Puerto Rico, a U.S. territory known for its stunning landscapes and vibrant culture, has become a focal point for people and businesses seeking financial opportunities through tax incentives. One of the most prominent pieces of legislation driving this interest is Act 60, formally known as the Puerto Rico Tax Incentives Code. Passed in 2019, Act 60 brings together various tax incentive programs designed to boost the island's economy by attracting investors, businesses, and high-net-worth individuals.
Whether you're considering relocating to Puerto Rico or starting a business there, understanding Act 60 is essential to navigating the available opportunities and maximizing the potential benefits. In this post, we’ll break down what Act 60 is, the benefits it offers, and the key requirements for individuals and businesses to take full advantage of the incentives.
What is Act 60?
Act 60, also referred to as the Puerto Rico Tax Incentives Code, is a piece of legislation passed by the Puerto Rican government to consolidate and simplify various tax incentive programs previously offered to businesses and individuals. Act 60 replaced earlier laws such as Act 20 (Export Services Act) and Act 22 (Individual Investors Act), both of which were instrumental in attracting businesses and wealthy individuals to Puerto Rico. The law’s primary goal is to stimulate Puerto Rico's economy by encouraging investment, job creation, and business activity on the island.
How Does Act 60 Work?
Act 60 provides significant tax incentives for those who establish a bona fide residency in Puerto Rico or set up businesses on the island. These incentives are structured to encourage individuals and companies to move to Puerto Rico or expand their operations there. In exchange for qualifying, individuals and businesses benefit from reduced tax rates, tax exemptions, and various economic incentives designed to drive growth in the Puerto Rican economy.
Because Puerto Rico is a U.S. territory, U.S. citizens who establish residency in Puerto Rico are not subject to federal income tax on income sourced from within Puerto Rico. This unique status has made Puerto Rico an attractive location for tax planning, investment, and business development.
Key Benefits of Act 60
Act 60 offers multiple tax benefits for both individuals and businesses. Let's take a closer look at some of the most significant advantages of this legislation.
For Individuals:
- 100% Exemption on Long-Term Capital Gains
One of the primary attractions of Act 60 for individuals is the 100% tax exemption on long-term capital gains. For individuals who move to Puerto Rico and establish bona fide residency, the law offers complete exemption from Puerto Rican taxes on capital gains realized after becoming a resident. This is an enticing benefit for investors who wish to minimize taxes on their stock market, real estate, and other investment gains.
For example, if you sell investments such as stocks or real estate and have held them for more than one year (qualifying them as long-term capital assets), the resulting capital gains would be completely tax-free in Puerto Rico.
- Tax Exemption on Dividends
Another key benefit under Act 60 is the tax exemption on dividends from Puerto Rican corporations. Individuals who become residents of Puerto Rico are able to receive tax-free dividends from Puerto Rican businesses. This is particularly beneficial for investors who hold shares in Puerto Rican companies, as it allows them to enjoy the income from those investments without facing taxation.
- Tax Exemption on Interest Income
Puerto Rico also offers a tax exemption on interest income derived from certain Puerto Rican investments. For instance, interest income from Puerto Rican government bonds or other local investments is exempt from local taxes. This is a valuable incentive for those with investments in bonds or similar instruments, allowing them to earn interest income without the tax burden.
- Real Estate Tax Benefits
For individuals interested in real estate investment, Act 60 provides certain exemptions from property taxes and tax benefits related to capital gains on real estate transactions. For example, income generated from the sale of Puerto Rican real estate may be eligible for tax exemptions under certain conditions, which can be a major benefit for investors and property developers.
For Businesses:
- 4% Corporate Tax Rate for Export Services
One of the most attractive benefits for businesses under Act 60 is the 4% corporate tax rate on income derived from export services. This incredibly low tax rate applies to businesses that are engaged in providing services outside of Puerto Rico. These services can include industries like consulting, software development, financial services, and legal services.
Businesses that qualify for the Export Services Act (part of Act 60) can take advantage of this low corporate tax rate, significantly reducing their tax liability. Compared to the standard U.S. corporate tax rate of 21%, this 4% rate offers substantial tax savings for qualifying businesses.
- Exemption from Taxes on Dividends
Under Act 60, qualifying businesses can distribute their earnings as dividends to shareholders without paying local taxes on those dividends. This provides significant tax relief, as it avoids the common issue of double taxation faced by businesses in other jurisdictions where both corporate income and dividends are taxed.
- Exemption from Certain 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 benefit helps reduce costs for businesses, making Puerto Rico an appealing option for companies looking to minimize their tax burdens and operating expenses.
- Tax Benefits for Reinvested Earnings
Puerto Rico provides additional benefits for businesses that reinvest their profits locally. Reinvested earnings in Puerto Rico are subject to favorable tax treatment, which further incentivizes business development and growth on the island. This can help stimulate local job creation and economic development, making it an attractive option for businesses aiming to expand in Puerto Rico.
- Access to Government Grants and Funding
Businesses located in Puerto Rico and qualifying for the Act 60 tax incentives may also be eligible for grants and funding from the Puerto Rican government. These programs are designed to encourage economic development, support innovation, and create jobs in specific sectors such as technology, manufacturing, and agriculture.
Requirements for Act 60
While Act 60 offers many benefits, both individuals and businesses must meet certain eligibility criteria to qualify for the tax incentives. Let’s break down the key requirements for both groups:
1. Bona Fide Residency for Individuals
For individuals, the most important requirement is to establish bona fide residency in Puerto Rico. To do so, individuals must meet the following criteria:
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Physical Presence: Spend at least 183 days per year in Puerto Rico. This is the minimum required to establish residency under U.S. tax law.
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Tax Home: Your tax home must be in Puerto Rico, meaning that Puerto Rico is your primary location for business and personal activities.
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Closer Connection: You must demonstrate a closer connection to Puerto Rico than to any other place, including the U.S. mainland. This includes factors like where you vote, where your family lives, and where your primary bank accounts are located.
2. New Business Operations
For businesses, Act 60 is primarily aimed at businesses that are newly established or substantially relocated to Puerto Rico. These businesses must provide services to clients outside Puerto Rico (i.e., export services). Examples of businesses that can qualify include:
- Consulting firms
- Software companies
- Legal or financial service providers
- Manufacturers of goods for export
Additionally, businesses must comply with Puerto Rican tax laws and file the necessary paperwork with the Puerto Rican Department of Economic Development and Commerce to receive an official tax exemption decree.
3. Application Process
Both individuals and businesses must go through the application process to receive the tax benefits under Act 60. This involves submitting an application to the Puerto Rican government, providing supporting documentation to demonstrate eligibility, and receiving approval in the form of an exemption decree. The application process can be complex, so it’s advisable to work with tax professionals who specialize in Puerto Rican tax law.
Why Should You Consider Act 60?
Puerto Rico’s Act 60 offers attractive financial incentives for both individuals and businesses looking to reduce their tax liabilities while enjoying the benefits of a U.S. territory. These benefits include:
- Substantial tax exemptions on investment income, including capital gains, dividends, and interest.
- Favorable corporate tax rates, including a 4% tax rate for export services.
- Tax breaks on real estate investments and business activities.
- A low cost of living and a tropical environment that makes Puerto Rico an appealing place to live and work.
If you’re an investor, business owner, or entrepreneur seeking to lower your tax burden, Puerto Rico could offer a compelling financial opportunity through Act 60. However, it’s important to consult with legal and tax professionals to understand all the requirements and navigate the application process effectively.
Final Thoughts
Act 60 is a unique opportunity for individuals and businesses to take advantage of tax incentives that are unavailable elsewhere in the United States. Whether you’re seeking to relocate to Puerto Rico for personal reasons or expand your business operations to take advantage of the tax benefits, Act 60 has the potential to offer significant financial rewards.
As with any major decision, it’s important to carefully evaluate the costs, benefits, and requirements associated with Act 60. By doing so, you can ensure that your move to Puerto Rico or your investment in the island’s economy is a successful one.
