Puerto Rico Act 60 Revisited: New Trends and Opportunities Under the Resident Tax Incentive Code

Last summer, Anchin’s International and Tax Controversy groups detailed the tax planning opportunities available to individuals and businesses that make the move to Puerto Rico.

Since then, we have received numerous requests for more information from individuals who are considering moving to Puerto Rico to take advantage of this significant benefit. As such, the Anchin team wanted to share the newest considerations by Act 60 hopefuls.

For individuals with individual tax exemption decrees who move mid-way through the year, it is important to fully understand the “year of the move” exemption. Under this exemption, individuals who (1) maintain a home in Puerto Rico for the last 183 days of the year, (2) have not been a bona fide resident of Puerto Rico in the three tax years preceding the year of the move, and (3) achieve bona fide residency the year of the move and the two following years can reap the benefits of Act 60 immediately so long as they move by July 1st.

Additionally, there has been a notable increase in the number of service providers making the move, including Registered Investment Advisors, private equity partners and law firm partners looking to benefit from the export service company exemption. This exemption applies to any service business with a bona fide office or establishment on the island that exports their services outside of Puerto Rico. Such providers can request and obtain a tax exemption decree that will make them eligible for a 4% flat corporate income tax rate and a 90% exemption from property taxes. When coupled with the individual investor exemption, distributions from a Puerto Rico export service company can be up to 100% tax exempt which may yield a total effective income tax rate of 4% on export services income.

If your business receives K-1s from investment funds with capital gains, you may need the new K-3 forms that were recently introduced by the IRS to be able to prepare your tax returns properly. These new forms must be filed and provided by the issuing partnership upon request. Understanding the taxability of capital gains for bona fide residents and ensuring that your K-1 and K-3 documentation match could help mitigate some questions from taxing authorities.

With more and more Act 60 hopefuls considering the island, and the Act 60 individual tax exemption decree scheduled to sunset in 2035, scrutiny by the taxing authorities is almost certain. Both the Internal Revenue Service (IRS) and the Puerto Rico Department of Treasury (Hacienda) have recently started initiatives of issuing notices to taxpayers who are claiming bona fide residency. It is important to work with tax advisors to ensure that your tax positions are solid, that your documentation is organized and that you have a plan to track the days you spend on the island. If subjected to a bona fide residency review it will likely be necessary to engage both US-based and Puerto Rico-based tax advisors with an in-depth knowledge and expertise of these specific rules.

If you are interested in Puerto Rico’s Resident Tax Incentive Code and how you may be able to take advantage of its tax benefits, contact Gwayne Lai, Director of International Tax, or your Anchin Relationship Partner.