Published June 20th, 2026

Act 60 represents a pivotal framework in Puerto Rico's tax landscape, designed to attract new residents and businesses by offering significant tax incentives. This legislation targets individuals who establish bona fide residency on the island, as well as companies conducting eligible business activities, particularly those involved in export services. By qualifying under Act 60, new residents and businesses can benefit from markedly reduced income tax rates and exemptions on various income streams and business operations. Understanding the nuances of who qualifies as a new resident or business and the scope of tax advantages available is essential for those considering relocation or startup opportunities in Puerto Rico. Navigating Act 60 requires a clear grasp of residency requirements, corporate eligibility criteria, and ongoing compliance obligations. With over 15 years of experience in tax and business advisory, Go Up Business Group provides expert insight into these complexities to help clients make informed decisions and maintain compliance within this specialized tax regime.

Core Benefits of Act 60 for New Residents and Businesses

Act 60 concentrates a set of tax incentives into two broad groups: benefits for individual residents holding a tax exemption decree, and benefits for businesses that qualify as eligible activities, especially export service companies. The mechanics differ, but the goal is the same: attract new capital and active business operations to Puerto Rico.

Key Corporate Tax Incentives Under Act 60

The headline benefit for qualified businesses is a 4% fixed corporate income tax rate on net income from eligible activities. This is a special rate under the Act 60 regime and applies instead of the regular Puerto Rico corporate tax brackets, which are higher and progressive.

To reach that 4% rate, the income must come from activities covered under the decree. Common examples include export of services (such as consulting, professional services, back-office functions, software development, certain financial services) performed in Puerto Rico for clients outside Puerto Rico. Non-qualifying income remains subject to regular Puerto Rico tax rules.

Qualified export service businesses under Act 60 often also receive additional tax benefits, such as:

Reductions or exemptions on municipal taxes (for example, municipal license tax), typically for income tied to eligible activities.
Partial property tax exemptions on property used in the Act 60 business activity, usually for a fixed term defined in the decree.
Preferential treatment of distributions from the Act 60 entity to its owners, subject to specific rules in the decree and local law.

These incentives are intended to make running an export-oriented operation from Puerto Rico more attractive than operating the same activity in a higher-tax jurisdiction. When the business also meets relevant U.S. federal rules, some corporations achieve a low combined effective tax rate on export activities, though this requires careful structuring and professional advice.

Core Benefits for Individual New Residents

On the individual side, Act 60 offers powerful incentives to those who become bona fide residents of Puerto Rico and obtain a personal tax exemption decree. One of the most notable benefits is a reduced or zero Puerto Rico income tax rate on certain types of passive income or investment income, depending on the specific chapter of Act 60 that applies to the decree.

A central feature for many high-net-worth individuals is the treatment of capital gains. In general, capital gains that accrue after becoming a bona fide Puerto Rico resident and that are sourced to Puerto Rico may qualify for significant local tax reductions. Some gains realized on assets acquired after residency can be taxed at very low or even zero Puerto Rico tax rates under the decree, if the conditions are met.

There is also an important federal angle. Under the U.S. Internal Revenue Code rules for Puerto Rico residents, Puerto Rico-source income earned by a bona fide resident is generally excluded from U.S. federal income tax. When this interacts with Act 60's local exemptions or reduced rates, the result is that qualifying Puerto Rico-source income can be free of both U.S. federal income tax and, in some cases, Puerto Rico income tax. Non-Puerto Rico-source income, however, may still be subject to U.S. federal tax even after relocation.

Distinguishing Individual and Business Incentives

The key distinction is that business incentives focus on the activity, while individual incentives focus on residency and investment income.

Business decrees attach to a legal entity engaging in eligible activities. The 4% rate, municipal and property tax relief, and export service business incentives apply to the income and assets tied to that business operation.
Individual decrees attach to a person who meets the bona fide residency tests and complies with Act 60 requirements. The benefits relate to dividends from Puerto Rico companies, interest, capital gains, and other covered income streams, not to wage income from non-qualifying sources.

From a planning standpoint, Act 60 relocation tax benefits are most effective when the business structure and the individual's personal investment profile are reviewed together. Corporate income, shareholder distributions, and personal capital gains each follow different sourcing and rate rules. Aligning those pieces with Act 60 tax exemption decree provisions is what turns the legal framework into a concrete reduction in long-term tax cost.

Establishing and Maintaining Bona Fide Puerto Rico Residency Under Act 60

Act 60 benefits for individuals depend on one threshold: becoming and remaining a bona fide resident of Puerto Rico under U.S. federal rules. The Puerto Rico decree is not enough by itself. If the IRS concludes that your tax home or closer connection remains in the mainland United States, it can treat you as a U.S. resident for federal purposes and deny the expected exclusions.

Core Tests For Bona Fide Residency

U.S. tax law applies three coordinated tests: the physical presence test, the tax home test, and the closer connection test. You must satisfy all three for the full calendar year to be treated as a bona fide resident for that year.

Physical Presence Test

The physical presence test focuses on days. In practice, most Act 60 residents plan around the 183-day rule: spending at least 183 days in Puerto Rico during the tax year. The regulations also include alternative day-count formulas, but those are technical and usually reserved for narrow situations.

Key points for day counting:

Keep a contemporaneous log of travel, including boarding passes, flight confirmations, and passport or Global Entry records.
Count days based on where you are at the end of the day; partial days from flight connections can create disputes.
Avoid patterns that suggest you effectively live elsewhere and only "check in" just enough to reach a target number.

Tax Home Test

Your tax home is generally where your primary trade, business, or employment is based. For Act 60 planning, that means moving the center of your work and business activity to Puerto Rico. If you continue to perform most services, manage staff, or run operations from another jurisdiction, the IRS can argue that your tax home never shifted, even if you spend significant time on the island.

Corporate structures do not fix this by themselves. Board meetings, key decision-making, and day-to-day management need to align with a Puerto Rico tax home narrative.

Closer Connection Test

The closer connection test looks at where your life is anchored. The IRS weighs factors such as:

Location of your principal residence and where you actually live most of the year.
Where your spouse and minor children reside.
Where you hold a driver's license, vote, and maintain professional licenses.
Primary bank accounts, medical providers, social and community ties.

To support Act 60 residency, these ties should consistently point to Puerto Rico. Leaving strong, unchanged ties in a prior state while claiming resident investor incentives increases audit risk.

Tax Impact And IRS Scrutiny

When you meet the bona fide residency tests, Puerto Rico-source income is generally excluded from U.S. federal income tax, and the Act 60 decree then layers in reduced Puerto Rico tax on qualifying investment income. If the IRS later determines you failed any test, it can recharacterize income as fully taxable in the United States, often with interest and penalties.

High-mobility taxpayers, traders, and remote workers face particular scrutiny because their income is portable and difficult to source without strong factual support.

Documentation And Record-Keeping

Maintaining residency is as much about evidence as it is about facts. We treat the following as baseline documentation:

Detailed travel calendars matched to flight and lodging records.
Lease or property ownership documents, utility bills, and service contracts showing active use of a Puerto Rico residence.
Copies of voter registration, driver's license, local registrations, and bank account openings.
Minutes or notes of key business decisions taken in Puerto Rico, especially for closely held entities.

Well-organized records convert your residency story into a defensible file. The stronger the documentation around physical presence, tax home, and closer connection, the more durable your Act 60 tax position becomes under IRS review.

Compliance Essentials: Reporting Obligations with OITE and DDEC

Act 60 benefits are conditional. The decree gives rights, but the Office of Industrial Tax Exemption (OITE) and the Department of Economic Development and Commerce (DDEC) expect steady compliance in return. The agencies monitor whether you fulfill the activity, residency, and investment commitments described in the decree itself.

Core Annual Filings

Most decrees require an annual report to OITE/DDEC. For export service entities, this report typically discloses:

Gross and net income from eligible and non-eligible activities
Number of employees and payroll in Puerto Rico
Description of services rendered and main client locations
Property used in the activity, including leased and owned assets
Confirmation that you met any minimum employment or investment thresholds

Individual resident investor decrees usually include an annual compliance report as well. That filing focuses on residency representations, required annual donations, and any investment commitments tied to the decree. The report must align with what appears on Puerto Rico tax returns and, where relevant, federal filings tied to Act 60 tax incentives for individuals.

Deadlines And Supporting Obligations

OITE/DDEC reports follow statutory deadlines, often tied to the Puerto Rico taxable year. In practice, this sits alongside other recurring requirements:

Puerto Rico income tax returns for individuals and entities
Municipal license and property tax reports where applicable
Payroll, withholding, and sales and use tax filings for active businesses

We treat the decree itself as the primary compliance calendar. Each decree can include specific due dates, forms, and documentary support (such as audited financial statements above certain revenue levels). Missing an internal deadline in the decree sometimes carries the same weight as missing a statutory deadline.

Consequences Of Non-Compliance

OITE and DDEC have discretion to impose fines, require corrective filings, or place a decree under review when reports are incomplete, inconsistent, or late. Repeated or material non-compliance risks partial modification or full revocation of Act 60 benefits. In a revocation scenario, the tax cost is not just prospective. Authorities may reassess prior years, deny the 4% rate or exemptions, and treat income as subject to regular Puerto Rico tax rules. For individuals, unresolved issues can also feed into broader scrutiny, including IRS enforcement Puerto Rico Act 60 reviews that test residency, sourcing, and disclosure quality.

From a practical standpoint, Act 60 works only when reporting, tax filings, and factual behavior move in the same direction. Ongoing management of deadlines, supporting records, and decree-specific conditions is what preserves the long-term value of the incentives.

Navigating IRS Scrutiny and Federal Tax Considerations

IRS interest in Act 60 taxpayers has increased as more high-income individuals and export service entities relocate. Residency claims, sourcing of income, and related-party pricing all draw attention, especially when federal tax liabilities drop sharply after a move.

The interaction between U.S. federal tax law and Puerto Rico's territorial system hinges on two pillars: bona fide residency and proper income sourcing. Bona fide residents exclude Puerto Rico-source income from U.S. federal tax, but U.S.-source income and certain foreign income remain within the federal net. Corporations operating under Act 60 still face federal rules on controlled foreign corporations, transfer pricing, and information reporting, even when Puerto Rico tax rates are reduced.

Key Federal And Puerto Rico Forms

Correct filing on both sides is central to defending an Act 60 position. For individuals, Form 1040 continues to apply as long as they are U.S. citizens or residents. The return should clearly reflect the exclusion of Puerto Rico-source income where allowed and report U.S.-source and other taxable income with consistent sourcing positions.

On the Puerto Rico side, entities and individuals use local income tax forms and schedules, including Schedule SC 2800 in the Puerto Rico return for certain adjustments and disclosures tied to special tax regimes. The data reported there needs to reconcile with federal filings and with OITE/DDEC reports.

For cross-border pricing within a group, Section 482 of the Internal Revenue Code governs arm's-length allocations. The IRS expects documentation that explains how income, expenses, and functions are divided between Puerto Rico entities and related parties. Weak or inconsistent support exposes Act 60 structures to transfer pricing adjustments that erase the intended benefit.

Enforcement Risks And Misreporting

When federal and Puerto Rico returns do not align with OITE/DDEC filings, the gap often becomes an audit roadmap. Common triggers include large swings in reported income around the year of relocation, aggressive characterization of income as Puerto Rico-source without factual support, and related-party charges that strip income from U.S. entities into low-tax Puerto Rico entities.

Consequences range from disallowed exclusions and transfer pricing adjustments to accuracy-related penalties and, in severe cases, fraud allegations. Puerto Rico authorities may also revisit prior years if IRS findings suggest misreporting. Effective Act 60 planning therefore rests on integrated federal and local compliance, supported by contemporaneous documentation and steady professional oversight of cross-jurisdictional reporting.

Strategic Tax Planning and Compliance Support for Act 60 Decree Holders

Effective use of Act 60 starts with structure, not with the tax return. For both resident investors and export service entities, we first map income streams, ownership, and residency facts against the decree terms and the U.S. and Puerto Rico sourcing rules. That initial map drives decisions on entity choice, where activities occur, and how funds move between the business and its owners.

From there, ongoing planning becomes an annual cycle rather than a one-time event. We align:

Business formation and restructuring with the specific chapter of Act 60, ensuring the entity actually carries out the eligible activity described in the decree.
Operational workflows so that management, employees, and key decision-making sit where the tax home and residency story require.
Distribution and compensation policies to balance corporate income at the 4% rate with dividends, interest, and capital gains that fit within the resident investor framework.
Investment timelines so that asset purchases, dispositions, and charitable commitments match decree conditions and residency periods.

An integrated approach treats OITE/DDEC reports, Puerto Rico returns, and U.S. federal filings as one file, not three separate obligations. We design bookkeeping and record-keeping around that file: chart of accounts that distinguishes eligible and non-eligible income, schedules that track day counts and closer-connection facts, and workpapers that support transfer pricing and sourcing positions.

Audit defense starts long before an audit notice. Contemporaneous memos explaining key positions, board minutes describing where decisions were made, and reconciliations between DDEC obligations under Act 60 and tax filings all reduce the risk that an examiner recharacterizes income or questions residency. When those elements are planned together, Act 60 incentives remain accessible while the structure stays defensible under scrutiny from both Puerto Rico and federal authorities.

Act 60 presents valuable tax advantages for new residents and businesses willing to align with its requirements. Realizing these benefits depends on meeting bona fide residency tests, structuring eligible business activities properly, and maintaining rigorous compliance with Puerto Rico and federal reporting obligations. The interplay between local decree conditions and U.S. tax law demands detailed attention to documentation, income sourcing, and annual filings to avoid costly penalties or revocation of incentives. As a Puerto Rico-based tax, accounting, and business advisory firm, Go Up Business Group specializes in guiding clients through the complexities of Act 60 decrees. Our expertise helps align your business and personal tax positions with the law's framework, securing the intended financial advantages while minimizing risk. For anyone considering relocation or establishing an export service business under Act 60, seeking professional advice is essential to navigate these rules effectively and sustain long-term success in Puerto Rico's unique tax environment.

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