Financial Planning in Puerto Rico: Act 60, 0–4% Income Tax for US Persons and the US Territory Advantage

Puerto Rico occupies a unique position in the international tax planning landscape that has no true equivalent anywhere in the world: it is a US territory — meaning residents can be US citizens with full passport rights, travel freely to the US mainland, and reside under US constitutional protections — yet Puerto Rico operates its own separate tax system under the US Internal Revenue Code, with provisions that allow qualifying residents to dramatically reduce their US federal income tax obligations on certain income.

This is not an offshore structure, a tax haven, or a citizenship renunciation scheme. It is a deliberate US Congressional feature of Puerto Rico's territorial status, and it has attracted significant attention (and scrutiny) since the Puerto Rico Incentives Code — now codified as Act 60 of 2019 — consolidated and extended earlier incentive legislation (Acts 20 and 22).

The Fundamental Tax Advantage: How It Works

US Federal Income Tax and Puerto Rico Residents

US citizens and green card holders are normally taxed on worldwide income regardless of where they live. Moving to Monaco, the UAE, or the Cayman Islands does not reduce US federal tax — the US is one of only two countries in the world (with Eritrea) that taxes based on citizenship rather than residence.

However, Puerto Rico is the exception. Under Section 933 of the Internal Revenue Code, a US citizen who is a bona fide resident of Puerto Rico for the entire tax year excludes from US federal income tax income derived from Puerto Rican sources. This exclusion is a function of Puerto Rico's unique constitutional status — it is not a foreign country, so the foreign earned income exclusion and foreign tax credit mechanisms do not apply, but the territorial exclusion under IRC §933 achieves a comparable result for Puerto Rico-source income.

Act 60 — Individual Investors (Chapter 2, formerly Act 22)

Under Act 60's Chapter 2 provisions for individual investors:

• A qualifying bona fide Puerto Rico resident who was not a Puerto Rico resident during a defined look-back period before applying (the regime is designed to attract genuine new arrivals rather than existing residents; the precise look-back period has changed over time and should be confirmed for the year of application) can apply for a decree.
• Under the decree, 100% of qualifying capital gains realised after becoming a Puerto Rico resident are taxed at 0% Puerto Rico income tax and 0% US federal income tax (since they are Puerto Rico-source gains excluded under §933).
• Dividend and interest income from qualifying investments are taxed at dividend and interest income rates of 0% under Puerto Rico law, and excluded from US federal tax.
• Pre-move appreciation: gains on assets held before establishing Puerto Rico residence are taxed at preferential Puerto Rico capital gains rates (currently 5%) if realised after a minimum 10-year holding period; short-term gains on pre-move assets retain higher rates.

Act 60 — Export Services (Chapter 3, formerly Act 20)

For businesses providing qualifying export services:

• A Puerto Rico entity providing eligible export services (financial services, consulting, technology, research, advertising, and many professional services) can apply for a decree providing:
  • 4% Puerto Rico corporate income tax on qualifying export services income.
  • 0% withholding tax on dividends paid from the Puerto Rico entity to qualifying residents.

When combined with Act 60's individual provisions, a business owner living in Puerto Rico, operating through a Puerto Rico entity providing export services, can achieve an effective tax rate on business income of approximately 4% with no US federal income tax — while remaining a US citizen.

Requirements for Bona Fide Residency

The IRS scrutinises Puerto Rico residency claims very carefully. Bona fide residence in Puerto Rico is a factual, substance-based determination. Under IRS Revenue Procedure 2021-10 and related guidance, the key tests are:

Presence Test

• At least 183 days per year physically present in Puerto Rico.
• No more than 90 days in the United States (mainland) per year.
• No "closer connection" to the United States than to Puerto Rico.

Tax Home Test

• The individual's tax home must be in Puerto Rico — meaning the principal place of business or employment is in Puerto Rico.

Closer Connection Test

• Objective factors: where you maintain a home, where your family lives, where you drive, where your bank accounts are, where your social and recreational activities occur, where your church and clubs are located, where your doctor is, where your vehicle is registered.

The IRS actively challenges inadequate Puerto Rico residency claims. Several high-profile cases have resulted in US persons being found to have failed the bona fide residency tests, losing the §933 exclusion and owing back taxes, interest, and penalties. The most common failure modes are:

• Spending too many days on the US mainland.
• Maintaining primary home and family in the US.
• Business activities and management decisions occurring primarily in the US.
• Paperwork residence without genuine lifestyle relocation.

This is a legitimate programme, but it requires a genuine, documented lifestyle move to Puerto Rico. It is not a paper exercise.

Act 60 Compliance Requirements

Under Act 60 as amended, individual investors (Chapter 2) must:

• Purchase and maintain a residential property in Puerto Rico within two years of obtaining the decree (cannot merely rent indefinitely in some cases; property ownership demonstrates commitment).
• Make annual charitable donations of at least USD 10,000 to Puerto Rico-based charities.
• Pay an annual report fee to the Puerto Rico Industrial Development Company (PRIDCO) of USD 5,000.
• File annual compliance reports demonstrating continued eligibility.

For export services businesses (Chapter 3), there are employment and job creation requirements — a minimum number of Puerto Rico-based employees must be maintained.

The Property Market and Cost of Living

Puerto Rico's property market offers significant value compared to US mainland cities:

• San Juan (Condado, Old San Juan, Miramar): the financial, cultural, and social centre; a mix of luxury condominiums, renovated colonial buildings, and waterfront properties.
• Dorado Beach: the pre-eminent luxury enclave, with the Dorado Beach Ritz-Carlton Reserve and high-end villa developments. Prices range from USD 1.5 million to USD 15 million+ for qualifying properties.
• Palmas del Mar (east coast): established resort community with golf and marina.

Overall cost of living is lower than most major US mainland cities. Property prices outside the luxury enclaves are accessible, and professional services, dining, and lifestyle costs are below New York, Miami, or San Francisco levels.

Infrastructure and Quality of Life

Puerto Rico's infrastructure has been significantly challenged:

• Hurricane Maria (2017): devastated the island's power grid and caused widespread damage. Recovery has been ongoing but prolonged — power reliability remains a known issue; many HNW residents and businesses have invested in solar and battery backup.
• Earthquakes (2020): significant seismic events affected the south of the island.
• Public services: government services can be slower and less reliable than US mainland standards.
• Healthcare: good quality hospitals and medical facilities, particularly in San Juan. The US healthcare system applies.

The social and cultural environment of Puerto Rico is vibrant — warm Caribbean climate, Spanish-speaking culture (bilingual English/Spanish in business and HNW communities), world-class cuisine, music, and outdoor lifestyle. A substantial Act 60 community has formed in San Juan and Dorado, with its own social infrastructure of events, networking, and professional support.

Act 60 for Non-US Persons

Non-US citizens and non-green card holders do not benefit from Act 60 in the same way — the §933 exclusion applies to US persons only. For non-US persons, Puerto Rico is simply a US territory subject to standard US immigration rules. Act 60's value is specifically for US citizens and green card holders who wish to reduce US tax obligations without giving up US citizenship.

Key Compliance Points

• Genuine residency is non-negotiable: 183+ days, primary home, lifestyle ties — documented and provable.
• IRS scrutiny: Act 60 is on the IRS's radar; inadequate claims are challenged.
• Pre-move planning: the timing of asset disposals relative to establishing Puerto Rico residence is critical — gains on pre-move assets are treated differently from post-move gains.
• State income tax: Puerto Rico acts as the state for this purpose — there is no US state income tax for Puerto Rico residents.
• Social Security and Medicare: federal payroll taxes continue to apply to Puerto Rico employment income.
• Estate tax: US estate tax applies to US citizens regardless of Puerto Rico residence — this is not a solution to US estate tax exposure.

This guide reflects the position as understood in mid-2026. Act 60's requirements, the IRS's audit posture, and related tax law change. This is one of the most complex areas of US tax planning. Engage qualified US tax counsel with specific Act 60 expertise before taking any steps.

How Global Investments Can Help

Global Investments advises HNW clients — including US citizens, green card holders, and internationally mobile individuals with US business interests — on cross-border wealth planning, US tax strategy, and multi-jurisdictional structuring. For US persons considering Puerto Rico under Act 60, we can coordinate advice from specialist US tax counsel, Puerto Rico legal professionals, and property advisers to provide a complete, compliant approach to relocation and income optimisation.

Contact our team for a confidential consultation.