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What is Puerto Rico’s Act 60 and What it Means for US citizens?

Puerto Rico’s Incentives Code, commonly known as Act 60, has drawn significant interest from entrepreneurs and investors, including Americans, for its highly attractive tax benefits. A key part of this law is the former Export Services Act, which encourages businesses to set up export service operations in Puerto Rico. By offering a corporate income tax rate as low as 4%, along with other incentives, Act 60 provides a powerful tool for companies seeking to lower their tax burden. Consequently, they can capitalize on Puerto Rico’s status as a US territory. This makes it an ideal option for high-net-worth individuals, entrepreneurs, business owners, digital nomads, and IT professionals looking for tax optimization.

Puerto Rico’s Consolidation of Tax Incentives

In 2019, Puerto Rico combined its various tax incentives into the single Act 60 legislation. This was done to streamline the process for new investors. The main benefits of the former tax acts were brought into this new code, creating a clear framework for economic development. The core principles remain largely the same. For companies in the export services sector, this means a stable, long-term tax environment with a preferential tax rate on income from services provided to clients outside of Puerto Rico.

Puerto Rico’s Low Corporate Income Tax Rate

The cornerstone of the export services incentive under Act 60 is the dramatically reduced corporate income tax rate. For eligible businesses, the standard corporate tax rate is just 4%. This is a stark contrast to the much higher rates found on the US mainland. In some specific cases, the rate can be even lower for services deemed strategic to Puerto Rico’s economic growth. This incentive is a major draw for a variety of industries, including consulting, software development, and financial services. The substantial tax savings can then be reinvested into growth and expansion.

The benefits for export service businesses under Act 60 include more than just the low income tax rate. Businesses that meet the eligibility rules can also receive a 100% exemption on dividends or profit distributions from the exempt business. Additionally, these companies may be entitled to exemptions on municipal and property taxes. These exemptions combine to create a highly favorable and comprehensive tax structure for qualifying companies that establish and operate in Puerto Rico, maximizing financial efficiency.

Who Qualifies for Export Service Incentives?

To qualify for the export services tax benefits under Act 60, a business must export its services from a legitimate office in Puerto Rico to clients located outside the island. Importantly, the services must not be delivered to individuals or entities within Puerto Rico itself. The legislation is designed to attract companies that will boost the island’s economy by creating local employment and investment. The application process requires submitting a request for a tax exemption decree to the Puerto Rico Department of Economic Development and Commerce.

Puerto Rico Act 60 & Specific Tax Incentives

Puerto Rico offers further tax advantages under its Incentives Code Act 60, which combined previous Acts 20 and 22. These are designed to attract investors and export-oriented service businesses.

• Individual Resident Investor Incentives – If you become a bona fide resident and receive a special tax grant, you can enjoy a 0% tax rate on interest and dividends from all sources. Furthermore, capital gains from assets acquired after you become a resident are also taxed at 0%. For gains on assets you owned before moving, specific rules apply, potentially resulting in a much lower tax rate (like 5% or 10%) compared to mainland US rates. This is particularly attractive for traders of stocks, bonds, and cryptocurrencies.
• Export Services Incentives – If you run a service-based business (like consulting, software development, marketing, etc.) that provides services from Puerto Rico to clients outside Puerto Rico, your business may qualify for a very low 4% corporate income tax rate. Dividends paid from these profits to you as a resident owner can also be completely tax-free.

To get these Act 60 benefits, you must apply for and receive a specific tax exemption decree from the Puerto Rican government, which acts like a contract detailing your tax treatment until 2035. Reloc8 Online can guide you through the application process for this valuable decree.

Individual Investor Incentives

In addition to the corporate tax benefits, Act 60 also offers powerful incentives for individual investors who become genuine residents of Puerto Rico. By establishing residency on the island for at least 183 days a year, individuals can qualify for a 100% exemption on Puerto Rico taxes for interest, dividends, and certain capital gains. This is a powerful incentive for high-net-worth individuals to relocate, as it attracts personal wealth to the island, further stimulating economic activity. However, individuals must meet the strict residency requirements and seek expert advice to ensure full compliance.

This unique tax setup is particularly beneficial for the following groups:

• US citizen investors and traders (stocks, crypto, etc.) generating significant capital gains, interest, and dividends.
• US entrepreneurs with location-independent service businesses that can be operated from Puerto Rico for clients outside the island.
• High-income individuals looking to significantly reduce their federal tax burden without giving up their US passport.

Important Note for Non-US Citizens

The rules for non-US citizens residing in Puerto Rico are different. While they might become residents under local rules, qualifying for US tax benefits or being considered a US person for certain regulations involves different tests, usually related to the US Substantial Presence Test applied within the context of Puerto Rico.

Genuine Relocation is Essential

Puerto Rico’s tax benefits are not a loophole for avoiding taxes while living elsewhere. You must genuinely move your primary home, personal life, and center of economic interest to the island. The IRS looks closely at bona fide residency claims, so maintaining strong ties to Puerto Rico and limiting connections to the mainland US is important.

FBAR Rules Still Apply

Even if your Puerto Rican income is excluded from US income tax, US persons (citizens, green card holders, and resident aliens) living in Puerto Rico are still subject to US reporting requirements for foreign financial accounts. This means you must file an FBAR (Report of Foreign Bank and Financial Accounts) if you have accounts outside the US (including Puerto Rico itself, as PR is considered part of the US for FBAR purposes) that meet the reporting threshold. Reloc8 Online can help you stay compliant with these reporting obligations.

Lifestyle in Puerto Rico

Caribbean Living with US Ties

Living in Puerto Rico offers a great lifestyle featuring:

• Tropical Climate – Warm weather year-round.
• Natural Beauty – Beaches, mountains, and rainforests.
• US Infrastructure – Uses the US dollar, US banking system, and US legal framework elements.
• Culture – A blend of Spanish, Taino, and African influences with strong American connections.
• Expat Community – A large community of mainland Americans and other expats.

Potential Risks and Things to Consider

The primary challenge is the complexity of the bona fide resident rules and Act 60 requirements. Meeting these requires careful planning and documentation. Failure to genuinely relocate or maintain the required presence can lead to the loss of tax benefits and potential issues with the IRS. Puerto Rico, as a US territory, also faces economic challenges and is vulnerable to natural disasters like hurricanes, which can impact infrastructure and daily life.

Start Your Relocation Journey with RELOC8 ONLINE

While the potential for tax savings under Act 60 is very appealing, moving to Puerto Rico for tax purposes is complex. US citizens and businesses must carefully follow both Puerto Rican and US federal tax laws. The IRS has strict rules regarding genuine residency, and it is vital for individuals to meet all requirements to avoid federal tax scrutiny. Working with experienced tax professionals and legal counsel is essential for anyone considering this strategy, as it ensures the proper structure and compliance needed to maximize benefits and mitigate potential risks.

Reloc8 Online offers the specialized knowledge needed to properly utilize Puerto Rico’s unique tax advantages.

Puerto Rico’s status as a US territory provides a unique advantage for American citizens. While residents gain significant tax exemptions from Puerto Rico, they retain their US citizenship, allowing unrestricted travel and access to the US mainland. This unique arrangement offers the stability of the US system coupled with the significant low-tax jurisdiction benefits of Act 60.

For more updates and guidance, reach out to Reloc8 Online to make your next move seamless. Contact us today to get all the relevant information on relocating to Puerto Rico , Puerto Rico ‘s Visa, and Puerto Rico’s tax regulations.

Disclaimer: The information provided in this article is for informational purposes only and was obtained from verifiable sources at the time and date of publication. It is not in any shape or form financial or investment advise and should not under any circumstances be treated as such. This information does not constitute legal advice and should not be relied upon as such. RELOC8 ONLINE is not responsible for any errors, inaccuracies, or inconsistencies that might be present in the content published here and readers are advised to carry out their own research on the topics discussed before making deceisions that might impact their circumstances. For the latest information and most accurate details, please refer to our Latest News page or contact us directly.