The Puerto Rico Act 60 Playbook
"Move to San Juan, sell your company, pay zero federal capital gains. The IRS doesn't love it — but it's still on the books. For now."
The 60-second pitch
Puerto Rico is a US territory, not a foreign country. PR residents pay PR tax, not federal tax, on most PR-source income — by virtue of IRC §933. In 2012, PR passed Act 20 (export services) and Act 22 (individual investors) to lure capital. In 2019, both were merged into Act 60 of 2019.
If you become a bona fide resident of Puerto Rico, you get two enormous incentives:
- 4% corporate tax on income from an Act 60 export-services business (down from up to 37% federal + 8.5% federal QBI-equivalent).
- 0% Puerto Rico tax (and 0% federal under §933) on capital gains, dividends, and interest from PR-domiciled investments earned after you became a resident.
The classic move: founder of a US company sees a $50M exit on the horizon, moves to PR ~12+ months before the deal, becomes a bona fide resident, the deal closes, and the post-move appreciation portion of the gain pays 0% — saving $10M+ in federal capital-gains and NIIT taxes.
The catch in 2024–2026: the IRS launched a Puerto Rico Act 60 Campaign targeting these residents specifically. Bona-fide-residence claims are being audited at a far higher rate than any other expat position. The strategy works only if you do all six tests perfectly and document like your refund depends on it — because it does.
Real-world example
The setup. Marcus owns 60% of a B2B SaaS company. Term sheet on his desk values his stake at $50M. His tax basis is $200K (Series A founder pricing). All-in federal cap-gains exit if he stays in TX: 20% LTCG + 3.8% NIIT = ~$11.9M to the IRS.
The move (June 2024). Marcus signs a 24-month lease in Condado, San Juan; ships his furniture; transfers his TX driver's license; closes US gym + library memberships; opens local bank accounts at Banco Popular; enrolls his daughter in a Dorado school; gets his PR Decree under Act 60 (Individual Resident Investor chapter).
The 183-day clock. 2024: he's in PR 200 days, US 88 days, foreign 77 days. 2025: PR 215 days, US 95 days, foreign 55 days. Passes the PR presence test both years.
Annual donation requirement. Under the 2022/2023 Act 60 amendments, he donates $10,000/year to a qualifying PR nonprofit. Pays the $5K annual filing fee on his Decree.
The exit (Dec 2026). Deal closes. Pre-move appreciation portion: stock FMV on his move date (June 2024) per a qualified valuation = $34M. Post-move appreciation: $50M – $34M = $16M of post-move gain.
The split. Per §865 + §933 + Notice 2010-49, the pre-move appreciation is treated as US-source / non-PR (taxed at full federal LTCG); the post-move appreciation is PR-source and excludable. 5-year wait rule (§865(g)): if he held the stock >10 years and meets the residency tests, the entire post-move portion qualifies for 0% PR Act 60 + 0% federal under §933.
Counterfactual. If Marcus had moved before the company existed (or 10+ years before exit when stock was nearly worthless), virtually all $49.8M of gain would be post-move and excludable — saving ~$11.8M. The timing of the move is everything.
The step-by-step checklist
- Apply for the Act 60 Decree. Submit application to the PR Department of Economic Development & Commerce (DDEC). Two main chapters: Chapter 2 (Individual Resident Investor) for portfolio & cap-gains incentives; Chapter 3 (Export Services) for operating-business 4% rate.
- Pay the application + annual filing fees. Application fee ~$5,005. Annual compliance fee $5,000 (Individual Investor) / $5,000+ (Export Services). Plus required charitable contribution: minimum $10,000/yr to a PR-qualified nonprofit (post-2022 amendments).
- Pass the IRC §937 Bona Fide Residence trifecta — every year:
- Presence Test. Spend ≥ 183 days in PR (or one of four alternative tests, e.g., ≤ 90 US days, or ≥ 549 days over 3 years).
- Tax Home Test. Your principal place of business / employment is in PR.
- Closer Connection Test. Family, home, banking, social ties, voter registration, driver's license, professional licenses, club memberships — all in PR.
- Establish a real life in PR — not a vacation home. Buy or sign a long-term lease (3+ years preferred for audit defense). Move kids to PR schools. Get a PR driver's license. Surrender US-state licenses where required.
- For cap-gains incentive: hold the appreciating asset before sale. Stock, crypto, real estate, business interests. Get an independent valuation as of the move date — this fixes the "pre-move" portion (taxable to US) vs. "post-move" portion (PR-source).
- Wait the §865(g) 10-year period or pay the alternative tax. For stock/securities held < 10 years at the time of move, §865(g) recharacterizes the gain as US-source unless you pay an alternative tax election on the pre-move portion at the time of move.
- For 4% Export Services: actually export services. Services must be performed from PR for clients outside PR. Marketing services, software dev, consulting, asset management, legal, accounting — all qualify. Services TO PR residents are not export services.
- Run real PR payroll. Hire PR residents (Chapter 3 of Act 60 generally requires 1+ employee depending on revenue). Pay PR payroll tax, employer SUTA, etc.
- File Form 8898 in the year of the move. Information return reporting that you became a bona fide PR resident. Mandatory.
- File a dual return — PR + US. File PR Form 482 with PR Treasury (Hacienda) on PR-source income. File US Form 1040 on non-PR-source income only (under §933 exclusion). Use Form 1040 + Schedule for PR — usually with a tax professional dual-licensed in both jurisdictions.
- Document everything. Day-log every day you're in PR. Save grocery receipts, doctor visits, school attendance records, utility bills, airline tickets — the IRS audit packet for Act 60 cases is brutal and reaches back 6 years.
- Stay current on PR compliance. Annual Decree fee, charitable donation, PR returns, real-estate registration. A lapse in any one of these can revoke the Decree retroactively.
IRS code & authority
- IRC §933 Income from sources in Puerto Rico is excluded from US gross income if the taxpayer is a bona fide PR resident for the entire taxable year.
- IRC §937 Definition of "bona fide resident" of a US territory; the three sub-tests (presence, tax home, closer connection). The lynchpin of the entire strategy.
- IRC §865 Source rules for sales of personal property — including the 10-year look-back for stock/securities (§865(g)).
- Reg §1.937-1, 1.937-2 Final regs on bona fide residence; the "tax home" and "closer connection" facts and circumstances.
- Notice 2010-49 IRS guidance allocating pre-move vs. post-move appreciation on assets sold by territory residents.
- PR Act 60-2019 Puerto Rico Incentives Code, consolidating Act 20 (export services, 4% corp) and Act 22 (individual investors, 0% on cap gains/dividends/interest).
- 2022/2023 Act 60 amendments Increased the minimum charitable donation to $10K/yr; tightened residency review; raised employee count thresholds in some Chapter 3 sectors.
- Form 8898 Statement for individuals who begin or end bona fide residence in a US territory.
- PR Form 482 Puerto Rico individual income tax return — filed with Hacienda.
- IRS Puerto Rico Act 60 Campaign (2021-present) — Large Business & International Division active enforcement campaign targeting PR Act 60 / 22 residents for residency, sourcing, and pre-move asset reclassification.
Audit risk flags — and Act 60 is a HOT button
- Failure of the closer-connection test. Most-audited issue: spouse and kids still in California, US gym membership active, US doctor still primary, US-registered car. Defense: Move the whole life — family, schools, doctors, gym, dentist, primary cellphone. Not a few weekends a quarter in PR.
- Pre-move appreciation mischaracterized. Founders who move 3 months before exit try to treat 100% of the gain as PR-source. The IRS will recompute under §865(g) and Notice 2010-49 — usually finding 70–90% is US-source pre-move appreciation. Defense: Get a contemporaneous third-party 409A-style valuation as of the day you become bona fide PR resident. Move years before the liquidity event, not weeks.
- Decree compliance lapses. Missed annual donation, missed annual report, no PR employee for Chapter 3. The PR government has revoked Decrees retroactively — turning prior tax-free years into taxable years. Defense: Have a PR tax professional on retainer; never miss a filing.
- "Substantial gainful activity in the US." If you fly to NYC to physically work with a US client 50 days/year, the IRS argues the income is US-source and not exempt under §933. Defense: Perform services from PR. Use Zoom. Document where each invoice's services were physically rendered.
- The 30-day permanent home rule. §937 says you cannot have a "permanent home outside PR" for more than 30 days during the closer-connection test period. Defense: Sell the US home or convert it irreversibly to a long-term rental. Don't keep a personal-use US house.
- State residency exit not finalized. California, NY, NJ will fight to keep you as a state-resident even after you're PR-bona-fide. Defense: File Form 540NR / IT-203 final-resident returns; document the move date with all the closer-connection facts the state expects.
- Crypto sourcing. Big debate area: where is crypto "located"? Aggressive position treats all post-move crypto gains as PR-source; conservative position sources to where the underlying trading takes place. Defense: Trade from PR-based exchanges/IP, document each trade location, get a private letter ruling if the dollars warrant it.
- Half-year-arrival traps. §933 requires bona fide residence for the entire taxable year. The first partial year usually doesn't qualify — special rules under §937(c) for the year of the move. Defense: Time the move so year 1 is partial (taxable) and year 2 onward is full-year (excludable).
When NOT to do this
- You're not going to actually live in PR. Half-day flights from Miami don't count. If you can't honestly live 200+ days a year in PR with your family, Act 60 will collapse on audit.
- Your liquidity event is < 12 months away. The pre-move portion will eat most of the gain — net benefit becomes marginal vs. the move costs and audit risk.
- Most of your income is US-source W-2. §933 doesn't exclude US-source wages. You'll still owe federal tax on US salary. Act 60 helps PR-sourced business income and PR-sourced investment income — not your remote US W-2.
- You can't tolerate audit risk. The IRS PR Campaign is real. Even compliant taxpayers are seeing 18-month-long audits. If a 2% probability of a 5-year audit gives you panic attacks, skip.
- You're a heavily regulated professional (MD, attorney, RIA). You'll need PR licensing or admission, which can take 12–24 months and may be impossible in your field without retraining.
- You hate humidity and want to keep your NYC apartment "for visits." The 30-day permanent-home rule and the closer-connection test will kill you.
- You have small kids in elite US schools. Pulling kids mid-year, finding equivalents in PR (the international schools have waitlists), and re-rooting socially is harder than the tax savings often justify.
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Disclaimer. This page is educational and not tax advice. Act 60 is an active IRS audit target as of 2024–2026. Bona fide residence, §865/933 sourcing, pre-move valuations, and Decree compliance turn on facts and documentation. Engage a tax professional and PR attorney experienced with Act 60 — this is not a DIY strategy.