The 0% capital gains rate is prospective only. Appreciated assets held before moving to Puerto Rico carry embedded U.S. federal tax liability that Act 60 status cannot erase, so asset repositioning before the move date is critical, not optional.
What Act 60 Status Actually Means
Act 60 status is a legally binding tax grant, not just a tax election. The Puerto Rico government issues you a decree with an expiration date, typically 15 years for individuals and up to 20 years for businesses, and that decree fixes your rates regardless of future legislative changes. The two most-used categories are Chapter 2 (Individual Investors) and Chapter 3 (Export Services, formerly Act 20). Each chapter has its own eligibility rules, annual compliance requirements, and rate schedules.
Individual Investor Decree: Rates and Requirements
Under the Individual Investor chapter, a new Puerto Rico resident pays 0% on capital gains accrued after establishing bona fide residency and 5% on dividends from Puerto Rico sources. To qualify, you must spend at least 183 days per year in Puerto Rico, establish a closer connection to Puerto Rico than to any U.S. state, and purchase residential property within two years. You must also make annual charitable contributions of at least $10,000 to Puerto Rico nonprofits. The decree application fee is $5,000 and annual reports cost an additional $300 per year to maintain.
Export Services Decree: Rates and Eligible Activities
The Export Services chapter taxes qualifying business income at a flat 4% Puerto Rico corporate rate, with a 100% exemption on dividends distributed from that income. Eligible activities include consulting, technology services, marketing, software development, and financial advisory work performed for clients outside Puerto Rico. The business must employ at least one full-time employee in Puerto Rico, maintain an office on the island, and pay the owner a reasonable salary subject to standard Puerto Rico payroll taxes. The application fee for an Export Services decree runs approximately $2,000, and the processing timeline is typically three to six months. For a more detailed comparison of how these rates interact with U.S. federal obligations, see Puerto Rico Act 60: How the Tax Incentives Actually Work in 2025.
The Bona Fide Residency Test and IRS Scrutiny
The IRS applies its own bona fide residency test under Section 937, separate from Puerto Rico's rules, and has been auditing Act 60 participants aggressively since 2022. The three-part test requires presence in Puerto Rico for at least 183 days, a closer connection to Puerto Rico than to any U.S. state, and that Puerto Rico be your tax home. The IRS looks for a physical residence you own or rent, driver's license, vehicle registration, bank accounts, and professional relationships on the island. People who split time between Puerto Rico and a home state while keeping their mainland banking, clients, and social ties intact are the primary audit targets.
Compliance Obligations After Approval
Holding Act 60 status requires ongoing annual filings with Puerto Rico's Department of Treasury, annual reports to the granting agency, and documentation of all residency days. Individual decree holders must file Form AS-2878 to certify annual compliance. Failure to file or comply with residency requirements can trigger decree revocation, which is retroactive and subjects all prior income to standard U.S. federal tax rates plus penalties. Most practitioners recommend keeping a contemporaneous day-count log and retaining a Puerto Rico-based CPA to manage local filings separately from your U.S. federal accountant.
Pre-Move Planning: Income Timing and Asset Repositioning
The 0% capital gains rate applies only to appreciation that accrues after you establish Puerto Rico residency. If you hold appreciated stock before moving, you owe U.S. federal tax on the pre-move gain when you sell, even if you sell after moving. The practical move is to accelerate taxable events before relocating or to hold assets long enough post-move that the gain is predominantly Puerto Rico-sourced. Real estate sold in Puerto Rico by a decree holder is taxed at a flat 5% on the gain rather than the U.S. federal rate of up to 23.8%, which is one of the few categories where pre-residency assets still benefit from the regime.
Things people ask first.
How long does it take to get Act 60 status approved?
Individual Investor decrees typically take four to eight months from a complete application submission. Export Services decrees run three to six months. Both timelines extend if the application has deficiencies or if the agency's workload is high.
Do I still pay U.S. federal income tax as an Act 60 resident?
Bona fide Puerto Rico residents exclude Puerto Rico-sourced income from U.S. federal tax under Section 933. However, income from U.S. sources remains fully subject to federal tax, and the IRS audits whether income is genuinely Puerto Rico-sourced, particularly for service businesses with U.S. clients.
What happens if I leave Puerto Rico before my decree expires?
Leaving Puerto Rico and losing bona fide residency status terminates the benefits of the decree. Capital gains accrued while you were a resident that you have not yet realized may be subject to an exit tax or clawback, and the IRS can assert that prior-year exclusions were improperly taken if residency is found to have been deficient.
Can I keep my U.S. bank accounts and brokerage accounts after moving?
Yes, but maintaining substantial ties to a specific U.S. state through banking, property, or professional licenses can undermine the closer-connection test. It is not technically prohibited, but IRS examiners treat these as evidence that the taxpayer's center of life remained in the mainland state.
Is Act 60 legal, or is it a gray area?
Act 60 is statutory law passed by the Puerto Rico Legislature and fully sanctioned under U.S. territorial tax law via Sections 933 and 937 of the Internal Revenue Code. It is legal. The risk is not the law itself but compliance failures, residency misrepresentation, or income-sourcing errors that create exposure under standard IRS enforcement.
Do I need to buy property in Puerto Rico to qualify?
For the Individual Investor chapter, you must purchase a residential property in Puerto Rico within two years of the decree grant date. Renting for the first two years is permitted during that window, but the purchase is a hard compliance requirement, not optional.
Is Act 60 the right structure for your income and lifestyle?
The Offshore Playbook maps out exactly how Act 60 fits alongside other territorial tax strategies, which income types it actually protects and which it does not, and how to structure assets before the move to avoid locking in U.S. federal liability by accident.
Get the Playbook