Puerto Rico’s Act 60 is an excellent tax program for US citizens or residents that are willing to relocate to Puerto Rico. Here’s what you need to know about Puerto Rico’s Act 60 if you’re setting up a bank or business on the island.
Note that this post is focused on US citizens or residents. It also applies to foreign nationals who move to Puerto Rico to operate a bank and become subject to local taxes. However, in such a case, the non-US person will need a residency visa and work permit to officially work on the island.
A work visa in Puerto Rico is issued by the United States and is identical to a visa issued to work in California or New York. Remember that it’s a domestic flight from Puerto Rico to the US with no immigration checkpoint. Thus, all US immigration laws apply to those traveling to Puerto Rico.
Puerto Rico’s Act 60 – An Introduction
Section 933 of the US tax code allows a bona fide resident of Puerto Rico to exclude Puerto Rico source income from his or her US tax return. That is to say, US persons (which includes citizens, residents, as well as green card and visa holders) do not pay US tax on their Puerto Rico sourced income. Puerto Rico sourced income is only taxed in Puerto Rico.
This means that Puerto Rico is free to make whatever tax laws for its residents that it likes… and here is where Puerto Rico’s Act 60 comes in. Puerto Rico’s Act 60 taxes certain types of business income at only 4%. Puerto Rico’s Act 60 is basically the same as Act 273 for international banks. Act 273 taxes international banks at 4% and Act 60 taxes approved businesses at 4%.
In addition, dividends paid from an international bank or a Puerto Rico Act 60 licensed company are tax-free to the recipient. You pay zero tax on dividends from these businesses so long as you are a resident of Puerto Rico and have an Act 60 decree. If you’re not a US resident, see dividends below.
To qualify for Puerto Rico’s Act 60, you must be a bona fide resident of Puerto Rico. In general, this means that you have moved to Puerto Rico for the foreseeable future and that the island is your primary home. At a minimum, you should be spending 183 days a year in Puerto Rico.
If you travel internationally, you must spend more time in Puerto Rico than you do in the United States. That means that Puerto Rico must be your home base and where you return to after your trip. Those who travel extensively must be especially diligent to minimize their days in the United States.
Puerto Rico’s Act 60 – Approved Businesses
The purpose of Puerto Rico’s Act 60 is to bring quality jobs to the island, as well as high net worth persons who will inject money into the economy. In order to qualify for Puerto Rico’s Act 60, you must start an “export service” business. This is a business that provides a service to companies and/or individuals outside of Puerto Rico.
Examples of export service businesses include:
A good example for a bank owner would be consulting and management service for a call center outside of Puerto Rico. You would bring as much income into Puerto Rico as possible in fees, reducing the tax in your country of operation and moving it to Puerto Rico at 4%. For more on this, see Where to set up a Bank Call Center.
Regarding investment banking and other broker-dealer services, keep in mind that banks in Puerto Rico may provide custody services, but not act as broker-dealer or trade client accounts. Thus, trading client funds would require a broker-dealer license from the United States or an offshore jurisdiction such as BVI. For more on custody, see International Banks in Puerto Rico May Provide Global Custody Services.
Puerto Rico’s Act 60 – Capital Gains
Like dividends from a business in Puerto Rico, Puerto Rico sourced capital gains are taxed at zero. Yes, that’s right, capital gains on Puerto Rico sourced assets are taxed at zero under Puerto Rico’s Act 60.
However, and this is a big caveat, Puerto Rico’s Act 60 only applies to gains on assets acquired after you move to the island. No, you can’t buy Dogecoin, live in the US for a year or two, move to Puerto Rico to sell your crypto, and magically eliminate your US tax bill. Puerto Rico’s Act 60 applies to the Doge you purchase after you become a bona fide resident of Puerto Rico.
Puerto Rico’s Act 60 for capital gains is a great tool for short-term investors and day traders. The zero percent tax rate applies to both long-term and short-term gains. It’s also an amazing tax deal when you sell your Puerto Rico’s Act 60 business.
I should note that Puerto Rico’s capital gains tax benefits generally apply to stock sales on a major exchange. Real estate in the United States is not Puerto Rico-sourced income. Likewise, the sale of a US business is unlikely to generate Puerto Rico sourced income.
Puerto Rico’s Act 273 – Dividends
The following is a clarification for international bank owners in Puerto Rico who operate under Act 273 but not Act 60. Dividends from an Act 273 international bank come out tax-free. They are not taxed in Puerto Rico and there is no withholding tax.
These dividends can then be paid to an offshore holding company, again with no additional tax. The only tax paid by the bank is the 4% corporate rate.
Non-US persons can elect to hold these dividends in the offshore company or receive them in their home country as a distribution. In many cases, the recipient will not pay local tax on the foreign dividend. Of course, each country is different and each person’s circumstances are different, so consult your local tax advisor.
However, US persons will pay US tax on these dividend distributions. And, because they are non-qualified foreign dividends, you will pay US tax at the highest rate. So, while foreign persons typically pay no tax on these distributions, US persons can pay up to 35%.
This creates a conflict of interest between shareholders. US investors will want to hold gains inside the bank tax-deferred. Non-US persons will likely prefer to distribute the dividends as quickly as possible.
Puerto Rico’s Act 60 – Conclusion
I hope you’ve found this post on Puerto Rico’s Act 60 to be helpful. US persons will find that Act 60 can be an excellent tax mitigation tool when combined with an Act 273 bank.