Understanding the Bona Fide Residency Requirement for Act 60 Tax Incentives
- Posted: March 16, 2021
- Posted by: Travis Lynk
- Last Reviewed: April 16, 2021
If saving big on income taxes while soaking up the sun on a U.S.-owned Caribbean island sounds like a dream life to you, relocating to Puerto Rico under the Act 60 tax exemptions may be right for you. Thousands of Americans have already made the move to Puerto Rico, enjoying a 0% income tax rate on capital gains or a 4% corporate tax rate for their business while indulging in the excitement of Puerto Rican culture and cuisine. But to those considering taking advantage of Puerto Rico’s generous tax exemptions without committing to a life on the island, be warned: Integrating into Puerto Rican life isn’t just a bonus. It’s a requirement.
Puerto Rico offers a myriad of tax incentives, but they all entail the same goal for the government: boosting Puerto Rico’s economy by attracting to the island high-net-worth individuals who will invest in the infrastructure. Thus, to reap the benefits of the ever-popular Act 60 Export Services and Individual Resident Investor tax exemptions, you must hold up your end of the bargain and settle into a life in Puerto Rico. Bona fide residency is the benchmark to determine commitment to the island, and it is measured by three tests: the presence test, the tax home test, and the closer connection test. All three are easy to satisfy if you truly commit to a new life in Puerto Rico.
The Presence Test
The presence test considers how much time you spend in Puerto Rico. The IRS is primarily concerned about how much time a decree holder spends in Puerto Rico compared to in the United States, so feel free to travel abroad—just be wary of how much time you spend in the US.
The IRS offers five different conditions a decree holder can use to fulfill the presence requirement for bona fide residency. You don’t need to satisfy them all—satisfying just a single one is sufficient. Two revolve around the number of days a decree holder is present in Puerto Rico throughout the tax year:
- Spending at least 183 days in Puerto Rico throughout the tax year
- Spending at least 549 days in Puerto Rico throughout the current and previous two tax years, including at least 60 days per tax year
The remaining three concentrate not on a decree holder’s connections to Puerto Rico but rather their lack of connections to the United States:
- Spending no more than 90 days in the US throughout the tax year
- Earning no more than $3,000 in the US and spending more days in Puerto Rico than in the US throughout the tax year
- Having no significant connections to the US throughout the tax year
Making the presence test a little easier is the fact that a “presence day” in Puerto Rico counts any day in which you are physically present in Puerto Rico, even if just briefly. Even if you’re only in Puerto Rico for an hour on a certain day, that counts as being present in Puerto Rico.
Another bonus is the 30 free international travel days decree holders are eligible for if they spend more time in Puerto Rico than the US. These free travel days encompass travel outside of the United States but effectively mean that a degree holder need only spend 153 days in Puerto Rico, as long as the extra 30 days are spent outside of the US. Note, however, that if you’re going for the “549 days in a three-year period” condition, you must still physically spend at least 60 days in Puerto Rico each year.
Finally, exceptions are available for special circumstances, such as medical treatment or disasters. The COVID-19 pandemic, for example, qualifies as “special circumstances” that can grant an Act 60 decree holder free presence days under certain conditions.
The Tax Home Test
The tax home test is far more straightforward than the presence test and only encompasses a single condition: maintain your tax home in Puerto Rico throughout the entire tax year. Your tax home is the jurisdiction in which your primary place of employment is located. Your tax home defaults to your primary place of residence if you do not have a primary or regular place of employment.
Basically, to satisfy the tax home test, keep your office—or your home, as the case may be—in Puerto Rico.
The Closer Connection Test
The closer connection test can be tricky for some Act 60 decree holders to satisfy because it’s subjective and offers no hard guidelines on fulfillment. The closer connection test simply seeks to determine whether an Act 60 decree holder maintains closer connections to Puerto Rico or the United States and uses a number of factors to determine one’s national ties, such as the following:
- Where they live
- Where they spouse and children, if any, live
- Where they keep important personal belongings, such as their car or furniture
- What jurisdiction their primary bank is in
- Where they primarily conduct business
- What jurisdiction their driver’s license is issued by
- Where they are registered to vote
- Where the organizations they affiliate with are located
Naturally, some of these factors are more important than others—the IRS will especially consider where a decree holder’s spouse and children live. Selling or renting out your home in the US is also a good idea, as not having a home readily available in the US will certainly boost your standing in the assessment of a closer connection.
Ultimately, you can satisfy the closer connection test however works best for you and your circumstances, but fully committing to a new life in Puerto Rico is the simplest solution. Many of the factors that help you pass the closer connection test, such as a Puerto Rican driver’s license or voter registration, will also help you get by in day-to-day life in Puerto Rico.
The “Year of the Move” Exception
Given that one of the requirements for bona fide Puerto Rican residency is to maintain a tax home in Puerto Rico for the entire tax year, satisfying this test in the year of your move is clearly impossible unless you move on January 1. That’s why IRS has introduced a special exception for your first year in Puerto Rico, contingent on three conditions:
- Maintaining a tax home in Puerto Rico for the last 183 days of the year
- Not having been a bona fide resident of Puerto Rico in the three tax years before the year of the move
- Achieving bona fide residency in the year of the move and the two years following it
This means that as long as you move to Puerto Rico before July 1, you can become a bona fide Puerto Rican resident in your first year on the island and reap the benefits of your Act 60 decree immediately.
Don’t Pass Up a Lucrative Life in Puerto Rico
Puerto Rico’s bona fide residency tests may seem intimidating, but if you’re dedicated to starting fresh in the US’s sunny Caribbean island territory, the tests are simple. With beautiful, sunny weather, a vibrant Hispanic culture, and generally lower prices than in the mainland, Puerto Rico offers more than just tax savings. And since its generous tax incentives are only available to bona fide residents, enjoying the wonders of a Puerto Rican life is imperative. In more ways than one, starting a new life in Puerto Rico can be the best investment you ever make.
Disclaimer: PRelocate, LLC is not a law firm, 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 tax incentives, maintaining bona fide residence in Puerto Rico, and any other Puerto Rico tax or residency related issues.