Puerto Rico tax incentives under Act 60: The complete 2026 guide

Key takeaways

 

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Puerto Rico tax incentives: What US taxpayers need to know in 2026

Puerto Rico tax incentives under Act 60 can provide a 0% Puerto Rico rate on qualifying investment income and a 4% rate on qualifying exempt-business income, while certain qualifying businesses receive property-tax relief. These benefits depend on the decree category, income source, and federal bona fide residence rules for the 2025 tax year and beyond.

The three figures to know are 0%, 4%, and up to 75%. Individual Resident Investors with qualifying decrees may receive a 0% Puerto Rico rate on covered capital gains, interest, and dividends under the current rules; qualifying businesses can receive a 4% income-tax rate, and some Act 60 business categories receive a 75% property-tax exemption.

The federal tax result depends on where the income is sourced, not simply on where the taxpayer lives when the income is received. IRS Publication 570 states that bona fide Puerto Rico residents generally exclude Puerto Rico-source income from their US return under the territory rules, while US-source income remains within the federal system.

A taxpayer evaluating tax incentives in Puerto Rico should therefore start with the federal residence and sourcing analysis. TFX’s guide to whether Puerto Rico residents owe US tax explains how the US filing rules interact with Puerto Rico residence, while the IRS rules for bona fide residents of Puerto Rico provide the federal starting point.

IRS examination risk is also real. Its LB&I Puerto Rico Act 22 campaign remains active in 2026 and specifically addresses taxpayers who claimed Puerto Rico benefits without satisfying IRC Section 937 or who incorrectly treated US-source income as Puerto Rico-source income.

What is Act 60? Puerto Rico's unified incentives code explained

Act 60 was enacted in 2019 as the Puerto Rico Incentives Code, consolidating tax-exemption and incentive programs that previously sat under separate laws, including Acts 20 and 22. For investors and service businesses, the relevant successor programs include Individual Resident Investors and Export Services, but Act 60 contains substantially more incentive categories.

The Puerto Rico Incentives Code, Act 60, consolidated earlier programs rather than creating a single tax break available to every new resident. DDEC remains responsible for evaluating applications, issuing and supervising decrees, processing amendments, and administering earlier incentive laws that continue to have decree holders.

The relationship between Act 60 vs. Act 20 and 22 is therefore one of consolidation and succession. The Puerto Rico Act 20 and 22 tax benefits did not simply disappear in 2019 – existing decrees can remain governed by their terms, while newer applicants generally apply through the Act 60 system.

The Spanish name, Código de Incentivos de Puerto Rico, is useful because DDEC guidance frequently uses that terminology. The phrase Manual de Incentivos 2025–2026 Puerto Rico does not identify one controlling government manual that replaces Act 60, its regulations, and subsequent amendments; current 2026 compliance guidance includes DDEC Circular Letter 2026-001, Administrative Determination 26-01, and Informative Bulletin 2026-004.

Act 38-2026 is especially important for current applicants. DDEC states that an Individual Resident Investor application filed by December 31, 2026 preserves the 0% option through 2035, while an applicant filing after that date is subject to the new six-year prior-residency condition and other amended rules.

Act 60 Chapter 2: Individual investor tax benefits

An Act 60 Individual Resident Investor can receive a 0% Puerto Rico rate on qualifying net capital gains, interest, and dividends under a qualifying decree filed under the current rules through December 31, 2026. The federal result is separate – IRC Section 937 determines whether investment income is treated as Puerto Rico-source.

The Act 60 capital gains exemption does not convert every gain realized after a move into tax-free Puerto Rico-source income. Investment property owned before becoming a bona fide Puerto Rico resident is subject to special federal sourcing rules, including rules that can allocate appreciation between pre-residency and Puerto Rico residency periods.

The following 4 points distinguish the main Act 60 individual investor benefits from rules that are commonly mixed together:

1. Qualifying post-move investment gains: Covered Puerto Rico-source net capital gains can receive the applicable decree rate – 0% for qualifying applications preserving the existing regime through December 31, 2035.
2. Interest and dividends: Qualifying covered interest and dividend income can also receive the 0% Puerto Rico rate under the current Individual Resident Investor regime.
3. Assets owned before the move: Federal law does not automatically source the entire later gain to Puerto Rico. IRS Publication 570 describes special investment-property rules and an election that can allocate qualifying appreciation attributable to the Puerto Rico holding period.
4. Business distributions and property relief: A blanket 100% distribution exemption or 50% property-tax reduction should not be presented as a universal Individual Resident Investor benefit. Those incentives can apply to other Act 60 business categories and must be checked against the specific decree.

Taxpayers holding appreciated stock, funds, or other investments before relocating should review how capital gains are taxed for Americans abroad before treating a later sale as exempt.

Based on our client scenario at TFX: a taxpayer buys an investment for $100,000 while living in New York, moves to Puerto Rico when it is worth $300,000, and later sells it for $500,000. The entire $400,000 gain should not automatically be labeled post-move Puerto Rico-source gain – the federal allocation and any available sourcing election must be analyzed first.

Act 60 Chapter 3: Export services and the 4% corporate tax rate

Qualifying export-service businesses can receive a 4% Puerto Rico income-tax rate on eligible exempt-business income under Act 60. The service must fall within an eligible category and satisfy the decree’s Puerto Rico and export-market requirements; ordinary domestic Puerto Rico business income does not become 4% income merely because the owner obtained a decree.

The Puerto Rico 4% corporate tax rate applies to qualifying decree income, not automatically to every dollar earned by a Puerto Rico company.

The following 5 service categories illustrate activities that can fall within Puerto Rico business tax incentives for qualifying export operations, subject to the statutory definitions and decree:

1. Consulting and professional services.
2. Software and technology services.
3. Advertising and marketing services.
4. Research and development services.
5. Certain financial, management, and other eligible business services.

The Puerto Rico export services tax rules focus on whether the covered service is performed through the Puerto Rico exempt business for an eligible market outside Puerto Rico. A generic rule requiring exactly 80% of clients to be located outside Puerto Rico is not a substitute for the Act 60 eligibility and nexus analysis.

Likewise, there is no universal $75,000 minimum owner salary for every Chapter 3 company. Owner compensation, payroll, employment obligations, and entity-level federal consequences depend on the entity and decree, so the number should not be inserted as a general Act 60 requirement.

US owners should also consider federal self-employment and entity-reporting consequences. TFX’s explanation of US tax issues for self-employed expats and overseas business owners provides useful background before forming or operating an exempt business.

 

Puerto Rico bona fide residence requirements: The 183-day rule and beyond

Puerto Rico bona fide residence requires 3 federal tests – the presence test, tax-home test, and closer-connection test. Spending at least 183 days in Puerto Rico is one way to satisfy the presence test, but IRS Publication 570 provides 5 alternative routes, so 183 days is not an absolute requirement for every taxpayer.

Act 60 Puerto Rico requirements do not replace IRC Section 937 – a tax decree and bona fide federal residence are separate requirements.

So, what is the Puerto Rico 183-day requirement? The straightforward presence-test route is at least 183 days in Puerto Rico during the tax year. IRS rules also permit four other tests, including a three-year 549-day test with at least 60 days in Puerto Rico during each year and, in another route, no more than 90 days in the United States.

The following 5 federal presence-test alternatives are available under Publication 570:

1. Be present in Puerto Rico for at least 183 days during the tax year.
2. Spend at least 549 days in Puerto Rico during the current and previous 2 tax years, including at least 60 days in each year.
3. Spend no more than 90 days in the United States during the tax year.
4. Have no more than $3,000 of US earned income and spend more days in Puerto Rico than in the United States.
5. Have no significant connection to the United States during the tax year.

The Puerto Rico bona fide residence test also requires the taxpayer's tax home not to be outside Puerto Rico and a closer connection to Puerto Rico than to the United States or a foreign country. The distinction becomes clearer when comparing the bona fide residence and physical presence tests.

Form 8898 is not required simply because every taxpayer moves to Puerto Rico. The IRS Form 8898 bona fide residence rules generally require the form when a taxpayer changes bona fide residence status and has more than $75,000 of worldwide gross income for the year; the threshold applies separately to each spouse.

Failing a required Section 937 test can prevent the taxpayer from being treated as a bona fide Puerto Rico resident for that tax year. That can remove the federal Section 933 exclusion for income the taxpayer expected to exclude, although the actual federal tax depends on income source and the taxpayer’s complete facts.

The 10-factor closer connection test: How the IRS evaluates your Puerto Rico residency

The closer-connection analysis looks at 10 practical factors, including your permanent home, family location, banking relationships, business activities, driver's license, voting jurisdiction, and the address shown on official documents. No single factor automatically settles the test – the IRS evaluates the taxpayer's facts and circumstances.

The following 10 factors appear in IRS Publication 570:

1. Location of your permanent home.
2. Location of your family.
3. Location of personal belongings.
4. Social, political, cultural, professional, and religious affiliations.
5. Location where you conduct routine banking.
6. Location where you conduct business activities.
7. Jurisdiction that issued your driver's license.
8. Jurisdiction where you vote.
9. Location of charitable organizations to which you contribute.
10. Country or jurisdiction you designate as your residence on forms and documents, and types of official forms and documents you file.

Keeping a mainland home is therefore relevant, but it is not a published IRS rule that automatically defeats Puerto Rico residence. It becomes stronger evidence when combined with factors such as a spouse remaining stateside, regular US business activity, mainland voter registration, and predominantly US banking or community ties.

The Puerto Rico closer connection exception can also cause confusion. For a US citizen claiming Puerto Rico bona fide residence, closer connection is part of the Section 937 residence test; the IRS closer-connection exception to the substantial presence test and Form 8840 apply to a different federal residency issue involving certain alien individuals. TFX’s Form 8840 closer-connection guide explains that separate rule.

How to apply for an Act 60 tax decree: Step-by-step process

A Puerto Rico tax decree application is filed through DDEC's Incentives Portal and is reviewed under Act 60, its regulations, and current administrative guidance. In 2026, Individual Resident Investor applicants have an especially important cutoff: applications timestamped by 11:59 p.m. on December 31, 2026 can preserve the current 0% regime.

The December 31, 2026 filing timestamp can determine which Individual Resident Investor regime applies even when DDEC approves the decree later.

The following 6 steps describe the current application sequence:

1. Confirm the incentive category. Determine whether the application is for an Individual Resident Investor, Export Services business, or another Act 60 activity.
2. File through the Incentives Portal. DDEC uses the portal timestamp, including the filing-fee confirmation, when determining whether an IRI application was received by the 2026 cutoff.
3. Submit required personal or business documentation. DDEC states that IRI applicants are subject to a background check and ordinarily must provide a criminal-record report from their prior residence.
4. Review the decree election. An IRI seeking the current 0% regime can retain it through December 31, 2035. Electing the amended 4% IRI rate can extend decree coverage through December 31, 2055, but the 4% rate applies when that election takes effect.
5. Meet post-approval obligations. Individual Resident Investors can face the $10,000 annual donation requirement and a primary-residence purchase obligation under the applicable decree rules.
6. Complete annual compliance. Decree holders must file applicable Puerto Rico tax returns and the required exempt-business annual report.

NOTE! Don’t use fixed application-fee amounts as universal 2026 figures without checking the live portal and the applicant's incentive category. DDEC's current bulletin refers to a portal filing fee and timestamp but does not establish one universal fee in the guidance relied on here.

The same applies to processing time. No binding current DDEC source guarantees approval within 6–12 months, so taxpayers should not base a relocation or planned asset sale on an assumed approval date.

IRS scrutiny of Puerto Rico tax incentives: What you need to know in 2026

IRS scrutiny of Puerto Rico tax incentives remains active in 2026 through the LB&I Puerto Rico Act 22 campaign. The campaign targets taxpayers who claim benefits without satisfying IRC Section 937 and taxpayers who improperly source US income to Puerto Rico to claim a Section 933 exclusion.

The IRS campaign focuses on two core issues – bona fide residence and income sourcing – rather than the mere fact that a taxpayer has an Act 60 decree.

The campaign is not new to 2026, and describing it as having started in 2024 or 2025 would be inaccurate. The IRS continues to list Puerto Rico Act 22 among its active campaigns and identifies examinations, outreach, and soft letters as potential treatment streams.

For taxpayers with both Puerto Rico and mainland activity, the IRS filing rules for US citizens and residents abroad remain relevant because US citizenship and federal income sourcing do not disappear after relocation.

Records should substantiate the residence and source positions taken on the return. Day-count calendars, airline records, credit-card transactions, utility records, leases or deeds, employment records, and evidence of where services were physically performed can become important when the IRS examines Section 937 status.

An understatement caused by negligence or a substantial understatement can trigger a 20% accuracy-related penalty under federal rules. Civil fraud can carry a 75% penalty under IRC Section 6663 when the legal fraud standard is met, separate from tax, interest, and any other applicable consequences.

 

Puerto Rico tax incentives vs. staying on the US mainland: A tax comparison

The difference between mainland taxation and Act 60 can be large, but a valid comparison must separate the 20% federal long-term capital-gain tax, the potential 3.8% NIIT, the 0% qualifying IRI rate, and the 4% qualifying business rate. State tax, payroll tax, and owner-level tax can change the result.

On $500,000 of gain, the simplified top federal capital-gain rate plus NIIT can reach 23.8%, while a qualifying Puerto Rico-source gain under the current IRI decree regime can receive a 0% Puerto Rico rate.

Based on our client scenario at TFX: assume a taxpayer has a $500,000 long-term capital gain that is fully exposed to the top 20% federal capital-gain rate and the full 3.8% NIIT. The simplified federal amount is $100,000 plus $19,000, or $119,000, before any state tax.

For a separate business scenario, assume an Act 60 export-service company earns $300,000 of qualifying net exempt-business income. At a 4% Puerto Rico business-level rate, the illustrative tax is $12,000, before payroll taxes, owner compensation, federal entity rules, or income outside the decree.

The following comparison uses simplified figures to show the decision rule – it is not a substitute for a return-level calculation.

 

The comparison only works when the underlying gain is actually Puerto Rico-source. Taxpayers with investments acquired before moving should first review the federal source rules and TFX's guide to capital gains and losses for US taxpayers.

Get help with your US-Puerto Rico filing

A 2025 tax return filed in 2026 can require separate analysis of Puerto Rico-source income, US-source income, Section 937 residence, and an Act 60 decree. TFX can help prepare the federal filing and international forms that apply to your facts, including situations involving investments, businesses, and a move between jurisdictions.

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Annual compliance requirements for Act 60 decree holders

Act 60 compliance continues after the decree is issued. For the 2025 tax year, DDEC and Hacienda confirmed that the exempt-business annual report, or IANE, remains filed under the previous DDEC procedure; depending on the decree, a calendar-year filing can be due as late as November 15, 2026.

For 2025, the new integration of the IANE into the Puerto Rico income-tax return was postponed, so decree holders must follow the pre-amendment filing process.

The following 5 compliance items deserve separate attention:

1. IANE filing: For 2025, the report remains due under the prior procedure – within 30 days after filing the applicable income-tax return, including extensions, by November 15, 2026 for certain calendar-year decree holders, or by the 15th day of the 11th month after a fiscal-year close, depending on decree terms.
2. Annual IRI donation: Act 60 Individual Resident Investors must document at least $10,000 of annual qualifying contributions, split between a CECFL-approved nonprofit and a qualifying organization under Puerto Rico Internal Revenue Code Section 1101.01(a)(2)(A)(iii).
3. 2025 donation relief: Decree holders should confirm the current qualifying-organization split for the $10,000 annual donation directly with DDEC or their decree terms, since the allocation between qualifying organizations can be updated by administrative guidance.
4. Primary residence: Applicable IRI decree holders must document compliance with the residential-property requirement, including the purchase deadline where their decree is subject to it.
5. Federal change-of-residence reporting: Form 8898 applies when the statutory conditions are met, including the more-than-$75,000 worldwide gross-income test. A required form filed incorrectly or not filed can result in a $1,000 penalty absent reasonable cause.

Current official sources reviewed here do not support a universal annual $5,000 IRI maintenance fee or $300 export-business maintenance fee applicable to every decree holder in 2026. The applicable decree, DDEC portal, and current transaction fee schedule should be checked instead of inserting those figures as general rules.

 

Puerto Rico real estate tax incentives under Act 60

Puerto Rico real estate tax incentives vary by incentive category. An Individual Resident Investor does not receive a universal 50% property-tax exemption on a primary home merely because of Act 60; instead, applicable IRI decrees include a residential-property acquisition requirement, while qualifying exempt businesses can receive separate property-tax exemptions.

For an applicable Individual Resident Investor decree, buying a Puerto Rico primary residence is a compliance requirement – not itself proof of a blanket 50% property-tax reduction.

DDEC's January 12, 2026 guidance states that an IRI subject to the requirement must acquire a Puerto Rico property for use as a principal residence within 2 years after obtaining the decree. DDEC also clarified acceptable ownership structures for existing and pre-2027 applications.

Act 38-2026 changes the rule for IRI applications filed on or after January 1, 2027. DDEC says those applicants must document title directly in the individual’s name, jointly with a spouse, or through a qualifying grantor trust, subject to the amended statutory conditions.

Business property incentives are different. Government material describing Act 60 identifies a 75% property-tax exemption for personal and real property used by qualifying Export Services businesses, while DDEC also advertises a 75% property-tax exemption for certain industrial-development activities.

Taxpayers buying a home should separately review the US rules for capital gains on the sale of a primary residence. If the purchase forms part of an international property portfolio, TFX’s guide to buying foreign real estate as a US taxpayer provides broader reporting context.

Use our US expat tax service after deciding what filing support you need.

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US federal tax obligations that remain despite Puerto Rico residency

A bona fide Puerto Rico resident does not leave the US tax system entirely. For 2025, IRS Publication 570 states that a US citizen or resident alien who is a bona fide Puerto Rico resident generally files a Puerto Rico return reporting worldwide income and, when a US return is required, reports worldwide income while excluding qualifying Puerto Rico-source income.

IRC Section 933 protects qualifying Puerto Rico-source income – it does not turn US-source income into exempt income.

If all of a bona fide resident's income is Puerto Rico-source, Publication 570 states that a US income-tax return is generally not required. Self-employment income is an important exception because US self-employment tax can still apply, including where net self-employment earnings reach the federal filing threshold.

Business owners may also have separate federal information-return requirements depending on how entities are organized. TFX’s guide to additional US filings for taxpayers with non-US corporations explains common forms that can arise outside the individual income-tax calculation.

Foreign-account reporting also needs careful wording. FBAR rules use an aggregate $10,000 threshold for foreign financial accounts, but FinCEN's definition of the United States includes Puerto Rico and other US territories, so an account located in Puerto Rico is not a foreign account merely because the taxpayer previously lived on the mainland. Accounts maintained in genuinely foreign jurisdictions can still require reporting.

Form 8938 can also apply to specified foreign financial assets above its applicable thresholds, although IRS Publication 570 notes special rules for bona fide residents of US possessions.

Act 60 for crypto and investment income: Special considerations

Cryptocurrency is treated as property for US federal tax purposes, and the IRS's Virtual Currency Compliance campaign remains active in 2026. An Act 60 decree does not change that federal classification; the residence, sourcing, holding period, and character of each crypto transaction still determine whether the gain can receive Puerto Rico treatment.

The Act 60 capital gains exemption can apply only after the income satisfies the relevant Puerto Rico decree and federal sourcing rules – moving an existing crypto wallet to Puerto Rico does not reset its tax history.

Pre-move digital assets therefore require the same caution as other appreciated investment property. IRS Publication 570 provides special sourcing rules for investment property held before a taxpayer becomes a bona fide resident, so the portion of appreciation attributable to the pre-move period should not simply be labeled Puerto Rico-source.

Based on our client scenario at TFX: a taxpayer buys Bitcoin for $80,000 before moving, and it is worth $250,000 on the date Puerto Rico residence begins. If the taxpayer later sells for $400,000, the federal source analysis should establish the treatment of the pre-move and post-move appreciation before applying the decree rate.

Staking, mining, consulting for digital-asset companies, and capital appreciation are also different types of income. IRS guidance treats staking rewards received when the taxpayer has dominion and control as income measured by fair market value, while a later disposal can generate a separate property gain or loss.

A Puerto Rico corporate tax incentive does not automatically turn staking or mining income into 4% export-service income. A separate qualifying service business would need to satisfy Act 60's exempt-business rules and the terms of its decree.

For investment-property concepts that can also arise when assets are held across jurisdictions, see TFX's guide to US capital gains tax on foreign property.

Common mistakes that invalidate Puerto Rico tax incentives

Puerto Rico tax compliance requirements fail most visibly when a taxpayer cannot substantiate Section 937 residence or income sourcing. The IRS's active campaign specifically targets these 2 issues, and an Act 60 decree alone does not cure either one.

The most expensive Act 60 mistake is treating a local decree as proof that the same income is exempt from US federal tax.

Based on our client scenario at TFX: a taxpayer spends only 160 days in Puerto Rico but assumes the move automatically failed because the taxpayer missed 183 days. That conclusion could also be wrong – the correct analysis is whether one of the 5 federal presence-test alternatives was met and whether the tax-home and closer-connection tests were satisfied.

The following 5 mistakes can undermine a Puerto Rico tax incentive position:

1. Treating 183 days as the only residence route. It is one of five federal presence-test alternatives.
2. Keeping stronger factual ties to the mainland. A mainland home, family location, voting, banking, and business activity can all affect the closer-connection analysis.
3. Missing Form 8898 when required. A taxpayer with more than $75,000 of worldwide gross income who meets the change-of-status conditions can face a $1,000 penalty for failing to file the form. The official Form 8898 instructions should be checked for the filing year.
4. Missing decree compliance. Applicable IRIs can have a $10,000 annual donation requirement, residential-property documentation, and IANE filing obligations.
5. Mis-sourcing US income. US-source compensation, investment income, or pre-move appreciation does not become Puerto Rico-source simply because the taxpayer receives the money while living on the island.

Taxpayers familiar with the FEIE should not import its day-count rules into Act 60. TFX’s guide to using the physical presence test when returning to the United States deals with a different Section 911 test for foreign-country residence.

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Puerto Rico Act 60 vs. other tax reduction strategies: Which is right for you?

Act 60, the Foreign Earned Income Exclusion, Qualified Opportunity Zones, and Qualified Small Business Stock use 4 different statutory mechanisms. For the 2025 tax year, the FEIE maximum is $130,000, legacy QOZ deferred gains generally reach their December 31, 2026 inclusion point, and post-July 4, 2025 QSBS received expanded federal treatment.

Act 60 is a Puerto Rico residence and source-based regime; FEIE, QOZ, and QSBS solve different tax problems and are not substitutes for one another.

The following 4 comparisons show the main distinction:

1. Act 60 Individual Resident Investor: Can provide a 0% Puerto Rico rate on qualifying covered investment income for eligible current-regime applicants, but federal Section 937 sourcing and bona fide residence remain necessary.
2. Foreign Earned Income Exclusion: Allows up to $130,000 for 2025 for qualifying foreign earned income. Puerto Rico is a US territory, not a foreign country for Section 911, and IRS guidance states that residence or presence in a US territory does not itself qualify a taxpayer for FEIE.
3. Qualified Opportunity Zones: Under the legacy regime, deferred eligible gains invested on time generally must be included no later than December 31, 2026, although qualifying QOF investments held for at least 10 years can have a separate fair-market-value basis election.
4. Qualified Small Business Stock: For qualifying stock acquired after July 4, 2025, the federal per-issuer exclusion cap increased to $15 million and stock held at least 5 years can qualify for up to 100% gain exclusion, subject to Section 1202 requirements. Earlier stock follows the prior rules.

The old blanket description of QSBS as a "$10 million exclusion" is therefore incomplete for stock acquired after July 4, 2025. The new $15 million rule is one of the federal changes that should be reflected in a 2026 comparison.

Retirement assets require another analysis because IRA and retirement-plan distributions are not automatically converted into Act 60 exempt capital gains. Before moving accounts or taking distributions, review TFX's guide to US tax consequences of moving or withdrawing retirement accounts.

So, is Puerto Rico a tax haven? Puerto Rico offers statutory tax incentives, but it remains a US territory subject to federal residence, sourcing, reporting, and enforcement rules. Calling it a tax haven misses the legal conditions that determine whether a taxpayer receives any Act 60 benefit.