US to Puerto Rico: Act 60 Tax Incentives for Mainland Americans

Puerto Rico occupies a unique position in international tax planning: it is a US territory, meaning mainland Americans can relocate without renouncing citizenship, yet it operates its own tax system with dramatically lower rates. Act 60 (the Puerto Rico Incentives Code) offers 4% corporate tax and 0% capital gains on qualifying income — benefits that would be impossible in any US state.

Act 60: The Key Incentives

Individual Investor Act (Chapter 60, Subchapter E)

Formerly Act 22, this provides qualifying individual investors with:

• 0% tax on capital gains accrued after becoming a bona fide Puerto Rico resident
• 0% tax on dividends and interest from Puerto Rico sources
• Gains accrued before relocating remain subject to US federal tax (a 10-year lookback applies for gains on assets held before the move)

Export Services Act (Chapter 60, Subchapter D)

Formerly Act 20, this provides qualifying export services businesses with:

• 4% flat corporate tax rate on qualifying export service income
• 0% tax on dividends distributed from the Act 60 company to the individual (who must also be an Act 60 individual investor)
• 75% exemption on municipal taxes

Combined Effect

A mainland American who relocates to Puerto Rico and establishes a qualifying export services business can achieve:

• 4% corporate tax on business income (vs 21% federal + state on the mainland)
• 0% tax on capital gains earned after relocation
• 0% tax on dividends from the Act 60 company
• Effective combined rate of approximately 4% on business income, vs 30-50% on the mainland

The Bona Fide Residence Test

The IRS applies a strict three-part test to determine whether you are a bona fide resident of Puerto Rico:

1. Physical Presence Test

You must be present in Puerto Rico for at least 183 days during the tax year. Additionally:

• The US mainland cannot be your "tax home" (the general area of your regular place of business)
• You cannot have a "closer connection" to the US mainland or any other country

2. Tax Home Test

Your tax home — the general area of your principal place of business — must be in Puerto Rico. This means your primary business operations must be conducted from Puerto Rico.

3. Closer Connection Test

You must not have a closer connection to the US mainland or any foreign country. The IRS evaluates multiple factors:

• Where is your permanent home?
• Where is your family?
• Where are your personal belongings?
• Where are your social, political, cultural, and religious organisations?
• Where do you vote?
• Where is your driver's licence issued?
• Where do you bank?
• Where is your church, club, or community involvement?

Maintaining a home, family ties, and social connections on the mainland can disqualify your Puerto Rico residency claim.

What Qualifies as Export Services

The 4% corporate tax rate applies to businesses that provide services to clients outside Puerto Rico. Qualifying services include:

• Consulting and advisory services
• Software development
• Creative services (design, marketing, content)
• Financial services (trading, fund management)
• Research and development
• Data processing and IT services
• Engineering and architecture services
• Educational services (online courses, training)

The key requirement: the services must be provided to clients located outside Puerto Rico. Revenue from Puerto Rico-based clients does not qualify.

The 10-Year Lookback Rule

Capital gains accrued before relocating to Puerto Rico remain subject to US federal tax:

• For securities: Gains on assets held before becoming a bona fide PR resident are subject to US tax when sold, based on the appreciation that occurred while you were a mainland resident
• For assets held for 10+ years before relocation and sold after 10+ years of PR residency, the gain is allocated proportionally
• For assets acquired after becoming a bona fide PR resident, 0% PR capital gains tax applies

Practical implication: The capital gains benefit is most valuable for:

• New investments made after relocation
• Crypto purchased after establishing PR residency
• Business equity created in Puerto Rico
• Investors willing to hold pre-move assets for 10+ years after relocation

Costs and Requirements

Act 60 Application

• Application fee: USD 750 (individual investor), USD 750 (export services)
• Annual reporting fee: USD 300-5,000
• Annual charitable donation: USD 10,000 to an approved Puerto Rico nonprofit
• Property purchase: Must purchase Puerto Rico real estate within 2 years of the decree grant (no minimum value specified, but must be a primary residence)

Cost of Living

Puerto Rico's cost of living is moderate:

• Housing (San Juan, 2-bed): USD 1,500-3,000/month rental; USD 300,000-800,000 purchase
• Dorado Beach / Condado area: USD 3,000-8,000/month rental (popular with Act 60 relocators)
• Utilities: Higher than mainland US (electricity is expensive at USD 0.25-0.35/kWh)
• Groceries: 15-25% more expensive than mainland US (import costs)
• Healthcare: Available through US health insurance plans; mainland provider networks may be limited

Total First-Year Cost

Component	Cost
Act 60 applications	USD 1,500
Legal and advisory fees	USD 10,000-25,000
Charitable donation	USD 10,000
Property purchase/deposit	USD 50,000+
Relocation costs	USD 10,000-30,000
Total	USD 81,500-116,500

Compliance Requirements

Annual Reporting

Act 60 decree holders must:

• File Puerto Rico income tax returns (Form 482)
• File an annual report with the Office of Incentives (DDEC)
• Make the USD 10,000 annual charitable donation
• Maintain bona fide residence in Puerto Rico
• Maintain their Act 60 company's registered office in Puerto Rico

IRS Filing

Puerto Rico residents still file US federal returns (Form 1040) but:

• Puerto Rico-source income is excluded from US federal tax (Section 933)
• Foreign financial account reporting (FBAR) is not required for Puerto Rico accounts
• Act 60 benefits must be claimed on the federal return

Common Mistakes

Insufficient Presence

The IRS audits Act 60 residents aggressively. Common failures:

• Spending too many days on the mainland
• Maintaining a mainland home that suggests closer connection
• Children attending mainland schools
• Spouse remaining on the mainland

Pre-Move Gains

Selling appreciated assets shortly before or shortly after relocating does not convert mainland gains to Puerto Rico gains. The IRS applies the lookback rules strictly.

Business Substance

The export services company must have genuine operations in Puerto Rico:

• Physical office space
• Puerto Rico-based employees (or the owner actively working from Puerto Rico)
• Client contracts executed from Puerto Rico
• Board meetings held in Puerto Rico

A shell company with no Puerto Rico substance will not qualify for the 4% rate.

Key Takeaways

• Act 60 offers US citizens a legal path to 4% corporate tax and 0% capital gains without renouncing citizenship — the only such opportunity in US jurisdiction
• The bona fide residence test is strict: 183+ days in Puerto Rico, tax home in PR, no closer connection to the mainland
• Capital gains benefits apply only to gains accrued after establishing bona fide PR residency — pre-move appreciation remains subject to US federal tax
• Export services must be provided to clients outside Puerto Rico to qualify for the 4% rate
• Annual charitable donation of USD 10,000 and property purchase are ongoing requirements
• The IRS actively audits Act 60 claims — maintaining genuine substance and physical presence is non-negotiable
• Puerto Rico is most valuable for service-based entrepreneurs, traders, and crypto investors who generate new gains after relocation
• For investors with large pre-move unrealised gains, the 10-year lookback reduces the immediate tax benefit