How Puerto Rico’s Act 60 Tax Incentives Can Benefit You
- Posted: November 30, 2022
- Posted by: Travis Lynk
- Last Reviewed: February 24, 2023
Read on for what you need to know about taxes before, during, and after your move to Puerto Rico.
- Passing the Presence Test
- Passing the Tax Home Test
- Passing the Closer Connection Test
- Passing the Residence Test
What is Act 60?
Moving to Puerto Rico can be a dream come true for individual U.S. investors and businesses seeking to lower their taxes, as long as they follow certain requirements. As a U.S. territory, Puerto Rico is subject to tax rules that are different from those of U.S. states.
Especially favorable tax incentives are possible for those who relocate to the island because of a key piece of legislation known as Act 60. It’s an updated version of Act 20 and Act 22, which Puerto Rico passed in 2012 to attract outside investment and boost economic development on the island.
Act 60 provides tremendous tax benefits to qualified businesses and individual investors. Thanks to this code, your income sourced from Puerto Rico can be exempt from both federal and state taxes. At the same time, you’ll retain your U.S. citizenship and won’t forfeit Medicare or Social Security.
Puerto Rico Tax Incentives for Businesses
Are you wondering how exactly your business will benefit from relocating to Puerto Rico? With the Act 60 Export Services Tax Incentive (formerly Act 20), it may only have to pay 4% corporate income tax.
Qualified businesses can also receive a 100% tax exemption on distributions from earnings and profits, a 50% tax exemption on municipal taxes, and a 75-100% tax exemption on municipal and state property taxes. Think about how your business can flourish with such a low tax burden.
Puerto Rico Tax Incentives for Individuals
How about moving just yourself? If you’ve invested in stocks, securities, or cryptocurrency, this may still be a great move for you. Under Act 60’s Investor Resident Individual Tax Incentive (formerly Act 22), an eligible individual investor can receive a 100% tax exemption on interest, dividends, short- and long-term capital gains, and gains on crypto-based assets acquired after moving. Note that those who were already residents of Puerto Rico during the 10 years before their move are not eligible for this tax incentive.
All of these benefits and so much more can be yours if you relocate to Puerto Rico. It’s a great bargain. However, you can’t qualify unless you establish residency on the island.
Becoming a Bona Fide Resident of Puerto Rico
If you’d like to enjoy these much lower federal and state taxes, you must follow through on a series of Act 60 Puerto Rico requirements. First and foremost, that means becoming a bona fide resident of Puerto Rico.
You’ll become a bona fide resident and be eligible for Act 60 tax benefits if you pass four qualifying tests: the presence test, the tax home test, the closer connection test, and the residence test.
Let’s explore each of these in greater detail.
Passing the Presence Test
First, to pass the presence test, you must satisfy the IRS requirement to be physically located inside Puerto Rico for at least 183 days of the taxable year. However, this is a rule of thumb, and others have retained their status with fewer than 183 days on the island’s soil in the wake of major natural disaster declarations.
Under certain conditions, you can also satisfy the presence test if you were located in Puerto Rico for at least 549 days during the current year and the preceding two years.
The most important consideration for the IRS is that you spend more time in Puerto Rico than in the rest of the United States. As you might suspect, it’s easier to satisfy this requirement if you move to Puerto Rico during the first part of the year. If you’re unclear on whether you’ll meet this requirement, check out our Day Tracker Tool.
Passing the Tax Home Test
Second, to pass the tax home test, you must not keep a “tax home” outside of Puerto Rico at any time. This applies to the primary place where you work and create value. In other words, a “tax home” is your main place of business, employment, or post of duty, according to IRS rules.
What if you don’t have a primary place of employment? If that’s the case, the IRS will treat your primary residence as your tax home. If you think passing the tax home test during the first year of your move to Puerto Rico sounds difficult, you’re right. Fortunately, the IRS provides a special exemption for that first year.
Passing the Closer Connection Test
Third, to pass the closer connection test, you must convince the IRS that you have stronger ties to Puerto Rico than to the rest of the United States.
Your chances of passing improve considerably as you strengthen banking, social, cultural, or religious ties to the island, identify Puerto Rico as your place of residence, and establish your permanent home there.
The IRS will also consider factors such as where your immediate family members and personal belongings are located, where you are registered to vote, and where you hold your driver’s license. With fewer close connections to the U.S. mainland, you’ll minimize your risk of an IRS audit.
Passing the Residence Test
Fourth, to pass the residence test, you’ll need to buy property in Puerto Rico to use as your principal residence within two years of obtaining this special tax decree. You must own it yourself or jointly with a spouse. Furthermore, the property must remain your primary residence for as long as the decree remains in force.
Luckily, you can take your pick from a huge selection of quality housing on the island. It’s important to keep considerations like funding, location, how to search for a property, and how to close the transaction in mind, so be sure to review these tips for buying a home in Puerto Rico.
Obtaining and Maintaining The Tax Exemption Decree
What else do you need to do to get this process started? You must acquire a grant of tax exemption by applying through Puerto Rico’s Industrial Tax Exemption Office.
Act 60 ensures that this grant will remain a binding contract between you and the Puerto Rican government for at least 15 years. Your benefits should not be affected even if there are amendments to the legislation during the term of this agreement.
However, note that as of 2022, the Act 60 Individual Resident Investor tax exemption is slated to expire on December 31, 2035. It is expected that individuals who receive their decree before this date will be grandfathered in. Those who wait until 2036 to apply for the incentive and become Puerto Rican residents won’t receive the same benefits unless new legislation is passed. Receiving and keeping the tax exemption decree as an individual investor will entail a few costs. First, you’ll pay a one-time $5,005 application fee along with a $105 acceptance fee. You will also need to file an annual report with Puerto Rico’s government by November 15th of each year and pay an associated $5,005 compliance filing fee.
In addition, every year you must make a donation of $10,000 split evenly between two qualifying nonprofit organizations in Puerto Rico. Neither you nor your relatives can control these nonprofit entities.
This comes out to $5,110 in application fees and an ongoing $15,005 in annual report filing fees and charitable contributions. Additional small fees may apply. It’s worth noting that between previous fee increases as well as rising inflation, these figures could easily rise at some point during the next few years.
What Ownership of a Puerto Rico C Corporation Means
Puerto Rico tax rules can vary depending on the nature and activities of your business. Let’s take the example of a C Corporation, which the IRS recognizes as an independent legal entity.
A C Corporation is separate from its owners. Many companies opt to become C Corporations because of the special tax advantages associated with this status. For example, the salaries of owners and employees are tax deductible. Charitable donations as well as renting, repairing, and maintaining facilities may yield additional tax breaks.
If your C Corporation conducts its business in Puerto Rico, then dividends paid to shareholders will be taxed at 0%. However, if your C Corporation derives its revenue from the United States, dividends will be subject to regular federal taxes. As of 2022, that could result in a tax rate of up to 37%.
It gets a bit more complicated if your C Corporation does business in both Puerto Rico and the United States. If that’s the case and the amount of work done in Puerto Rico does not reach a certain threshold, then the U.S.-sourced dividends will be subject to U.S. federal taxes.
What Ownership of a Puerto Rico Export-Service Company Means
Puerto Rico seeks to move away from its historical focus on manufacturing and become a major services exporter. Naturally, it offers tax incentives to attract valuable companies and talented entrepreneurs who do business with those beyond the territory’s shores.
Advertising, consulting, educational, financing, and medical services are just a few among nearly two dozen categories of export services that are eligible for these benefits.
If your export-service company is conducting its activities inside Puerto Rico, it may be eligible for substantial benefits that apply to income received from customers outside of Puerto Rico. One of these is the low 4% corporate tax rate we touched on earlier. Of course, this is far lower than the 21% corporate tax rate, plus state taxes, that your business would be likely to pay on the mainland.
Keep in mind that as the owner of an export-service company, you must pay yourself a “reasonable salary” based on the services you provide. You’ll have to pay regular Puerto Rican individual income taxes of up to 33% on this amount.
Let’s clarify what we mean when we say these tax breaks apply only to exported services. These services must not have a connection with Puerto Rico. If your company provides services connected to commercial activities on the island or gives advice regarding the laws and regulations of Puerto Rico, it is not providing export services, because there is a connection. This is an important point because if your company does business with other entities that are based on the island, you’ll risk losing your tax exemption.
You Have Little to Lose but Your Taxes
As you can see, Puerto Rico’s enormous Act 60 tax benefits greatly exceed the relatively small costs and inconveniences of relocation. We’ve covered the main ones, but take a look at all of these additional tax incentives that may also apply, depending on the nature of your business.
It’s no surprise that thousands of Americans who have moved to the island have been thrilled with the tax breaks that have saved them millions of dollars. They’ve been delighted to experience the rich culture, delicious food, and wonderful tropical sightseeing opportunities found in Puerto Rico. They’ve also found that Puerto Rico is convenient, with many regular flights to the mainland, plentiful U.S. retailers, and a U.S.-based legal system.
If you wish, you can follow in their footsteps and escape some of the worst ravages of 2022’s surging inflation and anemic economic growth by moving to this low-tax haven.
You’ll want to keep meticulous records to ensure you don’t jeopardize your eligibility for these generous Act 60 tax benefits. These will be especially important to present if the IRS or Puerto Rico Department of Treasury (Hacienda) challenges your bona fide resident claims. Consulting with a tax advisor would be a good idea as well.
Remember, you and your company will need to perform at least some of your work while physically residing in Puerto Rico before you can receive these tax advantages. You can follow one of two paths to make this happen: a total relocation of your business or partial relocation of it to Puerto Rico.
Under the latter approach, you’d set up a new entity on the island that charges a “management fee” to the rest of your mainland-based business. To avoid penalties, this would require a transfer pricing analysis and intercompany agreements to determine the share of profits realized in Puerto Rico vs. on the mainland, as laid out in this guide.
Let’s Review Key Points and Discuss Next Steps
To recap, under Puerto Rico’s Act 60 tax incentives, you and your business may be eligible for staggering tax savings if you adhere to the requirements. You’d be hard-pressed to find a better value home than a U.S. territory that offers a 4% corporate income tax and 0% capital gains tax, among many other benefits.
Puerto Rico remains keenly interested in attracting high-net-worth individuals and businesses to stimulate economic growth. Just be sure to comply with the presence test, the tax home test, the closer connection test, and the residence test if this is the right move for you.
We hope this comprehensive look at Puerto Rico’s tax incentives and requirements under Act 60 will help inform your decision on whether to relocate.
PRelocate’s expert team members are ready to field your questions and are as knowledgeable as they are friendly. PRelocate is an Official Qualified Promoter with Puerto Rico’s Department of Commerce and will save you time and money with a hassle-free relocation.
Contact us today to ask about starting the next exciting chapter of your life on this stunning Caribbean island.
Disclaimer: Neither PRelocate, LLC, nor any of its affiliates (together “PRelocate”) are law firms, and this is not legal advice. You should use common sense and rely on your own legal counsel for a formal legal opinion on Puerto Rico’s tax incentives, maintaining bona fide residence in Puerto Rico, and any other issues related to taxes or residency in Puerto Rico. PRelocate does not assume any responsibility for the contents of, or the consequences of using, any version of any real estate or other document templates or any spreadsheets found on our website (together, the “Materials”). Before using any Materials, you should consult with legal counsel licensed to practice in the relevant jurisdiction.