Puerto Rico’s Act 60 is one of the world’s most generous tax incentive regimes. But before you start visualizing huge savings, the real question is: Do you qualify?
Whether you’re an entrepreneur with exportable services or a high-income investor seeking capital gains relief, knowing the eligibility criteria is essential. In this article I walk through how Act 60 works, who can qualify, how the tests are applied practically, and where common misunderstandings lie—all based on current law and administrative practice as of October 2025.
Act 60 (the Puerto Rico Incentives Code) consolidates prior incentives (notably Acts 20 and 22) into a unified framework offering steep tax benefits to eligible businesses and individual investors. But eligibility is not automatic, you must satisfy both residency tests and activity/source tests (for business or investment). This post breaks down exactly who can qualify—and how.
Who Can Qualify?
Below is a working checklist. Each bullet is necessary (though not always sufficient) for Act 60 benefits.
Eligibility Checklist
1. Eligible Activities / Business Types
- Export services / Eligible businesses under Chapter 3 (formerly Act 20): These are service, consulting, technology, creative, finance, fund management, and similar services delivered from Puerto Rico to clients outside Puerto Rico.
- Individual investor / passive income (Chapter 2, formerly Act 22): For individuals who relocate to Puerto Rico and meet residency and timing constraints, certain interest, dividends, and capital gains may be exempt.
*In addition to the standard 4% tax rate, certain innovative or high-impact projects may qualify for enhanced incentives, such as reduced tax rates or special treatment, depending on the nature of the activity and DDEC approval.
2. Residency / Bona Fide Resident Tests (IRC §933 + PR law)
To qualify, you must become a bona fide resident of Puerto Rico, which generally involves satisfying all three of the following in each tax year you claim benefits:
- Presence Test: Generally requires spending at least 183 days in Puerto Rico during the tax year, with certain limited exceptions for specific travel or circumstances defined by the IRS.
- Tax Home Test: You must not have a tax home outside Puerto Rico (i.e., your main place of business / employment must be in Puerto Rico).
- Closer Connection Test: You must not have a closer connection to the U.S. (or another foreign country) than to Puerto Rico (based on domicile, family, social, business ties).
The bona fide resident test is anchored in the combined IRS/PR regime of §933 and related regulations.
Other constraints:
- To be treated as a bona fide resident for a given tax year, you must meet the full residency tests within that calendar year—most importantly, spending at least 183 days physically in Puerto Rico.
That means if you haven’t already met that day-count in a given tax year, it’s too late to qualify as a bona fide resident for that tax year.
But here’s the good news: you can still apply now and secure your Act 60 decree under today’s rules. Once you complete the residency requirements in a future year, you’ll be grandfathered under the benefits available at the time your decree was issued—an important strategic move given that program terms can change over time.
- In certain cases, you must not have been a resident of Puerto Rico during a “disqualifying” prior period (e.g., between January 17, 2006 and January 17, 2012, in earlier versions).
3. Entity vs. Individual Requirements
- Entity (Business): A Puerto Rico–based corporation or similar entity that obtains an exemption decree for the eligible services (Chapter 3), agreeing to the fixed tax rate (typically 4%) on qualifying net income.
- Individual: Under the investor regime, you apply (or be covered) for a decree permitting exemption on passive Puerto Rico-sourced income and capital gains.
- Substance / operations expectation: The entity typically must maintain real substance in Puerto Rico—employees, office, payroll, operational functions. For businesses exceeding ~$3 million in revenue, there may be a requirement to hire at least one Puerto Rico employee directly participating in operations.
How Eligibility Is Determined — The Practical Test
Understanding the statute is one thing; applying it is another. Let me show you how the rules play out in real life and where the red flags are.
Statutory Basis (in brief)
- The incentives are granted via a decree / contract with Puerto Rico’s Office of Industrial Tax Exemption (OITE)—once granted, the terms are generally locked in (cannot be unilaterally changed).
- The taxpayer must segregate eligible Puerto Rico–sourced income vs. noneligible income. For export services, only services to non-Puerto Rico clients typically qualify.
- Under §933 of U.S. tax law, a bona fide resident’s Puerto Rico–source income is generally excluded from U.S. gross income.
Example Scenarios
Scenario 1: Clear Qualifier
Maria, a software consultant, moves to Puerto Rico in January 2026. She spends 200 days per year on the island, rents office space, hires local staff, and services clients exclusively in the U.S. mainland (not in Puerto Rico). She obtains an export services decree.
- She satisfies the presence, tax home, and closer connection tests.
- Her entity generates eligible export service income.
- She will likely qualify for a 4% tax on net income, 100% dividend exemption, and exemption of post-move capital gains under the individual investor regime (for her passive investment holdings) if she also meets that regime’s requirements.
Scenario 2: Common Pitfall / Fail
John, a hedge fund manager, moves to Puerto Rico mid-year and spends 190 days on the island. But he also maintains his primary bank accounts, home, and family in Florida, frequently returns for business, and works on U.S.-domiciled projects. Moreover, his entity provides advisory services to both U.S. and Puerto Rico clients.
- He may struggle with the closer connection and tax home tests due to strong U.S. ties.
- Because part of his client base is within Puerto Rico, some of his income may not qualify as export services.
- The decree may fail or be challenged—or an audit could disqualify benefits.
These examples highlight that qualifying is both technical and factual. Even if your numbers and presence seem okay, you must carefully structure your living, business, and relationships.
Application & Compliance Highlights
Here is a roadmap and flags to watch if you’re going through Act 60.
Steps & Required Documents
- Preliminary assessment / planning with a PR-based tax attorney and CPA.
- Residency preparation: Establish ties (home, driver’s license, voter registration, local accounts, family presence).
- Entity formation (if business): Set up a Puerto Rico entity (LLC, corporation) with local substance.
- Application for decree: Submit to the Puerto Rico single business portal / OITE with required documents (business plan, financial projections, personnel plan, proof of substance).
- Grant / Decree issuance: Once accepted, you get a fixed-term decree (typically 15 years, with possible extension).
- Annual compliance: File local PR tax returns, report required metrics (employees, payroll, income), make required charitable contributions (for individual investor regime), maintain substance, and keep careful records.
Ongoing Filing & Substance Requirements
- You must adhere to the terms of the decree (scope, revenue, employees).
- Maintain substance (office, staff, operations in Puerto Rico).
- Make annual charitable donation minimum (often $10,000 to Puerto Rican nonprofits) under the individual investor regime.
- File Puerto Rico tax returns on all income (eligible and ineligible).
- File U.S. returns if you have U.S.-source income (though Puerto Rico–source income generally excluded).
- Respond to audits or information document requests (IDRs). In recent years the IRS and PR Hacienda have sharpened audits on Act 60 participants.
Penalties & Risk
- If you fail to comply or misstate facts, the decree may be rescinded, and you may lose benefits retroactively.
- You may face interest, penalties, and back taxes in both Puerto Rico and the U.S.
- Auditors may challenge your residency claim, sourcing of income, or substance.
- Because of recent scrutiny, the IRS is increasing audits of high-income taxpayers claiming Act 60 benefits.
These risks underscore that this is not a do-it-yourself program. You should engage specialized counsel and advisors to structure, document, and defend your position.
Common Misconceptions (Myth vs Reality)
- Myth: “Once I move, all my capital gains are tax-free.”
Reality: Only gains accrued after becoming a bona fide resident (or after a 10-year holding period rule for pre-residence gains) generally qualify. - Myth: “I just need to spend 183 days.”
Reality: You must also satisfy tax home and closer connection tests—not just the presence test. - Myth: “I can keep U.S. state residency.”
Reality: Many U.S. states (e.g. California) will contest this move; establishing bona fide Puerto Rico residency often requires severing state ties. - Myth: “I don’t need a decree—benefits are automatic.”
Reality: You must apply and obtain a decree. The decree is effectively a contract locking in terms. - Myth: “It lasts forever.”
Reality: The individual investor benefits generally expire December 31, 2035, and there is a possibility for renewals.
Next Steps & Resources
If you are seriously considering Act 60, here’s a neutral roadmap:
- Gather personal documentation: calendars, travel records, past tax returns, bank statements, residence records.
- Model your business/investment flows: separate Puerto Rico vs U.S. sourcing.
- Engage Puerto Rico counsel & CPA experienced in Act 60 and cross-border U.S./PR tax matters.
- Simulate worst-case scenarios (e.g. audit, partial disqualification).
- Apply for a decree only once you are confident your structure and facts support it.
Thinking about taking the next step?
If you’re ready to find out whether you truly qualify for Puerto Rico’s Act 60 incentives, our team of tax and legal professionals can help you evaluate your eligibility and outline the next steps. Schedule a free consultation with our expert Act 60 team to discuss your situation in confidence and get clarity before you make the move.