Puerto Rico’s Act 60, also known as the Puerto Rico Incentives Code, has positioned the island as one of the most attractive tax jurisdictions under the U.S. flag. For individuals, Act 60 offers a set of unique and powerful tax incentives that encourage residency and investment in Puerto Rico. If you are a U.S. citizen or permanent resident looking to optimize your tax position while living in a tropical paradise, this law might be of particular interest.
Understanding Act 60
Act 60 was enacted in 2019 as a consolidation of various incentive programs, most notably Act 20 and Act 22. These earlier acts were designed to promote economic development by offering favorable tax treatment to businesses and individuals relocating to Puerto Rico. Act 60 retains and refines those incentives under one comprehensive legal framework.
While Act 60 includes a variety of programs for industries like manufacturing, agriculture, and tourism, it is especially popular among high-net-worth individuals, entrepreneurs, and investors due to the benefits it offers for personal income and investment gains.
Key Individual Benefits Under Act 60
1. 100% Tax Exemption on Capital Gains
One of the most attractive benefits for individuals under Act 60 is the complete exemption from Puerto Rico income taxes on capital gains accrued after establishing residency. This applies to profits from the sale of stocks, real estate, cryptocurrencies, and other qualifying investments made after you become a bona fide resident of Puerto Rico.
Example: If you move to Puerto Rico and then buy shares of a company that later appreciates in value, the gain on that investment is fully exempt from Puerto Rican income taxes, provided you meet the residency and filing requirements.
Note: Gains on assets purchased before becoming a resident may be partially exempt, depending on how long they are held after relocation.
2. 4% Fixed Income Tax Rate on Certain Income
Individuals who run eligible businesses or provide professional services to clients outside Puerto Rico can enjoy a fixed 4% income tax rate on net profits from those services. This is especially beneficial for:
-
Consultants
-
Online business owners
-
Financial advisors
-
Software developers
-
Freelancers with mainland or international clients
This rate is significantly lower than U.S. federal income tax rates and is one of the most competitive globally.
3. Exemption from Puerto Rico Taxes on Dividend and Interest Income
For qualifying residents, dividends from Puerto Rico corporations and interest income may also be partially or fully exempt from local income tax. While U.S. citizens must still comply with certain federal tax rules, many find that the combination of Puerto Rican and federal provisions offers substantial savings.
4. No Federal Tax on Puerto Rico-Sourced Income
Because Puerto Rico is a U.S. territory, U.S. citizens living there are still subject to the Internal Revenue Code. However, Puerto Rico-sourced income is not subject to U.S. federal income tax for bona fide residents. This means income that is earned from within Puerto Rico, including qualified capital gains and local business profits, can escape both federal and local taxation (depending on the type of income and compliance with all requirements).
5. Property and Municipal Tax Exemptions
Although not as widely discussed, Act 60 also offers the following local tax exemptions:
-
75% exemption on property taxes for eligible business and personal property.
-
50% exemption on municipal license taxes, which apply to gross receipts of a business.
These benefits are more applicable if the individual owns or operates a qualifying business under Act 60.
Requirements for Individuals
To enjoy these benefits, individuals must meet several requirements, the most important of which is establishing bona fide residency in Puerto Rico.
Bona Fide Residency Test
The IRS and Puerto Rico both use the following criteria to determine residency:
-
Physical Presence Test
You must be physically present in Puerto Rico for at least 183 days during the calendar year. -
Tax Home Test
Your primary place of business or employment must be in Puerto Rico. -
Closer Connection Test
You must demonstrate that your primary ties (home, family, social, and financial) are in Puerto Rico rather than the mainland U.S.
Additional Compliance Requirements
-
Apply for and receive an Act 60 decree from the Puerto Rico Department of Economic Development and Commerce.
-
Make an annual charitable donation of at least $10,000 to approved Puerto Rican non-profit organizations.
-
Purchase a residential property in Puerto Rico within two years of obtaining the tax decree.
-
File annual compliance reports and pay a $5,000 annual fee to maintain the tax status.
Duration of Benefits
The tax incentives granted under Act 60 for individuals are typically valid for 15 years, with the possibility of renewal. During this time, you must continue to meet all compliance and residency requirements to maintain eligibility.
Who Should Consider Act 60?
Act 60 is best suited for:
-
High-income individuals looking to reduce their capital gains taxes.
-
Entrepreneurs and digital nomads with service-based businesses.
-
Remote workers with non-Puerto Rican clients.
-
Cryptocurrency investors and traders.
-
Retirees seeking tax-friendly environments with a warm climate.
It is not a fit for everyone. Those whose income is primarily from employment in the U.S., or who cannot easily relocate for more than half the year, may not be able to fully benefit from the program.
Potential Drawbacks and Considerations
While the benefits are substantial, individuals should be aware of some challenges:
-
IRS scrutiny: The IRS reviews Puerto Rico residency claims carefully. Incorrect filings or failure to meet the residency test can result in penalties and loss of benefits
-
Ongoing compliance: Annual reporting, charitable contributions, and property ownership requirements must be followed strictly.
Final Thoughts
For the right individuals, Act 60 offers one of the most powerful tax planning tools available within U.S. jurisdiction. The law provides legitimate ways to reduce or even eliminate capital gains tax, access a low fixed income tax rate, and enjoy a favorable lifestyle in a Caribbean setting.
However, it is not a loophole or shortcut—it comes with strict requirements, a need for strategic planning, and a willingness to integrate into Puerto Rico’s community and economy. Anyone considering a move should consult with a tax advisor experienced in Puerto Rican law and ensure they fully understand both the opportunities and responsibilities involved.
If you're a high-earning individual or entrepreneur looking to align your financial goals with a unique lifestyle, Act 60 might be the key to your next chapter.
