Puerto Rico Tax Incentives 2026: Act 60 Residency, Benefits & Compliance

Last updated: October 2026

Puerto Rico tax incentives remain one of the most compelling legal mechanisms available to US citizens who want to lawfully reduce their tax burden without renouncing their citizenship, and 2026 is bringing renewed demand from high-net-worth individuals, entrepreneurs and US companies evaluating relocation. The core framework today is Act 60 of 2019, the Puerto Rico Incentives Code, which consolidated the earlier Act 20 (export services) and Act 22 (individual investor) programs, among others, into a single statute. For bona fide residents, the appeal lies in the interaction between US federal law and local Puerto Rico law, a combination that, when structured correctly, can produce dramatically favourable outcomes on service income, dividends and long-term capital gains.

This guide explains who qualifies, how the residency tests work, what benefits exist, and the compliance obligations that too many newcomers underestimate.

Quick summary: what Puerto Rico tax incentives (Act 60) mean in 2026

Puerto Rico is an unincorporated US territory with its own internal revenue system. Because of this unusual constitutional status, income sourced within Puerto Rico and earned by a bona fide resident is generally excluded from US federal income tax under Section 933 of the Internal Revenue Code. Act 60 layers local tax exemptions and reduced rates on top of that federal exclusion, creating a legal structure that can meaningfully lower the overall tax burden for qualifying residents and businesses.

The two headline programs most people recognise are the individual resident investor incentives (formerly Act 22) and the export services incentives (formerly Act 20). Act 60 brought these and other programs, covering manufacturing, tourism, agriculture and more, under one administrative roof managed by the Department of Economic Development and Commerce (DDEC). For individuals, the attraction is favourable treatment of certain Puerto Rico-sourced investment income. For businesses, it is a reduced corporate tax rate on qualifying export activity, among other benefits.

None of these benefits are automatic. They require bona fide Puerto Rico tax residency, a formal incentive decree where applicable, and ongoing compliance with both Hacienda (the Puerto Rico Department of Treasury) and the IRS. Missteps on residency, income sourcing or substance can undo the entire benefit. If you are weighing a move, a residency assessment with experienced counsel is the sensible starting point.

Who can qualify: eligibility and categories under Act 60

Act 60 is not a single incentive but a framework containing several distinct categories, each with its own eligibility criteria, decree process and compliance obligations. Understanding which category applies to you is the first substantive step.

Individual resident investor incentives

The individual resident investor category, the successor to Act 22, is aimed at individuals who become bona fide residents of Puerto Rico and who had not been residents during a defined look-back period before relocating. The signature benefit is favourable treatment of certain Puerto Rico-sourced investment income, including interest, dividends and long-term capital gains that accrue after the individual becomes a resident. To obtain these benefits, the individual must apply for and secure a tax decree through DDEC, satisfy an annual charitable contribution requirement, and purchase residential property in Puerto Rico within the timeframe specified by the applicable rules and the decree.

The decree functions as a contract between the resident and the government, fixing the applicable benefits for its term provided the holder remains compliant. Note that filing fees, acceptance fees and the annual charitable contribution amount are set by DDEC and are subject to change, so confirm the current figures before applying.

Export services and other business incentives

The business side of Act 60, rooted in the former Act 20, is designed for companies that provide services from Puerto Rico to clients located outside the island. Qualifying export service businesses can benefit from a reduced corporate income tax rate on eligible export income, together with exemptions on certain distributions and property. Because this category targets genuinely export-oriented activity, the services must be rendered to non-Puerto Rico clients and must not have a nexus with Puerto Rico that would make them local-market services.

Beyond export services, Act 60 encompasses manufacturing, tourism, agriculture, renewable energy and other sectors, each with tailored benefits. Businesses must register and obtain a decree through DDEC, and depending on the category may face employment, payroll or investment conditions as part of their obligations. The economic and substance expectations have grown more prominent in recent administrative practice, so the days of a purely paper presence are gone.

In short, the Puerto Rico tax incentives available under Act 60 divide broadly into individual-focused and business-focused tracks. Many entrepreneurs ultimately pursue both, an individual decree covering personal investment income and a business decree covering their operating company, which is where coordinated structuring becomes essential.

Puerto Rico residency: legal tests and US tax consequences

Everything in the Act 60 analysis depends on becoming a bona fide resident of Puerto Rico for US federal tax purposes. Without that status, the Section 933 exclusion does not apply, and the local incentives lose much of their value. Bona fide residency is a federal concept governed by Section 937 of the Internal Revenue Code and elaborated in IRS Publication 570, and it rests on three interlocking tests.

• Presence test. You must meet one of several presence conditions for the tax year, the most common being physical presence in Puerto Rico for the required number of days during the year.
• Tax home test. Your tax home, generally your main place of business or employment, must be in Puerto Rico and not in the United States.
• Closer connection test. You must not have a closer connection to the United States or to a foreign country than to Puerto Rico.

These tests work together. Satisfying the day count while maintaining a US tax home, or retaining stronger personal and economic ties to a mainland state, can defeat bona fide residency and expose the taxpayer to US tax on income they believed was exempt. This is precisely where disputes with the IRS arise, because residency is ultimately a facts-and-circumstances determination.

Do US citizens pay taxes in Puerto Rico? The answer turns on residency. A US citizen who is a bona fide resident of Puerto Rico generally excludes Puerto Rico-sourced income from US federal income tax under IRC Section 933, but remains fully subject to US federal tax on US-source income, for example, income from a business operated on the mainland or wages earned for work physically performed in the United States. Bona fide residents must still file with Hacienda, and in many cases must also file a US federal return reporting non-Puerto Rico income. Publication 570 is the IRS’s primary guide to these rules and should be read closely before relocating.

Residency evidence checklist

Because residency is judged on the totality of the facts, documentation matters enormously. The following table summarises the categories of evidence that help establish genuine Puerto Rico tax residency.

Physical-presence test: counting days and exceptions

The presence test most people rely on counts the days physically spent in Puerto Rico during the tax year. The counting rules treat a day of presence as any day on which the individual is physically present in Puerto Rico, and there are complementary limits on the number of days that may be spent in the United States. Partial days and travel days require careful treatment, and there are special provisions that can affect the count, for instance, rules addressing time spent outside Puerto Rico for specific reasons, and particular treatment for certain categories of worker. Because the arithmetic can be unforgiving near year-end, a disciplined, contemporaneous day log is indispensable.

Keep it throughout the year rather than reconstructing it later, and consult Publication 570 and the Section 937 regulations for the specific day thresholds and exceptions that apply to your year.

Closer connection and tax home considerations

Even a taxpayer who meets the day count can fail bona fide residency if their tax home remains in the United States or if their closer connection lies elsewhere. The tax home is generally located where you conduct your principal trade or business; retaining a mainland office, a mainland employer or ongoing mainland business operations can anchor your tax home off-island. The closer connection analysis weighs where your permanent home, family, belongings, banking, affiliations and the centre of your life are located.

A taxpayer who keeps a primary residence, close family and the bulk of their economic life on the mainland may be treated as more closely connected to the United States, with the consequence that Puerto Rico income loses its federal exclusion. Severing or relocating these ties, not merely counting days, is what makes residency defensible.

How to apply for Act 60 incentives and the typical timeline

Securing Puerto Rico tax incentives under Act 60 is a structured, document-intensive process administered through DDEC, with compliance obligations flowing to Hacienda. While each case differs, the path generally follows a recognisable sequence.

1. Pre-qualification and planning. Begin with a consultation to confirm which Act 60 category fits your profile, to map out residency logistics, and to model the expected tax outcome. This stage also identifies US federal exposure that will survive the move.
2. Preparing the application. Assemble the supporting documentation, identity and background materials, business plans or investment details, and evidence relevant to the chosen category. Accuracy here prevents later requests for information that stall the file.
3. Filing the petition with DDEC. Submit the application through the DDEC incentives platform, together with the applicable filing fees set by DDEC.
4. Review and issuance of the decree. DDEC reviews the petition, may request clarifications, and ultimately issues a tax decree setting out the benefits and the conditions attached to them.
5. Post-decree compliance set-up. Register with Hacienda, establish local payroll and bookkeeping where required, satisfy property-purchase and charitable-contribution conditions where they apply, and calendar the annual reporting obligations.

As a practical matter, applicants should think in phases. The early phase typically covers the relocation itself, establishing residency, and preparing and filing the decree petition. A later phase covers decree issuance and the build-out of a compliant operating and reporting structure. Processing times vary considerably with the completeness of the application and administrative workload, so build in a generous margin rather than assuming a fixed turnaround.

The most common pitfalls are avoidable: incomplete documentation that triggers delays, failing to establish genuine residency before claiming benefits, neglecting decree conditions such as property purchase or charitable giving, and treating the decree as the finish line rather than the start of an ongoing compliance relationship. Engaging counsel early, ideally before the move, is the single most effective way to avoid them. Consider requesting a preliminary incentives eligibility memo before you commit to relocation.

Tax benefits explained: individual versus corporate Puerto Rico tax incentives

The benefits available depend heavily on whether you are pursuing individual resident investor incentives, business export incentives, or simply becoming an ordinary Puerto Rico resident without a decree. The table below compares the three positions at a high level. Specific rates and conditions are fixed by each decree and by current DDEC and Hacienda rules, so treat this as an orientation rather than a definitive schedule.

The practical lesson from the table is that the standout Puerto Rico tax incentives are tied to a decree and to real presence. A standard resident without a decree still benefits from the Section 933 exclusion on genuinely Puerto Rico-sourced income, but does not receive the enhanced rates and exemptions that make the individual resident investor and export services programs so attractive.

Example scenarios: after-tax income illustrations

The following examples are illustrative only, designed to show how status changes outcomes. They rely on simplifying assumptions and are not tax advice; your actual result depends on sourcing, your decree terms, and your full financial picture.

• How much is $100k after taxes in Puerto Rico? For a bona fide resident whose $100,000 is genuinely Puerto Rico-sourced and who holds a qualifying individual resident investor decree, certain categories of that income, such as qualifying long-term capital gains accruing after residency, may receive highly favourable or nil local treatment, while the Section 933 exclusion keeps it outside US federal tax. A resident without a decree, by contrast, would see that income taxed under ordinary Puerto Rico graduated rates.
• Business service income. A qualifying export services company that earns $100,000 of eligible income from off-island clients may be taxed at the reduced corporate rate established in its decree, rather than at the standard corporate rate, a difference that compounds significantly at scale. The owner’s personal tax on distributions then depends on their residency status and any individual decree.

In each case the key variable is sourcing. Income that is in substance US-source does not become Puerto Rico income simply because the recipient has moved. Getting the sourcing right is the foundation of a defensible position.

Entity choice and Puerto Rico LLCs: benefits and traps

For entrepreneurs, entity selection is as important as the incentive decree itself. Puerto Rico recognises limited liability companies under its General Corporations Act, and a Puerto Rico LLC can offer meaningful advantages when used correctly.

What are the benefits of an LLC in Puerto Rico? A Puerto Rico LLC provides limited liability protection for its owners and offers flexibility in how it is taxed, depending on elections made, it can generally be treated as a pass-through or taxed as a corporation, depending on what best fits the business and the applicable incentive. When paired with an export services decree, a properly structured LLC can be the vehicle through which qualifying export income is earned at the reduced rate. The combination of liability protection, classification flexibility and access to Act 60 benefits is why the LLC is a frequent choice for relocating entrepreneurs.

The traps are equally important. The way a Puerto Rico entity is classified for US federal purposes affects how its income and distributions are reported, and a mismatch between the US and Puerto Rico treatment can create unexpected federal exposure. Income sourcing and nexus rules determine whether service income is genuinely export income or disguised local or US-source income. And an entity that exists only on paper, without real people and real operations behind it, is vulnerable on substance. The right structure for one entrepreneur may be entirely wrong for another, which is why entity choice should be settled as part of the overall incentives plan rather than as an afterthought.

A corporate set-up consultation before incorporation is far cheaper than restructuring later.

Compliance: Puerto Rico returns, US filings and common pitfalls

Obtaining a decree is the beginning, not the end, of the taxpayer’s obligations. Robust Puerto Rico tax compliance is what preserves the benefits over time and withstands scrutiny from both Hacienda and the IRS.

On the Puerto Rico side, bona fide residents and businesses must file with Hacienda, meet estimated tax obligations where applicable, and comply with wage withholding and payroll rules if they employ staff. Decree holders must also file the annual compliance reports that confirm they continue to meet the conditions of their decree, failure to do so is a leading cause of problems. Businesses that make taxable sales must also address indirect tax.

Does Puerto Rico have a sales tax? Yes. Puerto Rico levies a sales and use tax known locally as the IVU (impuesto sobre ventas y uso). Businesses making taxable sales must generally register, collect and remit the IVU, and must follow Hacienda’s rules on which transactions are taxable and which qualify for exemption. The combined state and municipal rate is set by statute and administered by Hacienda; because rates and exemptions can change, confirm the current rate and your position with current Hacienda guidance rather than assuming a figure or an exemption.

On the US side, bona fide residents must continue to meet their federal reporting duties for income that falls outside the Section 933 exclusion, and may have information-reporting obligations in addition to income tax returns. Internationally oriented taxpayers should also be alert to foreign-account and foreign-asset reporting regimes that can apply regardless of Puerto Rico residency. Penalty exposure for missed filings and underpayments can be significant, and recordkeeping, particularly the contemporaneous residency documentation discussed above, is the taxpayer’s best protection.

Interaction with the IRS: what to watch for

The interface between Puerto Rico residency and the IRS deserves particular attention. IRS Publication 570 is the authoritative federal guide for individuals with income from US possessions, including Puerto Rico, and it explains how bona fide residents report income, which income is excluded, and how to handle years in which residency status changes. Individuals who become or cease to be bona fide residents of Puerto Rico generally have a reporting obligation associated with that change in status, and getting that reporting right in the transition year is critical. US-source income continues to be reported on the federal return, and the sourcing of each stream of income should be documented.

Because dual-residency and sourcing issues are precisely where IRS examinations concentrate, taxpayers should keep records that would let them defend both their residency and their sourcing positions if asked.

Risks, anti-abuse rules and substance requirements under Puerto Rico tax incentives

The generosity of Puerto Rico tax incentives has, predictably, attracted scrutiny, and the administrative focus in recent practice has shifted toward substance and genuine economic activity. Taxpayers who treat Act 60 as a paper exercise face real risk.

The central principle is that benefits are earned by real presence and real activity. For individuals, that means genuinely relocating the centre of one’s life to Puerto Rico rather than maintaining the status quo on the mainland while counting days. For businesses, it means conducting actual operations on the island. Where a company claims export income, the economic substance behind that company, people, premises and functions, must support the claim. Mispricing transactions between related entities, or sourcing income to Puerto Rico that is in substance earned elsewhere, invites challenge and potential revocation of a decree.

A practical substance checklist helps keep a structure defensible:

• Premises. Maintain genuine office or operating space in Puerto Rico appropriate to the activity.
• People. Employ staff locally where the decree or the nature of the business requires it, with real payroll.
• Governance. Hold and document decision-making and board activity in Puerto Rico.
• Records. Keep bookkeeping, contracts and sourcing documentation that reflect where value is genuinely created.

Decrees can be revoked for non-compliance, and a revocation can have serious financial consequences. The cost of building genuine substance is almost always lower than the cost of losing the benefits and facing penalties.

Practical checklist: moving to Puerto Rico for individuals and businesses

For readers ready to act, the following checklist sequences the major tasks involved in a move. It is a planning aid, not a substitute for tailored advice.

1. Pre-move consultation. Confirm the right Act 60 category, model the expected outcome, and identify surviving US obligations.
2. Establish residency logistics. Secure a Puerto Rico residence, begin your contemporaneous day log, and start relocating personal and economic ties.
3. Apply for incentives. Prepare and file the decree petition with DDEC and track it through issuance.
4. Stand up the structure. Form or restructure the operating entity, confirm its US classification, and set up local payroll and bookkeeping.
5. Open local banking. Establish Puerto Rico bank and brokerage relationships to reinforce residency and support operations.
6. Register with Hacienda. Complete tax registrations, including IVU where applicable, and calendar all filing deadlines.
7. Satisfy decree conditions. Complete property purchase, charitable contributions, or employment conditions within the required timeframes.
8. Build the compliance calendar. Schedule annual decree compliance reports, Puerto Rico and US filings, and periodic reviews.

Schedule a residency assessment before you book a one-way ticket, timing the move correctly within the tax year can materially affect your first-year outcome.

Conclusion and next steps

Puerto Rico tax incentives under Act 60 offer a genuinely powerful, legally grounded path to reduced taxation for US individuals and businesses prepared to establish real residency and real substance on the island. The benefits, the Section 933 exclusion for bona fide residents, favourable treatment of qualifying investment income, and reduced corporate rates on qualifying export services, are substantial, but they are matched by equally serious residency, sourcing and compliance requirements. The taxpayers who succeed treat the move as a comprehensive relocation of their life or business, document everything, and maintain disciplined compliance with both Hacienda and the IRS year after year.

If you are evaluating Puerto Rico tax incentives for 2026, the prudent first step is a professional assessment of your eligibility, your residency plan and your structure. To discuss your situation, contact a Puerto Rico tax lawyer and explore the Puerto Rico, Tax practice page.

Sources

1. Puerto Rico Department of Treasury (Departamento de Hacienda)
2. Puerto Rico Department of Economic Development & Commerce (DDEC)
3. IRS, Publication 570, Tax Guide for Individuals With Income From U.S. Possessions
4. Cornell Legal Information Institute, IRC §933 (Residents of Puerto Rico)
5. Cornell Legal Information Institute, IRC §937 (Special rules relating to possessions)