Taxes in Puerto Rico

Puerto Rico is a U.S. territory with a unique tax system that differs significantly from the mainland United States. While Puerto Ricans are U.S. citizens, the island operates under its own tax code. This creates both advantages and responsibilities for individuals and businesses living or operating in Puerto Rico.

In recent years, Puerto Rico has become an increasingly attractive destination for individuals and companies looking to reduce their tax burden, especially under Act 60, which offers significant tax incentives. Whether you are a resident, a business owner, or an investor, understanding the local tax system is essential.

This guide breaks down the key aspects of Puerto Rico’s tax structure, including income taxes, corporate taxes, capital gains, property taxes, and special incentive programs.

1. Overview: How Puerto Rico’s Tax System Works

Puerto Rico’s tax system is governed by the Puerto Rico Department of Treasury (Hacienda). Although it shares similarities with U.S. tax regulations, it functions as a separate jurisdiction for tax purposes in most cases.

Key differences include:

• Puerto Rico residents do not pay U.S. federal income tax on income earned in Puerto Rico.

• The island has its own tax rates for individuals and businesses.

• Special tax incentives (like Act 60) exist to attract investors and entrepreneurs.

2. Individual Income Tax

If you are a bona fide resident of Puerto Rico, you are subject to Puerto Rico’s local income tax system rather than U.S. federal income tax (on Puerto Rico-sourced income).

Puerto Rico Resident Individual Tax Rates (2024):

Deductions and Credits:

• Puerto Rico allows personal exemptions and deductions for dependents, mortgage interest, and charitable donations.

• Credits may be available for education, elderly care, or low-income households.

U.S. Citizens in Puerto Rico:

If you meet the bona fide residency test, your Puerto Rico-sourced income is exempt from U.S. federal tax. However, U.S. citizens must still report and pay federal taxes on income sourced from outside Puerto Rico (like dividends from U.S. corporations or overseas income).

3. Corporate Taxes in Puerto Rico

Puerto Rican corporations are taxed under a different structure than U.S.-based corporations.

Standard Corporate Tax Rates:

• Normal corporate income tax: 18.5%

• Surtax on net income over $25,000: Graduated rates from 5% to 19%

Maximum combined corporate tax rate: Approximately 37.5% for companies that don’t qualify for any incentives.

Alternative Minimum Tax (AMT):

A minimum tax of up to 30% applies to corporations using special deductions or exemptions.

4. Sales and Use Tax (SUT)

Puerto Rico has a high combined sales tax rate of 11.5%, consisting of:

• 4.5% state tax

• 1% municipal tax

• 6% special tax on certain services and goods

This tax applies to most goods and some services, including business-to-business (B2B) transactions in many industries.

5. Property Taxes

Property taxes in Puerto Rico are imposed by the Municipal Revenue Collection Center (CRIM).

Real Property Tax:

• Typically ranges from 1.03% to 1.30% of the government-assessed value

• Values are often much lower than market value

• Applies to residential, commercial, and undeveloped land

Personal Property Tax:

• Businesses are also taxed on personal property like equipment, inventory, and machinery

• Rates vary by municipality and property type

6. Capital Gains Taxes

Capital gains taxation in Puerto Rico depends on when and where the asset was acquired and whether you are a resident.

For Puerto Rico Residents:

• Capital gains on Puerto Rico-sourced assets: Taxed at 15%, or 0% under Act 60 if the asset was acquired after moving to Puerto Rico.

• U.S.-sourced capital gains: Subject to U.S. federal tax, even if you're a Puerto Rico resident.

• Assets acquired before moving to Puerto Rico: Gains may be partially taxed by the U.S. and Puerto Rico, depending on timing and length of residence.

7. Act 60 Incentives (Formerly Acts 20 & 22)

Puerto Rico’s Act 60, known as the Puerto Rico Incentives Code, was designed to attract high-net-worth individuals and businesses by offering substantial tax benefits.

For Individuals (Export Investors – formerly Act 22):

• 0% tax on long-term capital gains for assets acquired after becoming a Puerto Rico resident

• 0% tax on dividends received from Puerto Rico corporations

• Must become a bona fide resident and meet specific conditions:

  • Physical presence (183+ days per year)

  • Closer connection to Puerto Rico than to the mainland U.S.

  • Official tax home in Puerto Rico

For Businesses (Export Services – formerly Act 20):

• 4% corporate income tax on Puerto Rico-sourced services provided to clients outside the island

• 100% tax exemption on dividends from Puerto Rican entities to Puerto Rican residents

• Valid for an initial term of 15 years, renewable

Requirements:

• Apply for and obtain a tax decree from the Puerto Rico Department of Economic Development and Commerce

• Annual reporting and donation requirements

• Residency and property ownership conditions must be met

8. Municipal Taxes

Most municipalities in Puerto Rico levy a municipal license tax (also called “Patente Municipal”) on gross business receipts.

• Rates typically range from 0.2% to 0.5%

• Based on gross income, not net profit

Certain Act 60 businesses may qualify for partial exemptions from these municipal taxes.

9. Other Taxes to Consider

Estate and Gift Taxes:

Puerto Rico does not impose estate or gift taxes. However, U.S. federal estate and gift tax laws may still apply to U.S. citizens and residents.

Excise Taxes:

Excise taxes apply to specific goods like alcohol, tobacco, petroleum products, and vehicles.

10. Filing and Compliance

Key Points:

• Puerto Rico residents must file an annual Puerto Rico income tax return (Form 482).

• Businesses must file corporate returns and submit financial statements.

• U.S. citizens must also file a U.S. federal return (Form 1040), even if they owe no federal tax, especially if they have income from outside Puerto Rico.

• Individuals and businesses receiving Act 60 benefits must meet annual reporting and compliance requirements.

Final Thoughts

Puerto Rico’s tax system is complex but offers significant benefits—especially for those who qualify under Act 60. From reduced income tax rates to complete exemptions on capital gains and dividends, the island has created a compelling environment for individuals and businesses willing to establish a genuine presence.

However, the advantages come with responsibilities. Understanding residency requirements, compliance rules, and local regulations is essential for staying compliant and making the most of Puerto Rico’s tax structure.

If you are considering relocating or investing, it’s highly recommended to work with a licensed tax advisor or attorney familiar with both U.S. and Puerto Rico tax laws to ensure your strategy aligns with your financial goals and obligations.