One of the most compelling reasons high-net-worth individuals, entrepreneurs, and investors are flocking to Puerto Rico is the territory's unique and substantial tax benefits. As a U.S. territory with its own tax system, Puerto Rico offers legal tax strategies that can dramatically reduce your tax burden while maintaining the security and familiarity of U.S. jurisdiction.
Understanding Act 60: The Puerto Rico Incentives Code
In 2019, Puerto Rico consolidated its various tax incentive programs under Act 60, also known as the Puerto Rico Incentives Code. This comprehensive legislation streamlined previous programs like Acts 20 and 22 while maintaining their core benefits. Let's explore the primary tax advantages available under Act 60:
Export Services Tax Incentives (Former Act 20)
For business owners who export services from Puerto Rico to clients outside the island, Act 60 offers:
- 4% corporate tax rate on business income (compared to the U.S. federal rate of 21%)
- 100% tax exemption on distributions from earnings and profits
- 75% exemption on property taxes for certain businesses
- 50% exemption on municipal taxes
Eligible businesses include consulting, legal services, accounting, engineering, creative services, marketing, software development, research and development, and many other service-based industries.
Individual Investor Tax Incentives (Former Act 22)
For individuals who become bona fide residents of Puerto Rico, Act 60 provides exceptional benefits on investment income:
- 100% tax exemption on dividends and interest
- 100% tax exemption on short and long-term capital gains accrued after becoming a resident
- 5% tax on long-term capital gains for appreciation before becoming a resident (when realized after becoming a resident)
Important Qualification Requirements
To qualify for these incentives, you must:
- Become a bona fide resident of Puerto Rico
- Not have been a resident of Puerto Rico for the six years preceding your move
- Purchase a primary residence in Puerto Rico
- Spend at least 183 days per year on the island
- File the appropriate decree applications and pay required fees
Additional Tax Benefits for Puerto Rico Residents
Beyond Act 60, Puerto Rico offers other tax advantages:
Federal Income Tax Exclusion
As a bona fide resident of Puerto Rico, you're not required to pay federal income tax on income sourced in Puerto Rico. This includes salary, business income, and rental income generated on the island.
Estate and Gift Tax Benefits
Puerto Rico residents who were born or raised on the island (or lived there for extended periods) may be exempt from U.S. federal estate taxes on Puerto Rico-sourced assets.
Real-World Tax Savings Example
Let's consider a scenario for a business owner relocating to Puerto Rico:
Before Moving to Puerto Rico:
- Business generating $1,000,000 in annual profit
- Federal corporate tax rate: 21% = $210,000
- State corporate tax (varies): ~8% = $80,000
- Total tax: ~$290,000
- After-tax income: ~$710,000
After Moving to Puerto Rico (with Act 60 Decree):
- Business generating $1,000,000 in annual profit
- Puerto Rico corporate tax rate: 4% = $40,000
- Total tax: $40,000
- After-tax income: $960,000
Annual Tax Savings: $250,000
Considerations and Caveats
While the tax benefits are substantial, there are important factors to consider before making the move:
- Bona Fide Residency Requirements: You must truly make Puerto Rico your primary home and meet all residency tests.
- Lifestyle Changes: Consider whether island living aligns with your personal and family preferences.
- Business Structure: Proper structuring is crucial to maximize benefits.
- Compliance Costs: There are application fees, annual reporting requirements, and compliance costs.
- Political Risk: Tax incentives could change with future legislation.
How Our Real Estate Services Can Help
Relocating to Puerto Rico for tax benefits requires finding the right property that meets both your lifestyle needs and the residency requirements. Our team specializes in helping clients:
- Identify properties that qualify for residency purposes
- Connect with reputable tax advisors specializing in Puerto Rico incentives
- Navigate the local real estate market efficiently
- Understand neighborhoods that best match your lifestyle preferences
The tax benefits of Puerto Rico make property ownership on the island not just a lifestyle choice but a strategic financial decision. Our experienced team can help you navigate both aspects to find your ideal Puerto Rico property.
Disclaimer: This article provides general information and should not be construed as tax, legal, or financial advice. Tax laws are complex and subject to change. Please consult with qualified tax, legal, and financial advisors before making any decisions based on this information.
