The Complete Guide to Puerto Rico Act 60 Tax Incentives

What Is Act 60?

Act 60, formally the Puerto Rico Incentives Code (Act 60-2019, codified as P.R. Laws tit. 13, § 6821 et seq.), consolidated and modernized the island's prior economic incentive programs — including the well-known Act 20 (Export Services Act) and Act 22 (Individual Investors Act) — into a single, unified code. The consolidation preserved the core benefits of both programs while introducing streamlined application processes and updated compliance standards.

The law offers tax incentive decrees under multiple chapters, but two are relevant to most individual applicants:

• Chapter 2 — Individual Resident Investor: Provides 0% tax on capital gains, dividends, and interest sourced to Puerto Rico, plus a 100% exemption on municipal and state property taxes for the first five years. This is the decree for individuals whose income is primarily from investments.
• Chapter 3 — Export Services: Provides a 4% flat income tax rate on eligible services exported to clients outside Puerto Rico. This is the decree for business owners, consultants, service providers, and professionals whose income comes from active work serving off-island clients.

Many decree holders obtain both: Chapter 2 for their investment income and Chapter 3 for their business income. The two decrees can be held simultaneously, and the combined benefit is a near-total elimination of tax on both active and passive income — within the bounds of Puerto Rico sourcing rules.

Chapter 2: The Individual Resident Investor Decree

Chapter 2 is designed for individuals who relocate to Puerto Rico and generate income from investments. Once the decree is granted, the holder pays 0% tax on all Puerto Rico-source capital gains, dividends, and interest. This includes interest from Puerto Rico municipal bonds, Puerto Rico bank deposits, and dividends from Puerto Rico corporations.

The critical distinction is between Puerto Rico-source income and US-source income. Dividends from a US-based corporation remain subject to US tax unless the shares are held for the requisite period under the 10-year lookback rule (discussed in our detailed lookback analysis). But gains on securities acquired after establishing bona fide residency are Puerto Rico-source and taxed at 0%.

Chapter 2 decree holders must purchase residential real property in Puerto Rico within two years of the decree's effective date, with a minimum investment of $300,000 (for decrees granted before 2024) or the applicable threshold under the current code. The property must be the decree holder's primary residence. See our guide to Puerto Rico real estate under Act 60 for neighborhood-by-neighborhood analysis.

The 10-Year Lookback Rule

For marketable securities, Act 60 applies a bifurcation: appreciation that occurred before you established bona fide residency remains subject to US capital gains tax (15% or 20% plus the 3.8% NIIT), while appreciation after the residency start date is Puerto Rico-source and taxed at 0%. After 10 years of continuous bona fide residency, the entire gain — including pre-move appreciation — becomes Puerto Rico-source and fully exempt.

This 10-year clock is the reason timing matters enormously. Investors who move early lock in the 0% rate sooner and begin the 10-year accrual. Those who wait are carrying pre-move appreciation that remains taxable for a longer period.

Chapter 3: The Export Services Decree

Chapter 3 grants a 4% flat income tax rate on net income from eligible services provided to clients located outside Puerto Rico. The decree replaces the default Puerto Rico corporate tax rate (which can reach 37.5%) and the US federal rate (up to 37%) with a single-digit percentage.

Eligible services are broad: consulting, software development, architecture, engineering, accounting, legal services, marketing, creative services, healthcare services delivered remotely, and dozens of other professional categories. The key requirement is that the service recipient must be located outside Puerto Rico — the income must be "exported."

A Chapter 3 decree holder operating through a Puerto Rico entity pays 4% on the entity's net income. Distributions from that entity to a Chapter 2 decree holder are then taxed at 0% as Puerto Rico-source dividends. The combination — 4% at the entity level, 0% at the personal level — creates an effective total tax burden of roughly 4% on active business income. Compared to a 37% federal rate plus state tax, the savings on $500,000 of net income exceed $160,000 per year.

For a detailed comparison of what this means in dollars, see our side-by-side analysis of Act 60 versus mainland US taxes.

The December 2026 Deadline: 0% Grandfathering

This is the single most important timing consideration in Act 60 planning. The difference between 0% and 4% on capital gains, compounded over the 15-to-30-year life of a decree, can represent hundreds of thousands — potentially millions — of dollars on a substantial investment portfolio.

To be grandfathered, your decree application must be filed (not just initiated) with the Puerto Rico Department of Economic Development and Commerce (DEDC) before December 31, 2026. The application process typically takes 60 to 90 days once all documentation is assembled, meaning the practical deadline to begin the process is September 2026. For a full breakdown, see our December 2026 deadline briefing.

Bona Fide Residency: The Three-Part Test

The tax benefits of Act 60 are available only to individuals who establish bona fide residency in Puerto Rico. This is not a formality — it is the single most scrutinized element of the program, and the IRS evaluates it under three tests that must all be met simultaneously, per IRC Section 937.

1. Physical Presence: 183 Days

You must be present in Puerto Rico for at least 183 days during the tax year. Days of travel to and from Puerto Rico count as days in Puerto Rico. You cannot be present in the United States for more than 182 days. Partial days count as full days under the IRS's counting methodology.

2. Tax Home

Your tax home — defined under IRC Section 911(d)(3) as your regular or principal place of business — must be in Puerto Rico. If you work from Puerto Rico for a mainland employer without a Puerto Rico office, the IRS may challenge whether your tax home has genuinely moved.

3. Closer Connection

You must demonstrate a closer connection to Puerto Rico than to the United States or any other country. The IRS evaluates this through approximately 11 factors, including:

• Location of your permanent home
• Location of your family (spouse, dependents)
• Where you vote (Puerto Rico voter registration or mainland)
• Driver's license and vehicle registration jurisdiction
• Location of bank accounts and financial accounts
• Location of personal property and furniture
• Where you maintain professional licenses
• Location of clubs, organizations, and social ties
• Where you receive mail and maintain correspondence
• Location of doctors, dentists, and healthcare providers
• State of incorporation for any business entities

No single factor is dispositive — the IRS weighs them holistically. But a decree holder who maintains a mainland driver's license, votes in a mainland state, keeps their primary bank accounts on the mainland, and has family living on the mainland is unlikely to pass the closer-connection test, regardless of day count. For a complete walkthrough, see our bona fide residency test guide.

Fees and Compliance Obligations

Act 60 is not free to enter or maintain. The following costs apply to all decree holders:

• Application fee: $5,005, paid to the DEDC at the time of filing. This is non-refundable regardless of whether the decree is granted.
• Annual compliance fee: $5,005 per year, paid to the DEDC. This fee funds the compliance monitoring program and is required for the decree to remain in good standing. Failure to pay results in decree suspension.
• Annual charitable donation: $10,000 per year to qualified Puerto Rico charities. Chapter 2 decree holders must make this donation annually. The first donation is due within the first year of the decree and must be documented in the annual compliance report.

In addition to these fixed costs, decree holders must file an annual compliance report with the DEDC documenting their physical presence days, income sourcing, charitable donations, and ongoing eligibility. The report is due within 90 days of the end of the tax year. Non-compliance — missed donations, late reports, or failure to meet the 183-day requirement — can trigger decree revocation.

The Decree Term: 15 to 30 Years, Extendable to 2055

One of Act 60's most powerful features is the contractual guarantee. Unlike a tax rate set by statute — which a legislature can change at any time — an Act 60 decree is a binding contract between the decree holder and the Government of Puerto Rico. The decree's tax rates and terms cannot be unilaterally modified by subsequent legislation for the life of the contract.

Chapter 2 decrees run for the lifetime of the holder. Chapter 3 decrees are granted for an initial term of 15 years (reduced from 20 years under the prior Act 20), with a 15-year extension available, for a total of 30 years. Both decree types are extendable through 2055, the sunset date codified in the Incentives Code.

This contractual structure is what distinguishes Act 60 from a mere tax rate reduction. A state that offers a low tax rate today can raise it tomorrow. Puerto Rico cannot legally alter the terms of an executed decree — doing so would constitute a breach of contract actionable under Puerto Rico law. Over 4,000 active decrees are in force, and no decree has ever been retroactively modified.

You can read more about the legal defensibility of the program in our FAQ section.

IRC Section 933: The Legal Foundation

The entire Act 60 framework rests on IRC Section 933, a provision of the US Internal Revenue Code that excludes income derived from sources within Puerto Rico from US federal gross income. Section 933 has been in the tax code since 1954 and was most recently affirmed by Congress in the Tax Cuts and Jobs Act of 2017 and subsequent technical corrections.

Because Puerto Rico is a US territory — not a foreign country — income sourced to Puerto Rico is not subject to US federal income tax, but it is subject to Puerto Rico's own tax code. Act 60 sets the Puerto Rico tax rate on that income to 4% (Chapter 3) or 0% (Chapter 2). The result: income that is legal US-source income for a mainland resident becomes legally exempt from US federal tax once it is Puerto Rico-source income earned by a bona fide resident.

This is not tax evasion. It is the explicit, codified intent of Congress. Section 933 exists precisely to give Puerto Rico the fiscal autonomy to offer incentives that attract capital and residents to the island. The IRS has published multiple guidance documents acknowledging the program, and federal courts have upheld Section 933's application in numerous cases.

Is Act 60 Right for You?

Act 60 is not a universal solution. It requires a genuine relocation — moving your life, your family, your primary residence, and your tax home to Puerto Rico. The 183-day requirement is real, and the closer-connection test demands authentic integration into Puerto Rico life. For someone who treats it as a paper residency, the program will fail under audit.

But for individuals and families who are willing to relocate — or who are already evaluating a move to a lower-tax jurisdiction — Act 60 offers savings that no mainland strategy can match. A combined effective tax rate of approximately 4% on active income and 0% on investment income, secured by a contract through 2055, is unmatched in the US tax landscape.

The December 2026 deadline adds urgency. If you are evaluating Act 60, the window to secure the 0% passive income rate is closing. Once it closes, the math changes permanently — new applicants will pay 4% on capital gains instead of 0%, for the entire life of their decree.

To understand whether your specific situation qualifies, review the opportunity and explore our frequently asked questions. For a private consultation, we invite you to start a conversation.