What is Puerto Rico Act 60 and what are its main benefits for individuals?

Puerto Rico Act 60, also known as the Puerto Rico Incentives Code, is a set of tax laws designed to attract individuals and businesses to relocate to the island. For qualifying individuals, it offers significant tax exemptions, potentially reducing their effective tax rate to 0% on certain passive income like interest, dividends, and capital gains. This is particularly attractive to U.S. citizens because, as a U.S. territory, Puerto Rico-sourced income is generally exempt from U.S. federal income taxes, and individuals can retain benefits like Medicare and Social Security [3].

What are the key residency requirements to qualify for Act 60 in 2026?

To qualify for Act 60 in 2026, individuals must meet both IRS bona fide residency tests and Puerto Rico-specific obligations. The IRS tests include the Physical Presence Test (typically 183+ days in Puerto Rico per year), the Tax Home Test (primary place of business and economic activity in Puerto Rico), and the Closer Connection Test (demonstrating stronger personal and economic ties to Puerto Rico). Puerto Rico-specific obligations include maintaining a primary residence on the island and making annual charitable contributions [4] [5].

What are the changes to Act 60 tax rates for 2026 and beyond?

The year 2026 marks a significant transition. To retain the 0% tax rate on dividends, interest, and post-residency capital gains, individuals must submit their Act 60 Individual Resident Investor application by December 31, 2026. Applications filed on or after January 1, 2027, will be subject to a 4% tax rate on these types of income. Individuals with valid decrees issued before January 1, 2026, are grandfathered under the old 0% exempt rules [1] [2].

What is the annual charitable contribution requirement for Act 60 participants in 2026?

For 2026, the annual charitable contribution requirement for Act 60 participants has increased to $15,000. This donation must be made to qualifying Puerto Rico-based nonprofit organizations, and proof of donation is required as part of ongoing compliance [2] [5].

What are some common mistakes that can lead to the loss of Act 60 benefits?

Common mistakes include failing the Physical Presence Test (spending less than 183 days in Puerto Rico), maintaining stronger ties to the U.S. mainland, failing the Tax Home Test, weak documentation of relocation, missing annual donation requirements, and treating Puerto Rico as a part-time tax strategy. The IRS and Puerto Rico authorities expect genuine, full-time relocation and commitment [2] [5].

Is there a specific IRS code section related to Puerto Rico tax exemptions?

Yes, the primary U.S. tax code section relevant to the exclusion of Puerto Rico-sourced income for bona fide residents is Internal Revenue Code Section 933. This section generally allows bona fide residents of Puerto Rico to exclude income from sources within Puerto Rico from their gross income for U.S. federal income tax purposes. The determination of bona fide residency is further guided by Treasury Regulation Section 1.933-1(c) [3].

What is the application process for obtaining an Act 60 tax decree?

The application process involves several steps: submitting an online application, paying government filing fees, providing background information, completing compliance documentation, awaiting decree approval, and finally, relocating to Puerto Rico and continuously maintaining bona fide residency. It is highly recommended to seek guidance from experienced tax advisors throughout this process [5].

Puerto Rico Act 60 Tax Incentives — 2026 Guide

Overview: Puerto Rico Act 60 Tax Incentives for 2026

Puerto Rico's Act 60, officially known as the Puerto Rico Incentives Code, is a comprehensive set of tax laws designed to attract individuals and businesses to relocate to the island. By offering significant tax exemptions, Act 60 aims to stimulate economic development and investment within the U.S. territory. For qualifying individuals, this incentive can substantially reduce their effective tax rate, potentially to as low as 0% on certain types of income, making it a highly attractive proposition for high-net-worth individuals and entrepreneurs seeking tax advantages [3].

What is Puerto Rico Act 60?

Act 60-2019 consolidates various prior incentive laws, including the well-known Act 20 (Export Services Act) and Act 22 (Individual Resident Investor Act), into a single, unified code. The core principle of Act 60 is to provide a contractual agreement between the Government of Puerto Rico and eligible individuals or businesses, guaranteeing specific tax benefits for a defined period. For individual investors, the primary draw is the exemption from Puerto Rico income taxes on passive income, such as interest, dividends, and certain capital gains [3].

It is crucial to understand that while Puerto Rico is a U.S. territory, its residents are generally exempt from U.S. federal income taxes on Puerto Rico-sourced income. This unique status, combined with Act 60's local tax exemptions, creates a powerful incentive for U.S. citizens to establish bona fide residency on the island [3].

Who Qualifies for Act 60 Individual Resident Investor Incentives?

To qualify for the Act 60 Individual Resident Investor incentive, applicants must satisfy stringent requirements from both the U.S. Internal Revenue Service (IRS) and the Puerto Rico government. Failure to meet any of these criteria can jeopardize the tax benefits [4] [5].

IRS Bona Fide Residency Tests:

The IRS mandates three primary tests to determine bona fide residency in Puerto Rico [3] [4] [5]:

Physical Presence Test: The most common way to satisfy this is by spending at least 183 days in Puerto Rico during the tax year. While alternative day-count formulas exist, the 183-day rule is the most straightforward for investors [4] [5].
Tax Home Test: Your primary place of business and economic activity must be established in Puerto Rico. This means your main office or income-producing activities should be based on the island, and you should not maintain a primary tax home in the mainland U.S. [4] [5].
Closer Connection Test: You must demonstrate stronger personal and economic ties to Puerto Rico than to any other location. This includes factors such as maintaining a primary residence, obtaining a Puerto Rico driver's license, registering to vote locally, having local bank accounts, relocating family, and participating in community activities [4] [5].

Puerto Rico-Specific Obligations:

In addition to IRS requirements, the Puerto Rico government imposes specific obligations for Act 60 decree holders [4] [5]:

Primary Residence: You must maintain a primary residence in Puerto Rico. For applicants after January 1, 2027, evidence of property ownership must prove that the title to the principal residence is either registered or pending registration in the Puerto Rico Property Registry in the name of the investor, investor and spouse jointly, or a trust as described in Section 2022.07 [1].
Charitable Contributions: Act 60 participants are required to make annual charitable contributions. For 2026, this annual amount has increased to $15,000 (up from $10,000 previously) to qualifying Puerto Rico-based nonprofit organizations [2] [5].
Annual Compliance Reports: Filing annual compliance reports and paying associated fees are mandatory [4] [5]. The 2026 compliance portal will require enhanced annual reporting, including certified CPA letters, proof of residency documentation, and a breakdown of income sources and Act 60-eligible activities. Crypto traders must also declare wallet addresses, transaction histories, and asset holdings [2].

How to Claim Act 60 Benefits (Application Process)

Obtaining an Act 60 tax decree from the Puerto Rico government is a multi-step process [5]:

Submit Online Application: The initial step involves submitting an application through the designated online portal.
Pay Government Filing Fees: Associated government filing fees must be paid as part of the application process.
Provide Background Information: Applicants will need to furnish detailed background information.
Complete Compliance Documentation: Comprehensive documentation demonstrating compliance with all eligibility criteria is required.
Await Decree Approval: After submission, the application undergoes review, and applicants must await approval of their tax decree.
Relocate and Maintain Residency: Upon approval, the individual must physically relocate to Puerto Rico and continuously maintain bona fide residency as per the requirements.

It is highly recommended to work with experienced tax advisors in both the U.S. and Puerto Rico to navigate this complex application process effectively [2].

2026 Limits, Amounts, and Rates

The year 2026 marks a significant transition for Act 60 Individual Resident Investor incentives due to proposed legislative changes (House Bill 505) [1] [2].

0% Tax Rate Deadline: To retain the current 0% tax rate on dividends, interest, and post-residency capital gains, individuals must submit their Act 60 Individual Resident Investor application by December 31, 2026 [1].
4% Tax Rate for New Applicants: Applications filed on or after January 1, 2027, will be subject to a 4% tax rate on dividends, interest, and capital gains. While still preferential, this is less favorable than the previous 0% regime [1] [2].
Grandfathering: Resident Individuals with a valid decree issued before January 1, 2026, are grandfathered in under the old exempt rules, meaning their 0% tax rate remains intact [2].
Charitable Contribution: The annual charitable contribution requirement for 2026 has increased to $15,000 [2] [5].
Property Ownership: For applicants after January 1, 2027, stricter property ownership requirements apply, mandating registration of the principal residence title in the Puerto Rico Property Registry [1]. The general requirement to purchase a primary residence in Puerto Rico within two years of receiving the decree remains [2] [4].
Program Extension: The Individual Resident Investor program is expected to be extended through 2055, offering a longer period of benefits for new applicants [1] [2].

Common Mistakes That Cost Taxpayers Money

Despite the attractive benefits, many taxpayers make critical errors that can lead to the revocation of their Act 60 decree or significant IRS scrutiny [2] [5]:

Failing the Physical Presence Test: Spending fewer than 183 days in Puerto Rico is a common and easily verifiable mistake that can disqualify an individual [5].
Maintaining Stronger Ties to the Mainland U.S.: If the IRS determines that an individual has a closer connection to the U.S. mainland than to Puerto Rico, the bona fide residency status can be challenged [2] [5].
Failing the Tax Home Test: Not genuinely establishing one's primary place of business and economic activity in Puerto Rico can lead to disqualification [5].
Weak Documentation of Relocation: Inadequate records to prove physical presence, tax home, and closer connection can be detrimental during audits [5].
Missing Annual Donation Requirements: Failure to make the required annual charitable contributions to qualifying Puerto Rico non-profits can result in non-compliance [5].
Treating Puerto Rico as a Part-Time Tax Strategy: Both the IRS and Puerto Rico authorities expect a genuine, full-time relocation and commitment to the island, not merely a tax avoidance scheme [2] [5].
Discrepancies in Filings: Inconsistencies between Puerto Rico and federal tax filings, including Form 8898, are easily discoverable by the IRS and can trigger examinations [2].
Ignoring IRS Scrutiny: The IRS has an ongoing enforcement campaign targeting non-resident citizens claiming Act 60 exemptions without meeting residency and income-sourcing requirements. Taxpayers receiving communications from the IRS regarding residency or travel history should seek immediate legal counsel [2].

IRS Code Section Reference

The primary U.S. tax code section relevant to the exclusion of Puerto Rico-sourced income for bona fide residents of Puerto Rico is Internal Revenue Code Section 933. This section generally provides that income from sources within Puerto Rico (other than amounts received for services performed as an employee of the United States or any agency thereof) by an individual who is a bona fide resident of Puerto Rico during the entire taxable year is excluded from gross income and exempt from U.S. federal income tax [3].

Additionally, the determination of bona fide residency is guided by U.S. Treasury Regulations, specifically Treasury Regulation Section 1.933-1(c), which outlines the physical presence, tax home, and closer connection tests [3].

Ready to Optimize Your Tax Strategy?

Navigating the complexities of Puerto Rico Act 60 requires expert guidance to ensure compliance and maximize benefits. Whether you are considering relocation or need assistance with ongoing compliance, our team of experienced tax strategists and CPAs can provide tailored advice. Don't leave your financial future to chance.

Book a consultation today to discuss how Act 60 can benefit you: https://unclekam.com/consultation/

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