The IRS treats Act 60 as a high-audit-risk area. Claiming the individual investor exemption while keeping your primary home, family, and business activity on the U.S. mainland is the single most common reason applicants get disqualified and hit with back taxes plus penalties.
What Act 60 Actually Is
Act 60, signed in 2019, consolidated Puerto Rico's prior incentive codes, most notably the old Act 20 (export services) and Act 22 (individual investors), into a single omnibus statute. The two chapters most relevant to tax planning are Chapter 2 (Individual Investors) and Chapter 3 (Export Services). Both require genuine relocation to Puerto Rico, not just a mailing address. Puerto Rico Act 60: How the Tax Incentives Actually Work in 2025 covers the bona fide residency tests in detail if you want to confirm your situation qualifies before reading further.
Chapter 2: Individual Investor Tax Rates
Under Chapter 2, a bona fide Puerto Rico resident pays 0% on dividends, 0% on interest, and 0% on long-term capital gains sourced to Puerto Rico, all of which is exempt from U.S. federal income tax as well. Capital gains accrued before the move are taxed at a 5% Puerto Rico rate when eventually realized, provided you hold the assets for at least ten years after relocating. The annual charitable donation requirement is $10,000 to Puerto Rico-based nonprofits, and the decree fee is $5,000 at application.
Chapter 3: Export Services Corporate Rate
Businesses that export services from Puerto Rico to customers outside the island qualify for a 4% fixed corporate income tax rate under Chapter 3. Qualifying services include software development, consulting, financial services, advertising, and most other knowledge-based work. The business must maintain a real office in Puerto Rico and pay employees or contractors there. The decree is granted for 20 years with an option to extend, locking in the 4% rate against any future rate increases.
Bona Fide Residency: The Test That Disqualifies Most Applicants
The IRS applies a three-part bona fide residency test under Section 937 of the Internal Revenue Code: presence (183 days in Puerto Rico), tax home (no closer connection to the U.S. mainland), and closer connection (ties like bank accounts, driver's license, voter registration, and family home must shift to Puerto Rico). Failing any prong means your income remains fully subject to U.S. federal tax, which eliminates the entire benefit. The IRS has audited Act 22 and Act 60 holders with increasing frequency since 2021, focusing on people who claim Puerto Rico residency but whose spouses, children, and social lives remain on the mainland.
Real Costs to Set Up and Maintain Compliance
Beyond the decree fees, expect to budget for Puerto Rico tax return preparation (typically $3,000 to $8,000 per year for a combined U.S. and Puerto Rico filing), a local accountant familiar with Act 60 compliance, and the cost of genuinely relocating, renting or buying property, and spending at least 183 days on the island. Many applicants also engage a local attorney for the decree application at roughly $3,000 to $7,000. The total first-year cost for an individual investor decree, including legal, accounting, and filing fees, runs $20,000 to $40,000 for most people, not counting housing or relocation expenses.
Who Act 60 Is and Is Not Built For
Act 60 delivers the most value to high-income individuals with significant capital gains, founders expecting a liquidity event, and service business owners with portable income that can legally be sourced to Puerto Rico. It is a poor fit for W-2 employees whose employer will not relocate, people with U.S.-sourced business income that cannot be restructured, or anyone unwilling to spend the majority of the year in Puerto Rico. The tax math breaks down fast if the 183-day rule is not genuinely met, because the full U.S. federal rate still applies to any income that does not qualify as Puerto Rico-sourced.
Things people ask first.
Do I still file a U.S. federal tax return as an Act 60 holder?
Yes. U.S. citizens always file a federal return regardless of where they live. The difference is that bona fide Puerto Rico-sourced income is excluded from federal taxable income under the territorial exemption. You will file both a federal return and a Puerto Rico return each year.
Can I keep my mainland U.S. business and still qualify for Act 60?
Not without restructuring. Income earned from U.S. mainland sources remains fully taxable by the IRS. To benefit from the 4% Chapter 3 rate, the Puerto Rico entity must be the one performing and delivering the services to clients outside Puerto Rico. A mainland LLC that simply pays a Puerto Rico holding company does not qualify on its own.
What happens to capital gains I accrued before moving to Puerto Rico?
Pre-move gains are taxed at 5% in Puerto Rico if you hold the assets for at least ten years after establishing bona fide residency. If you sell within the first ten years, the portion attributable to pre-move appreciation is taxed by the IRS at normal federal capital gains rates.
Is Puerto Rico Act 60 legal? Could it be repealed?
Yes, it is fully legal under the U.S. tax code because Puerto Rico has authority over its own territorial tax system. Repeal risk is real but limited by the decree structure: once your decree is granted, the rates are contractually locked for 20 years, even if Puerto Rico changes the law for future applicants.
How long does it take to get an Act 60 decree approved?
Processing times have varied widely, ranging from a few months to over a year depending on application volume and completeness of the filing. Most practitioners budget six to twelve months for approval, though expedited processing is sometimes available for an additional fee.
Does my spouse also need to meet the 183-day rule?
Each person's bona fide residency is assessed individually, but a spouse who remains on the mainland full-time is a significant red flag in an IRS audit because it undermines the closer connection prong. In practice, the arrangement works most cleanly when both spouses relocate.
Ready to build the full structure around Act 60?
Act 60 is one piece of a larger tax architecture. The Offshore Playbook maps out how to combine territorial tax regimes, entity structuring, and banking to make the whole system work together, not just one incentive in isolation.
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