{"id":77,"date":"2026-02-12T15:20:45","date_gmt":"2026-02-12T15:20:45","guid":{"rendered":"https:\/\/www.pr-taxincentives.com\/blog\/?p=77"},"modified":"2026-03-04T18:22:59","modified_gmt":"2026-03-04T18:22:59","slug":"the-three-pillars-of-act-60-compliance-residency-sourcing-and-substance","status":"publish","type":"post","link":"https:\/\/www.pr-taxincentives.com\/blog\/2026\/02\/12\/the-three-pillars-of-act-60-compliance-residency-sourcing-and-substance\/","title":{"rendered":"The Three Pillars of Act 60 Compliance &#8211; Residency, Sourcing, and Substance"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\">For many high earners exploring Puerto Rico\u2019s Act 60 incentives, the tax benefits are compelling. But the incentives aren\u2019t automatic, and understanding the <strong>three pillars of compliance<\/strong> \u2014 residency, sourcing, and substance \u2014 is essential to both <em>qualify<\/em> and <em>remain compliant<\/em> over time.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>1. Bona Fide Residency<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">At the heart of Act 60\u2019s individual benefits is <strong>bona fide residency<\/strong>. The tax incentives \u2014 including potential exemptions or preferential treatment on certain income \u2014 hinge on meeting specific tests established under the Internal Revenue Code and interpreted in IRS guidance.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Under IRS rules, an individual must satisfy <strong>three residency tests<\/strong> each tax year:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Presence Test<\/strong> \u2014 Generally interpreted as spending at least 183 days in Puerto Rico during the tax year, though alternative criteria apply when viewed over multi-year periods.<\/li>\n\n\n\n<li><strong>Tax Home Test<\/strong> \u2014 Your <em>tax home<\/em> must be in Puerto Rico, meaning your primary work or principal place of business is on the island rather than in the mainland U.S.<\/li>\n\n\n\n<li><strong>Closer Connection Test<\/strong> \u2014 You must demonstrate stronger personal and economic ties to Puerto Rico than to any other location, factoring in family, social, and business relationships.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">Meeting these tests is more than a box-checking exercise. It requires consistent documentation, thoughtful planning of travel and living arrangements, and alignment between your day-to-day life and the legal definitions of residency.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>2. Income Sourcing &#8211; <em>Where Income Is Earned Matters<\/em><\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Even with bona fide residency, not all income is treated the same.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Puerto Rico and U.S. tax law distinguish between <strong>Puerto Rico-sourced<\/strong> and <strong>U.S.-sourced<\/strong> income. Under Section 933 of the U.S. Internal Revenue Code, bona fide residents may exclude their Puerto Rico-source income from U.S. federal tax, but <strong>income sourced outside Puerto Rico generally remains taxable by the U.S.<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">This distinction is critical for individuals with diverse income streams:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Capital gains<\/strong> \u2014 Gains on assets acquired <em>after<\/em> establishing Puerto Rico residency generally qualify as Puerto Rico-source and may qualify for a <strong>0% tax rate<\/strong>, while assets held <em>before<\/em> relocating may still trigger U.S. tax depending on timing and sourcing rules.<\/li>\n\n\n\n<li><strong>Dividends and interest<\/strong> \u2014 Income from Puerto Rico entities may be treated as Puerto Rico-sourced, but U.S.-based dividends often remain subject to U.S. tax.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">Understanding and documenting the <strong>source<\/strong> of each type of income is not optional, it\u2019s central to compliance.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>3. Substance &#8211; <em>Real Presence and Economic Engagement<\/em><\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Act 60 incentives are not rewards for nominal paperwork or superficial ties. They are designed to attract individuals whose <strong>economic and lifestyle footprint<\/strong> aligns with Puerto Rico\u2019s long-term development goals.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Substance includes:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Maintaining a <strong>real residence<\/strong> on the island<\/li>\n\n\n\n<li>Establishing meaningful <strong>financial, social, and professional ties<\/strong> to Puerto Rico<\/li>\n\n\n\n<li>Complying with <strong>annual reporting and documentation<\/strong>, such as the Exempt Annual Report to the Puerto Rico Department of Economic Development and Commerce (DDEC), and fulfilling related requirements like charitable contributions that some decrees mandate.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">Without genuine substance, residency and sourcing tests may not hold up under scrutiny. Both Puerto Rico tax authorities and the IRS have increasingly focused on proper documentation and real economic presence when evaluating compliance claims.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Ongoing Compliance is <em>Required <\/em>for Benefits<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Act 60 incentives offer meaningful opportunities, but they are anchored in <em>ongoing compliance<\/em>, <strong>not one-time qualification<\/strong>. To benefit, you must continuously align your residency, income sources, and economic engagement with the legal standards set by both Puerto Rico and U.S. tax law.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Understanding these three pillars \u2014 residency, sourcing, and substance \u2014 is not just prudent. It\u2019s essential for anyone considering Act 60 as part of a long-term tax strategy.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>For many high earners exploring Puerto Rico\u2019s Act 60 incentives, the tax benefits are compelling. But the incentives aren\u2019t automatic, and understanding the three pillars of compliance \u2014 residency, sourcing, and substance \u2014 is essential to both qualify and remain compliant over time. 1. Bona Fide Residency At the heart of Act 60\u2019s individual benefits is bona fide residency. The tax incentives \u2014 including potential exemptions or preferential treatment on&#8230; <a class=\"more-link\" href=\"https:\/\/www.pr-taxincentives.com\/blog\/2026\/02\/12\/the-three-pillars-of-act-60-compliance-residency-sourcing-and-substance\/\">Read More<a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"","footnotes":""},"categories":[3,4],"tags":[],"class_list":["post-77","post","type-post","status-publish","format-standard","category-act-60","category-taxes","entry"],"_links":{"self":[{"href":"https:\/\/www.pr-taxincentives.com\/blog\/wp-json\/wp\/v2\/posts\/77","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.pr-taxincentives.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.pr-taxincentives.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.pr-taxincentives.com\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.pr-taxincentives.com\/blog\/wp-json\/wp\/v2\/comments?post=77"}],"version-history":[{"count":2,"href":"https:\/\/www.pr-taxincentives.com\/blog\/wp-json\/wp\/v2\/posts\/77\/revisions"}],"predecessor-version":[{"id":98,"href":"https:\/\/www.pr-taxincentives.com\/blog\/wp-json\/wp\/v2\/posts\/77\/revisions\/98"}],"wp:attachment":[{"href":"https:\/\/www.pr-taxincentives.com\/blog\/wp-json\/wp\/v2\/media?parent=77"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.pr-taxincentives.com\/blog\/wp-json\/wp\/v2\/categories?post=77"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.pr-taxincentives.com\/blog\/wp-json\/wp\/v2\/tags?post=77"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}