer connection test, the individual must show that Puerto Rico is their primary home and that they have deep personal, financial, and social ties to the island.
4. Intent to Remain in Puerto Rico
Establishing the intent to remain in Puerto Rico is a crucial factor in becoming a bona fide resident. The IRS evaluates whether the individual intends to make Puerto Rico their permanent home, not just a temporary residence. Several pieces of evidence can demonstrate this intent:
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The individual’s lease or ownership of property in Puerto Rico.
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The presence of family members in Puerto Rico, particularly if the individual’s spouse and children are also residing on the island.
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Evidence that the individual has been actively involved in Puerto Rican business, social, or community life.
This requirement underscores the importance of not simply using Puerto Rico as a tax shelter. Act 60 is designed for individuals who are committed to living and contributing to Puerto Rican society, not just those seeking temporary tax benefits.
How to Prove Residency under Act 60
After meeting the basic residency requirements, individuals must provide documentation to prove their residency in Puerto Rico. This documentation may include:
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Passport and travel records: Copies of travel documents can help establish physical presence in Puerto Rico for at least 183 days in the tax year.
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Rental agreements or property ownership: If the individual rents or owns property in Puerto Rico, they should provide proof of this relationship.
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Puerto Rican tax returns: Filing local taxes in Puerto Rico is another indication of bona fide residency.
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Utility bills and bank statements: These documents can show that the individual’s life is integrated into the local economy and community.
In some cases, the Puerto Rican Department of Economic Development and Commerce (DDEC) may require additional documentation or evidence of the individual’s residency status. It’s important to keep accurate and detailed records to support the residency claim.
The Application Process for Act 60 Residency
To apply for the tax incentives under Act 60, individuals must submit an application to the Puerto Rico Department of Economic Development and Commerce (DDEC). The application process involves providing personal and financial information, as well as demonstrating compliance with the residency requirements.
Once the application is approved, the individual will receive a tax exemption decree, which outlines the specific tax benefits they are entitled to. This decree serves as the official document granting the individual access to the tax incentives available under Act 60.
Key Considerations Before Relocating to Puerto Rico
While the tax benefits of Act 60 are certainly enticing, there are several important factors to consider before making the move to Puerto Rico:
1. U.S. Federal Taxes Still Apply
Though Puerto Rico is a U.S. territory, individuals are still U.S. citizens and must file federal tax returns. However, income earned in Puerto Rico is generally not subject to U.S. federal income tax. It is important to understand the intricacies of U.S. tax law and how it interacts with Puerto Rican tax incentives. Consulting a tax professional is highly recommended to navigate these complex rules.
2. Living in Puerto Rico
While Puerto Rico offers a tropical climate, lower taxes, and a relatively lower cost of living compared to many parts of the mainland U.S., there are other factors to consider, such as the island's infrastructure, healthcare system, and schools. Additionally, living in Puerto Rico means that you will be subject to local laws, which may differ from those on the mainland.
3. Commitment to Residency
To maintain eligibility for the tax incentives under Act 60, you must demonstrate your intent to remain a resident of Puerto Rico. This means complying with the physical presence, tax home, and closer connection requirements year after year. Failing to meet these requirements could result in the loss of tax benefits and potential penalties.
Conclusion
Puerto Rico’s Act 60 offers compelling tax incentives for individuals who are willing to establish residency on the island. To qualify for these benefits, individuals must meet specific residency requirements, including spending at least 183 days on the island, having their tax home in Puerto Rico, and proving a closer connection to the island than to any other location.
By understanding the residency requirements and following the application process, individuals can take advantage of the significant tax exemptions offered by Act 60. However, it is essential to consult with tax professionals and legal experts to ensure full compliance with the law and to make an informed decision about relocating to Puerto Rico.
If you’re considering Puerto Rico as a tax-friendly destination, be sure to fully evaluate the residency requirements, long-term commitment, and lifestyle changes associated with living on the island. With the right preparation and guidance, Act 60 can be a valuable tool for financial growth and relocation.
