Stop paying 37% federal income tax when you could be paying 4%. Puerto Rico Act 60 isn’t just another tax loophole – it’s a legitimate pathway to reducing your tax burden by hundreds of thousands of dollars annually.
What makes Puerto Rico Act 60 so powerful? It’s a Puerto Rican law that offers extraordinary tax incentives to individuals and businesses that relocate to the island. We’re talking about 4% tax on eligible business income, 0% tax on capital gains for qualifying investments, and complete exemption from federal taxes on Puerto Rico-source income.
But here’s the reality check: Act 60 isn’t for everyone, and it definitely isn’t automatic. The requirements are specific, the compliance obligations are ongoing, and the penalties for getting it wrong can be severe. I’ve seen people rush into Act 60 without proper planning, only to face audits, penalties, and tax bills that exceeded what they would have paid on the mainland.
The difference between success and failure with Puerto Rico Act 60 comes down to understanding exactly what you’re getting into and having a plan that ensures compliance from day one.
What Puerto Rico Act 60 Actually Provides
Puerto Rico Act 60 provides unprecedented tax benefits for qualifying individuals and businesses. Puerto Rico Act 60 provides a legal framework for dramatically reducing your tax burden while maintaining U.S. citizenship. Puerto Rico Act 60 provides opportunities that simply don’t exist anywhere else in the United States.
Act 60 combines two powerful programs: the Individual Investors Act and the Export Services Act. Together, these programs can reduce your taxes to levels that seem impossible in today’s tax environment. But the key word here is “qualifying” – not everyone can take advantage of these benefits.
The Individual Investors Act targets people with significant capital gains and dividend income. If you qualify, you pay 0% tax on capital gains from investments made after becoming a Puerto Rico resident. Zero percent. On everything from stock sales to real estate transactions to business dispositions.
The Export Services Act focuses on service businesses that can operate from Puerto Rico while serving clients outside the island. Qualifying businesses pay just 4% tax on their Puerto Rico-source income. Compare that to the combined federal and state tax rates most high earners face – often 45% or more.
Here’s what most people don’t understand: these aren’t temporary benefits. Act 60 provides tax incentives for up to 30 years, with the possibility of extension. You’re not just saving money this year – you’re potentially saving millions over decades.
But Act 60 isn’t just about the tax rates. It’s about the requirements that make those rates possible. You must establish genuine residency in Puerto Rico. You must spend at least 183 days per year on the island. You must make the required charitable contributions. You must maintain detailed records proving your compliance.
That client who saved $2.3 million? He spent six months planning before he moved. We analyzed his business model, structured his Puerto Rico operations, prepared for the residency requirements, and created systems to track his compliance. The tax savings were enormous, but the planning was essential.
Individual Investors Act Requirements
The Individual Investors Act portion of Puerto Rico Act 60 has specific requirements that must be met to qualify for the 0% capital gains rate. Let me break down each requirement because missing even one can disqualify you entirely.
Residency Requirements
Physical presence: You must be present in Puerto Rico for at least 183 days during each tax year. Not 182 days. Not “close to 183 days.” Exactly 183 days or more, and you need to document every single day.
Tax residence: You must become a bona fide resident of Puerto Rico for federal tax purposes. This means Puerto Rico must be your principal place of business, employment, or residence.
No significant connection: You cannot have a significant connection to the United States or any other country. This means limiting your time on the mainland and documenting your Puerto Rico ties.
Financial Requirements
- Annual donation: You must make a minimum annual donation of $10,000 to a Puerto Rico nonprofit organization. This isn’t optional – it’s a requirement for maintaining your decree.
- Real estate purchase: You must purchase residential real estate in Puerto Rico within two years of receiving your decree. The property must be for your personal use.
- Investment requirements: You must make specific investments in Puerto Rico businesses or securities, depending on your decree terms.
Application Process
The application process is detailed and document-intensive. Here’s what you need to prepare:
- Personal information: Detailed personal and professional background, including education, work history, and business relationships.
- Financial documentation: Tax returns, financial statements, investment portfolios, and proof of income sources.
- Business plan: If you’re applying for export services benefits, you need a comprehensive business plan showing how you’ll operate from Puerto Rico.
- Supporting documents: Letters of recommendation, professional certifications, and any other documentation supporting your application.
Export Services Act Requirements
The Export Services Act has different requirements focused on operating a qualifying business from Puerto Rico.
Qualifying Activities
Not every business qualifies for Export Services Act benefits. Qualifying activities include:
- Professional services: Consulting, legal services, accounting, engineering, and similar professional services
- Technology services: Software development, IT consulting, digital marketing, and technology support
- Financial services: Investment management, financial planning, and related services
- Creative services: Advertising, design, content creation, and marketing services
Business Requirements
- Puerto Rico operations: Your business must have substantial operations in Puerto Rico, including key personnel, equipment, and decision-making functions.
- Export focus: At least 80% of your services must be provided to customers outside Puerto Rico. This is strictly monitored and must be documented.
- Employment requirements: You must employ at least five full-time employees in Puerto Rico, with specific salary requirements.
- Office space: You must maintain a physical office in Puerto Rico where substantial business operations occur.
Compliance Obligations
Act 60 benefits come with ongoing compliance requirements that many people underestimate:
- Annual reports: You must file detailed annual reports with the Puerto Rico Department of Economic Development and Commerce.
- Record keeping: Maintain detailed records of your time in Puerto Rico, business activities, and compliance with decree requirements.
- Audit requirements: Your financial statements may need to be audited by a certified public accountant.
- Renewal process: Decrees must be renewed periodically, requiring demonstration of continued compliance.
Real-World Case Examples
Case 1: The Investment Manager
A portfolio manager with $50 million in assets moved to Puerto Rico under Act 60. His planning included:
- Establishing a Puerto Rico investment advisory firm
- Transferring existing clients to the PR entity
- Moving personal residency and maintaining 200+ days annually
- Result: Tax savings of $1.8 million annually on management fees
Case 2: The Technology Consultant
A software consultant earning $2 million annually relocated under the Export Services Act:
- Created a Puerto Rico technology services company
- Hired local staff and established office operations
- Maintained client relationships while operating from PR
- Result: Reduced tax rate from 45% to 4% on Puerto Rico income
Case 3: The Real Estate Investor
An investor with significant capital gains planned a Puerto Rico move:
- Timing: Moved before realizing major gains
- Structure: Established PR residency and investment activities
- Compliance: Maintained detailed presence records
- Result: $3.2 million in tax savings on real estate sale
Common Mistakes and How to Avoid Them
- Inadequate presence tracking: Many people lose their benefits because they can’t prove they met the 183-day requirement. Solution: Use digital tracking systems and maintain detailed travel logs.
- Insufficient business substance: The IRS and Puerto Rico authorities look for genuine business operations, not just tax-motivated moves. Solution: Establish real business operations with employees, office space, and genuine activity.
- Poor timing of income recognition: Moving to Puerto Rico after generating income eliminates the tax benefits on that income. Solution: Plan the timing of your move to maximize benefits on future income.
- Inadequate record keeping: Act 60 requires extensive documentation for ongoing compliance. Solution: Implement systems for tracking all required information from day one.
- Ignoring mainland tax implications: Moving to Puerto Rico doesn’t eliminate all U.S. tax obligations. Solution: Understand which income remains subject to federal tax and plan accordingly.
The Stakes of Getting Puerto Rico Act 60 Right
If you qualify for Act 60 and execute properly, you’re looking at tax savings that can reach millions of dollars over the decree period. If you attempt Act 60 without proper planning, you risk audits, penalties, and tax bills that exceed what you would have paid without the move. If you’re considering Act 60, you need to understand that this isn’t just a tax strategy – it’s a life change that requires total commitment.
The difference between success and failure with Act 60 often comes down to details that seem minor but have massive implications. I’ve seen people lose their entire tax benefit because they miscounted their days in Puerto Rico by just a few days. I’ve seen businesses lose their 4% tax rate because they didn’t maintain sufficient substance in Puerto Rico operations.
Planning Opportunities That Maximize Benefits
Timing your move: The best time to move to Puerto Rico is before you have major income events. If you’re planning to sell a business, realize significant capital gains, or have a liquidity event, moving to Puerto Rico first can save you enormous amounts in taxes.
Business restructuring: Many service businesses can be restructured to take advantage of Act 60 benefits. This might involve creating a Puerto Rico entity, transferring operations, and establishing genuine business substance on the island.
Investment timing: For individual investors, the key is establishing Puerto Rico residency before making investments that will generate future gains. Gains on investments made after becoming a resident can qualify for 0% tax treatment.
Family planning: Act 60 benefits can be structured to benefit family members, but this requires careful planning around gift and estate tax implications.
The Professional Guidance Imperative
I’ve never seen a successful Act 60 case that didn’t involve professional guidance from the beginning. The law is complex, the requirements are specific, and the stakes are too high for trial and error.
Professional guidance isn’t just about preparing the application. It’s about analyzing whether Act 60 makes sense for your situation. It’s about structuring your move to maximize benefits while ensuring compliance. It’s about creating systems for ongoing compliance that protect your benefits over the long term.
The client who saved $2.3 million didn’t just hire a lawyer to prepare his application. He hired a team that included tax professionals, Puerto Rico attorneys, business advisors, and compliance specialists. The initial professional fees were substantial, but they were a tiny fraction of the tax savings achieved.
Act Now or Pay Later
The window for Act 60 benefits is limited by time and circumstances. Every year you wait is another year of paying higher taxes. Every income event that occurs before you establish Puerto Rico residency is another missed opportunity.
But rushing into Act 60 without proper planning is equally costly. The key is to start the planning process now, even if you don’t move immediately. Understanding your options, structuring your affairs, and preparing for a potential move puts you in position to act when the timing is right.
Get the analysis done. Get the planning done. Get professional guidance from people who understand both the opportunities and the pitfalls. Because the cost of getting Puerto Rico Act 60 wrong is measured in millions of dollars, and the cost of missing the opportunity is measured the same way.