ACT 60 - Puerto Rico Tax Avoidance
Many high net worth and high income American taxpayers are considering taking advantage of or actually already using residency in Puerto Rico to reduce their income tax and other tax exposure. Despite how this is marketed and glamorized on social media,
it involves significant more than moving there for part of the year and is only worth it if your annual savings significantly outweigh the strict physical presence rules, compliance costs, and lifestyle disruptions required.
Here are some of the most basic legal compliance details to consider.
WHY ARE PEOPLE MOVING TO PUERTO RICO TO SAVE ON TAXES?
- Capital Gains: 100% exemption on interest, dividends, and capital gains accrued after becoming a bona fide resident (under the individual investor portion of Act 60).
- Business Income: Corporate tax rates as low as 4% for export service businesses serving clients outside the island.
- U.S. Citizenship Status: You remain a U.S. citizen and do not need a passport or visa to live.
WHAT DOES THE I.R.S. REQUIRE TO QUALIFY FOR PUERTO RICO TAX BENEFITS?
HIigh-net-worth taxpayers who attempt to avoid U.S. tax via territorial residency have to meet three strict statutory tests under U.S. tax law:
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The Presence Test: Requiring physical presence in Puerto Rico for at least 183 days during the taxable year. Auditors scrutinize day-count logs, flight records, and digital footprints.
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The Tax Home Test: Requiring that the taxpayer's principal place of business is on the island. This is a frequent failure point for remote workers or executives still managing mainland operations.
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The Closer Connection Test: Evaluating whether the individual maintains stronger economic, social, and familial ties to the mainland U.S. or a foreign country than to Puerto Rico.
WHAT ARE THE COMMON SIGNS OF ABUSE THAT TRIGGER ACT 60 AUDITS?
- Pre-move Appreciation: Selling assets with pre-move appreciation shortly after relocating and improperly treating the entire gain as Puerto Rico-sourced income exempt from U.S. tax. Under Treasury Regulation § 1.937-2, gains accrued within 10 years of moving often remain subject to U.S. tax.
- Disguised Mainland Income: Mischaracterizing active trade, business, or consulting income earned in the continental U.S. as local Puerto Rican source income.
- Paper-only Residency: Obtaining a tax decree under Act 60 (formerly Acts 20/22) without genuinely shifting the center of one's daily life, housing, and banking to the territory.
WHAT ARE THE COSTS AND LEGAL REQUIREMENTS OF ACT 60?
Strict Residency Tests: You must pass the IRS "bona fide resident" test, meaning you must live in Puerto Rico for at least 183 days a year, make it your main home, and establish a closer personal and economic connection there than to the U.S. mainland.
Mandatory Fees & Donations: Act 60 requires application/acceptance fees, annual compliance costs, and a mandatory annual donation of $10,000 to a local Puerto Rican non-profit organization.
Not a Magic Wand for All Income: Pre-move capital gains or income sourced directly from the U.S. mainland are still subject to standard U.S. federal taxes.
Infrastructure & Cost Realities: The island faces challenges with power grid reliability, local cost of living increases, and local taxes (like property and sales taxes) that can be high. Users on Reddit share a consensus that moving strictly for tax avoidance without integrating into the community can also lead to social friction with locals.
WHAT ARE THE DRAWBACKS OF LIVING IN PUERTO RICO?
Living in Puerto Rico presents notable challenges, including:
Infrastructure and Utilities
- Frequent Power Outages: The island's electric grid is notoriously unreliable, leading to regular blackouts (apagones) that make backup generators or solar setups nearly essential.
- Road Conditions: Potholes and deferred road maintenance are common outside major metropolitan zones.
Cost of Living and Economy
- High Utility and Import Costs: While some local items are cheap, electricity rates are very high, and imported goods cost significantly more due to shipping.
- Limited Local Job Market: High-paying local jobs are scarce, making the economy heavily reliant on remote work or outside income.
- Specialist Shortages: While basic and private care can be good, patients often face long wait times or must fly to the U.S. mainland for advanced, specialized medical procedures.
Environment and Bureaucracy
- Hurricane Risk: The island is directly in the path of seasonal tropical storms and major hurricanes.
- Red Tape: Dealing with local government agencies and administrative paperwork can be slow and disorganized.
WHAT'S THE DIFFERENCE BETWEEN ACT 20, ACT 22 and ACT 60?
Act 60 (The Consolidated Code): Streamlined Act 20 and Act 22 into one master code, adding stricter compliance obligations such as mandatory annual charitable donations, requirements to purchase local residential real estate, and minimum local employment thresholds.
Act 20 (Export Services Business): Targeted at businesses relocating or opening operations in Puerto Rico that serve clients outside the island. It provides a low 4% corporate income tax rate and tax exemptions on distributions/dividends.
Act 22 (Individual Investors): Targeted at high-net-worth individuals moving to Puerto Rico. It provides 0% tax on interest, dividends, and post-migration capital gains realized after becoming a bona fide resident.
THIS IS NOT TAX ADVICE
Nothing in a general informational forum like this is ever specific tax or legal advice. Always get advice from a qualified professional like a CPA or attorney, based on your specific facts.
Asset protection attorney Ike Devji has over two decades of experience devoted to asset protection planning for high net worth business owners, physicians and real estate investors across the United States. He is the recipient of the 2026 State Bar of Arizona President's Award for Asset Protection planning.
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