Let’s clear this up right away, moving to Puerto Rico does not automatically exempt you from U.S. taxes. The island’s generous tax incentives, including a 4% corporate tax for qualifying businesses and 0% capital gains for residents under Act 60, are real, but they require careful planning, structured execution, and proof that Puerto Rico is your true home.
Many individuals assume that simply relocating or setting up a business in Puerto Rico immediately removes their U.S. tax obligations. The reality is more nuanced. The United States taxes its citizens on worldwide income, meaning that unless you meet specific requirements for bona fide residency, U.S. federal taxes continue to apply to income earned from sources outside Puerto Rico.
Puerto Rico-Sourced Income vs. U.S.-Sourced Income
Understanding which types of income qualify for Puerto Rico’s tax incentives is crucial. Once you establish bona fide residency, Puerto Rico–sourced income is generally taxed under local law rather than by the federal government. This distinction is where the substantial tax savings are realized.
Income earned from services provided within Puerto Rico, for example, may qualify for the 4% corporate tax rate under the Act 60 Export Services Incentive. Capital gains on assets acquired after establishing residency may also be fully exempt from both Puerto Rican and U.S. taxes. Additionally, certain interest and dividend income generated locally can benefit from reduced or zero taxation under the Act 60 framework.
It is important to understand that not all income becomes exempt simply by moving. Income generated from U.S.-based sources, such as rental properties, business activities conducted outside Puerto Rico, or salary earned while physically working in the mainland, remains subject to U.S. federal tax. Capital gains on assets acquired prior to relocation are also typically taxed by the IRS, depending on when the gains are realized.
In short, Puerto Rico is not a loophole to hide U.S. income. The savings are legitimate when your income is genuinely sourced on the island, and your residency is real and compliant with both Puerto Rico and U.S. rules.
Qualifying as a Bona Fide Resident
To benefit from Puerto Rico’s tax incentives, you must meet the bona fide residency requirements. This is not a mere formality; it is a critical legal standard enforced by the IRS and the Puerto Rico Department of Economic Development and Commerce (DDEC). Requirements vary for business decrees versus investor decrees.
For investor decrees:
Physical presence requires spending the majority of the year in Puerto Rico, typically defined as 183 days or more, or meeting alternative day-count calculations as outlined by the IRS.
Tax home means that your primary place of business or employment is located in Puerto Rico. For business owners, this requires that management, operations, and services are conducted locally, reflecting real economic activity on the island.
Closer connection refers to the broader ties that demonstrate Puerto Rico as your true home. This includes your residence, family, social life, professional relationships, voter registration, and other economic or cultural connections.
Meeting all three components is essential for qualifying as a bona fide resident and ensuring that Puerto Rico–sourced income is properly taxed under Act 60 rather than by the IRS.
Act 60 Incentives and How They Work
Puerto Rico’s Act 60 incentive program is structured as a contractual agreement with the government rather than an automatic entitlement. It offers:
- A 4% fixed corporate tax rate for qualifying export service companies
- Exemption from Puerto Rican tax on certain capital gains realized after establishing residency
- Reduced or exempt tax on local dividends and interest in some cases
- Additional municipal and property tax benefits for approved activities
To obtain these incentives, applicants must submit detailed applications to the DDEC, demonstrate expected economic impact, and commit to maintaining compliance over time. This includes submitting annual reports, adhering to payroll and employment requirements, and preserving documentation to support residency and business activities.
The Act 60 decree effectively aligns your business activities, personal residency, and Puerto Rico tax system, but only if executed properly.
Common Misconceptions and Pitfalls
A frequent misunderstanding is that moving to Puerto Rico alone is sufficient to escape U.S. taxation. Unfortunately, this is not the case. Several common mistakes can jeopardize eligibility:
- Establishing residency only on paper without meeting the physical presence requirement
- Retaining primary homes or ongoing business operations in the mainland U.S.
- Relying solely on virtual addresses or offshore structures without demonstrating economic substance
- Executing significant asset transfers prior to bona fide residency in a way that conflicts with IRS timing rules
Failure to comply with bona fide residency tests or Act 60 decree conditions can result in the loss of incentives and the reclassification of income as U.S.-sourced, potentially triggering significant back taxes, interest, and penalties.
Benefits of Doing It Right
When structured correctly, relocating to Puerto Rico under Act 60 can be transformative. Clients who follow proper procedures enjoy substantial financial and lifestyle benefits:
- Lower effective tax rates on Puerto Rico–sourced business income and capital gains
- The ability to operate under U.S. law, using U.S. dollars and banking systems
- Access to a vibrant entrepreneurial community, including startups, tech companies, and investors
- A significantly enhanced quality of life with access to beaches, mountains, outdoor activities, and cultural events
Unlike many other international jurisdictions, Puerto Rico allows U.S. citizens to retain all the legal protections, currency stability, and access to markets that the mainland provides, while benefiting from a strategic tax environment.
The Bottom Line
Act 60 is not about tax evasion; it is about alignment. Your residency, income, and lifestyle must all converge in Puerto Rico to legally take advantage of the island’s incentives. Proper planning, documentation, and compliance are essential to maximize benefits while minimizing risk.
Relocation can be a genuine lifestyle and financial upgrade when handled thoughtfully. The key is to ensure your residency is bona fide, your income is properly sourced, and all Act 60 requirements are met.
Working With Professionals Matters
Navigating U.S. tax rules in tandem with Puerto Rico incentives requires expertise. My team and I guide clients through every step:
- Structuring businesses to qualify under Act 60
- Planning residency and asset transfers
- Filing applications with the DDEC
- Ensuring ongoing compliance with both Puerto Rican and U.S. tax authorities
With careful planning, a Puerto Rico relocation is not only a smart financial move but also a lifestyle decision with lasting impact.