What Is Puerto Rico Act 60?
Act 60, in the simplest terms, is game-changing legislation that will have you saying “ adiós” to federal and state income taxes. On July 1, 2019, the Government of Puerto Rico consolidated all of its tax incentive laws into a single code, known as Act 60-2019, or the Puerto Rico Incentives Code. This code provides a variety of tax benefits for businesses, real estate investors, and individuals who relocate to or establish themselves in Puerto Rico.
Some of the key benefits of Act 60-2019 include:
- 75% exemption on property tax
- A 4% corporate income tax rate for most businesses.
- 100% tax exemption on capital gains
- A 0% tax rate on dividends paid to individual investors who are bona fide residents
- A variety of tax breaks for businesses that invest in research and development, manufacturing, and other key industries.
- And more
Puerto Rico holds a unique position as an unincorporated U.S. territory. This makes these incentives particularly appealing to many U.S. citizens and real estate investors moving to Puerto Rico because they do not require a residency permit (no expatriating or renouncing US citizenship) and they can enjoy exemptions from U.S. federal and state income taxes on their Puerto Rico-sourced income while retaining benefits like Medicare and Social Security. Plus, the Puerto Rico tax code closely mirrors the U.S. Internal Revenue Code, making the transition easier for individuals who become bona fide residents of Puerto Rico.
Export Services & Commerce and Individual Investors
Act 60 has many benefits across different sectors that are helping Puerto Rico build a vibrant economy. Two main areas include Export Services & Commerce, and Individual Investors which will dive into further.
Export Services & Commerce:
Chapter 3 of Act 60 covers Export Services & Commerce and is a pivotal tool in helping Puerto Rico become an international export service and commerce center by reducing income taxes and providing exemptions from property taxes, municipal taxes, and taxes on dividend distributions for income generated and property used in the exempt operations.
The following are considered eligible Export Services and Commerce activities:
- Contract research and development.
- Advertising, public relations.
- Call centers, telecommunications, service centers.
- Centers for electronic data processing.
- Centralized management services (corporate headquarters), such as strategic direction, planning, distribution, logistics, and budgetary services.
- Consulting services, such as economic, scientific, environmental, technological, managerial, marketing, human resources, computer, and auditing.
- Computer software development.
- Creative industries.
- Educational and training services.
- Hospital and laboratory services, including medical tourism and telemedicine.
- Investment Banking and other financial services.
- Marketing centers.
- Production of blueprints, architectural and engineering services, and project management.
- Professional services such as legal, tax, and accounting.
- Shared service centers: accounting, finance, tax auditing, marketing, engineering, quality control, human resources, communications, electronic data processing and others.
- Voice and data telecommunications for individuals outside of Puerto Rico.
- Distribution/licensing of computer programs (physical, cloud, or blockchain).
- Assembly, bottling, and packaging operations of products for export.
- Distribution of commercial and mercantile products manufactured in or outside Puerto Rico for use or consumption outside Puerto Rico.
- Storage and distribution centers.
- Trading services.
As you can see, there are a lot of types of businesses that could benefit by relocating their business to Puerto Rico. The incentives for these types of businesses include:
- Fixed Income tax rate of 4%.
- 100% income tax exemption for distributions from earnings and profits.
- 75% property tax exemption for real property used in the Export Business (taxable portion subject to the regular tax rate of up to 11.83%).
- 75% property tax exemption for personal property used in the Export Services business (taxable portion subject to the regular tax rate of up to 8.83%).
- 50% exemption from municipal taxes (a taxable portion of gross receipts subject to the regular tax rate of 0.5%, or 1.5% for financial businesses).
Tax Exemption Period:
The Export Services decree will have a term of 15 years with a possible 5-year extension.
Individual Investors:
Chapter 2 of Act 60 for Individual Investors provides 100% tax exemption from Puerto Rico income taxes on all interest and dividend income and on certain capital gains realized and accrued after such an individual becomes a bona fide resident of Puerto Rico. Chapter 2 applies to any individual investor who becomes a Puerto Rico resident (“Individual Investor”) on or before the taxable year ending on December 31, 2035, provided that the individual was not a resident of Puerto Rico at any time from January 17, 2006, to January 17, 2012.
Under the U.S. tax code (Section 933), a bona fide resident of Puerto Rico can exclude Puerto Rico-source income from their U.S. gross income for tax purposes. This means that if you are a bona fide resident of Puerto Rico and you earn income from sources within Puerto Rico, you will not have to pay U.S. federal income taxes on that income. However, you will still have to pay Puerto Rico income taxes on that income, however, Puerto Rico generally has much lower tax brackets. They range from 7%-33% for most income, but if you are self-employed and offering services only, they range from 6%-20%.
Note: Income that is not sourced in Puerto Rico is considered U.S.-source income. This includes income from sources such as employment, investments, and businesses. U.S.-source income is still subject to regular U.S. taxes, even if you are a bona fide resident of Puerto Rico.
Tax Exemption Period:
The Resident Individual Investor decree will be valid until December 31, 2035.
Act 60 Requirements
So how do you reap all these great benefits of Act 60? To begin with, you must become Bona-Fide Resident of Puerto Rico.
So how do you become a Bona-Fide Resident of Puerto Rico?
- You must spend at least 183 days in Puerto Rico throughout the tax year (but you could live elsewhere the rest of the time… say, during hurricane season).
- You must not have a tax home outside of Puerto Rico, (Your tax home is the jurisdiction in which your primary place of employment is located), and
- You must have a closer connection to Puerto Rico than to any other country (Does your spouse and kids live there too, do you have a bank account established, etc.
Individual Investors must also meet the following requirements:
- Make an annual donation of a minimum of $10,000 to local nonprofit entities that are not controlled by the Individual Investor and are certified under the P.R. Internal Revenue Code. Half of the donation must be to certain organizations that work to eradicate child poverty;
- Within two years of receipt of the grant, the Individual Investor must purchase real property in Puerto Rico for use as his/her principal residence. The property must be owned by the Individual Investor as sole owner or together with the spouse; and
- File an Annual Report with the Government of Puerto Rico with a filing fee of $5,000.
How to Apply for Act 60
Once you establish residency (home, driver’s license, bank accounts, etc.), you can submit an online application through the Single Business Portal. There are also many English-speaking companies that (for a fee) will walk you through the process.
Once approved, the government will issue a tax exemption decree that will provide a full detail of tax rates and conditions of Act 60. This “decree” will be considered a contract between the Government of Puerto Rico and the applicant.
Additional Benefits for Real Estate Investors
Despite experiencing some economic challenges in recent years, Puerto Rico’s resilient workforce and supportive business environment make it an attractive location for investors and businesses. Along with Act 60, the government has implemented additional policies and initiatives to promote economic growth and improve job opportunities, with nearly the entire island classified as a Zone of Opportunity by the IRS.
The Opportunity Zones (“OZs”) program, was designed to drive private investment into economically distressed areas. OZs in Puerto Rico were adopted as part of the federal Tax Cuts and Jobs Act of 2017 (“TCJA”) and currently, there is a whopping 863 designated Opportunity Zones!
These OZs help to pave the way for low-income communities to be designated as qualified opportunity zones and offer federal income tax incentives to a taxpayer who invests capital gains in a business located within an OZ.
Since approximately 98% of Puerto Rico has been designated as an OZ, it creates an attractive investment alternative for U.S. investors. Act 60 states that it is the public policy of Puerto Rico to make the island an investment destination for qualified opportunity funds (OZ Funds) that invest in Priority Projects located in OZs.
The Bottom Line
Puerto Rico Act 60 is a valuable tax incentive program that can save you and your business a significant amount of money. Plus with all the tax breaks offered by Act 60, Puerto Rico’s designation as an Opportunity Zone is a great place for individuals and businesses to invest in.
Puerto Rico is a beautiful island with a rich history and culture. It is also a business-friendly jurisdiction with a low cost of living. If you are looking for a new place to live or invest, Puerto Rico should be on your list.
Contact us today to start discussing if Puerto Rico is right for you, and all the great properties and investment opportunities we have to offer.
This publication is based on applicable sections of the Incentives Code or other relevant tax law, as amended, and regulations as of the date of its preparation. Such laws may change in the future, and such changes may be applied retroactively. We do not assume responsibility to update this publication if the applicable law changes