Puerto Rico’s Act 60 (formerly Acts 20 and 22) offers U.S. citizens a legal framework to dramatically reduce—or eliminate—taxes on certain personal and corporate income without renouncing U.S. citizenship. The incentives are designed to attract investors and service‑exporting businesses to the island, which is an unincorporated U.S. territory located in the Caribbean.
How the tax incentives work
Individual Investor Act (formerly Act 22)
- Exempts from Puerto Rican tax capital gains, dividends, interest, and other passive income earned after establishing bona‑fide residency.
- Salary, wages, and income from crypto mining or staking are not exempt.
Export Services Act (formerly Act 20)
- Allows a Puerto‑based company that provides services exported outside the island to be taxed at a flat 4 % corporate rate on qualifying income.
- The services must be performed in Puerto Rico and billed to non‑Puerto Rican clients.
Beneficiaries can combine both regimes: an individual can enjoy zero tax on passive income while operating an export‑service business taxed at 4 %.
Residency requirements
To qualify, applicants must satisfy three “bona‑fide resident” tests (commonly referred to as the presence, tax home, and closer connection tests). In addition:
- Physical presence: at least 183 days per year in Puerto Rico, or meet the alternative criteria for the presence test.
- Home purchase: acquire a residential property within two years of establishing residency.
- Annual contribution: some act categories require a $10,000 yearly donation to a local government fund to maintain the exemption.
U.S. trusts may own Act 60 businesses, provided ≥ 50 % of the trust’s beneficiaries are Puerto Rico residents.
Timing and retroactivity
- The tax exemptions apply only to income earned after establishing residency.
- Unrealized capital gains held before moving remain subject to U.S. federal tax when realized, even if the sale occurs after relocation.
- Gains from a Puerto‑incorporated business sold while the owner is a resident can qualify for the zero‑percent capital‑gains rate.
Recent legislative activity
- A proposal to raise the zero‑percent rate on capital gains, dividends, and interest to 12 % was debated but has not passed.
- Any change would apply prospectively to new applicants; existing beneficiaries are “grandfathered” and retain the current rates.
Potential drawbacks
- Full relocation required: moving personal belongings, changing bank accounts, obtaining a Puerto Rican driver’s license, voting registration, and establishing local medical care.
- Cost of living: housing and everyday expenses are rising, which can offset some tax savings depending on the individual’s prior cost base.
- Local criticism: the program is sometimes viewed as fostering gentrification that benefits incoming U.S. citizens more than native residents.
- Future policy risk: while current rates are zero for qualifying passive income, legislative changes could alter the landscape for future participants.
Practical considerations
- Assess residency feasibility: ensure you can meet the physical‑presence and home‑ownership requirements without disrupting personal or family life.
- Structure investments before moving: to avoid U.S. tax on pre‑move capital gains, consider realizing gains before establishing Puerto Rico residency or using other tax‑deferral strategies.
- Combine acts when appropriate: entrepreneurs who both invest passively and run export‑service businesses can maximize savings by leveraging both the individual and corporate components.
- Monitor legislative updates: stay informed about any bills affecting the capital‑gains exemption, especially if planning to apply in the near term.
Overall, Act 60 can provide substantial tax relief for U.S. citizens willing to become bona‑fide Puerto Rican residents and align their personal and business activities with the program’s requirements. Careful planning and ongoing compliance are essential to sustain the benefits.
