What Is Puerto Rico Act 60?
Formerly Acts 20 and 22, Act 60, the Incentives Code of Puerto Rico, was designed to attract investors, service businesses, and high-net-worth individuals. Key benefits include:
- 100% tax exemption on dividends, interest, and capital gains from Puerto Rico-source investments (for certain resident individuals).
- Reduced income tax rates for eligible service-based businesses.
- A full exemption for passive income, subject to eligibility and application requirements.
Interaction with U.S. Federal Tax for U.S. Citizens or Green Card Holders
Even as Act 60 provides local tax relief, U.S. citizens or permanent residents must still obey federal rules:
- Bona fide residence tests under IRC § 937 matter: only certain Puerto Rico-source income may be excluded from the U.S. federal return.(irs.gov)
- Passive U.S.-source income (e.g. dividends from U.S. stocks) remains subject to U.S. federal tax.
- Filing requirements: must file both Puerto Rico return (worldwide income if bona fide resident) and U.S. Form 1040 (excluding PR-source income if eligible).
- Must file Form 8898 if becoming bona fide resident and worldwide income exceeds US$75,000.(irs.gov)
How to Become Eligible Under Act 60
- Move to Puerto Rico and satisfy bona fide residence (183 days, tax home, closer connection).
- Apply for residential decree with Puerto Rico authorities under Act 60.
- Maintain physical presence — often at least 183 days a year.
- Ensure business or investment income qualifies under rules (some sectors excluded).
Example: Remote Worker & Capital Gains
Luis, a remote software engineer and U.S. citizen, moves to Ponce, Puerto Rico, in 2025. He applies and gets approved under Act 60.
- He earns US$100,000 from U.S. clients (service income) and US$30,000 from capital gains on Puerto Rico-source real estate investments.
- Under Act 60:
- Puerto Rico taxes service-income under reduced rates; Puerto Rico-source capital gains may be exempt.
- U.S. federal return excludes the Puerto Rico-source capital gains and some interest/dividends from PR investments if bona fide resident.
- His U.S. client income (U.S. source) still taxed federally, though he may have PR credit for U.S. taxes paid.
Pitfalls & Monitoring
- IRS scrutiny: ensure eligibility, declarations, and documentation robust.
- Temporary residence: spending too many days outside PR may break bona fide status.
- Business source of income: ensure business is structured to provide “services from Puerto Rico” rather than merely delivered there.
- Stay updated: tax relief deadlines effect, e.g. disaster relief for territories that might affect Puerto Rico or nearby islands.
Final Notes
Act 60 offers foundational tax incentives, but U.S. federal jurisdiction remains impactful. Strategic planning, clear documentation, and strong structure ensure you benefit fully while staying compliant.