Puerto Rico’s attractive tax benefits require residency status on the island. Here’s how to do it.

Puerto Rico’s Act 60 has piqued the interest of many in the financial community, and for good reason. The island’s relaxed tax laws were explicitly written to attract outside investors and entrepreneurs. But to take full advantage of benefits like a single-digit corporate tax and no taxes on capital gains, you’ll have to first establish Puerto Rican bona fide residency.

Because Puerto Rico is a U.S. territory, Americans don’t need to renounce their home country citizenship to earn resident status on the island. For U.S. taxpayers, moving to Puerto Rico is considered an internal migration, not immigration. Still, there are a few requirements and regulations that dictate who can become a bona fide resident of Puerto Rico. In this guide for investors, we’ll briefly explain Act 60, then look at the steps to establishing Puerto Rican residency.

What is Act 60?

We provided an overview of Article 60 and other tax benefits in Puerto Rico in a previous article, so we’ll only briefly touch on the subject here.  

In 2019, Puerto Rico updated and consolidated two previous tax laws—Act 20 and Act 22—into Act 60. The language of the Act is transparent in its intent to attract outside investors by “creating a better and more effective business and investment environment” in Puerto Rico. With the island already known as a tax haven, the latest economic incentives have made conducting business in Puerto Rico more enticing than ever. 

The tax benefits for qualifying resident businesses include:

  • A 4% corporate tax rate
  • No tax on capital gains, interests, dividends, and royalties
  • No tax on distributions from earnings and profits
  • 75% exemption on real and personal property taxes  
  • 50% exemption on municipal taxes

Requirements for Puerto Rican residency

But before you can enjoy any of these benefits, you’ll have to establish yourself as a bona fide Puerto Rican resident. Once you’ve met the requirements, you’ll have to submit Form 8898 to the IRS to update your residency status. The agency provides detailed instructions for filling out this form, which outline in depth the qualifications we’ll discuss below. 

In Publication 570, the IRS lays out three main criteria to establish Puerto Rican residency: an individual must be “present” for a certain time on the island, they must have their “tax home” there, and they must have “closer connections” to Puerto Rico than anywhere else. Let’s break down what each of these requirements entails. 

Presence 

The first of the requirements is the most significant and probably the most tricky to satisfy. “Presence,” as you may have guessed,  tests whether you’ve actually spent most of your time on the island rather than in the contiguous United States (or elsewhere in the world). To pass the presence test, you must meet one—and only one—of the following conditions: 

  • You were present in Puerto Rico 183 days out of the tax year
  • You spent at least 549 days in Puerto Rico throughout the current and previous two tax years, including at least 60 days per tax year
  • You spent no more than 90 days in the mainland U.S. throughout the tax year
  • You earned no more than $3,000 in the mainland U.S. and you spent more days in Puerto Rico than in the U.S. throughout the tax year
  • You have no significant connections to the U.S. throughout the tax year

It’s worth noting that even a brief amount of time (as little as a few hours) can constitute a “day” of presence on the island under these requirements. Moreover, at least 30 of the above-mentioned 183 days can be used as “free travel days,” meaning you don’t have to actually be in Puerto Rico—you just can’t be anywhere else in the U.S.

Tax Forms: Residency in Puerto Rico

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Tax home

The second requirement is straightforward: you must maintain a “tax home”—the tax jurisdiction of your primary place of employment—in Puerto Rico for a full tax year. If you don’t have a primary place of employment, this defaults to your place of permanent residence. Your tax home cannot be located outside of Puerto Rico on any other days of that tax year. 

For the first year of your move, you can satisfy this requirement if you haven’t maintained a tax home outside of Puerto Rico within the last 183 days or more of the previous tax year. In other words, you can achieve residency status within the same year as your move as long as you relocate your tax home there before July 1st. 

Closer connections

The last requirement—that you must have a “closer connection” to Puerto Rico than any other place— is tricky for a different reason. You may have already noticed the subjective language. What, exactly, constitutes a “closer connection” to this U.S. territory?

The IRS looks for compelling evidence of your intent to establish and maintain a life that is primarily based in Puerto Rico. This evidence includes a broad array of factors. What they might look into includes: 

  • Where you’re registered to vote 
  • Where your spouse or children live, work, go to school, etc.
  • Where the bulk of your business operates 
  • Where your driver’s license is from
  • Where your belongings and permanent home are located 
  • Where your bank is located
  • Where organizations you donate to or participate in are located (i.e., places of worship, clubs, charities, etc.)

To put it simply: The IRS is looking for proof that you’ve uprooted your life in the United States and fully intend to live in Puerto Rico for the foreseeable future. It would be difficult to pass the closer connection test without actually moving your entire livelihood—along with that of your spouse’s and children’s life, if applicable—to the island. 

Consequently, if you intend to establish residency in Puerto Rico, it’s best to start building connections there as soon as possible. This will look different for every person, but a good place to start would be setting up your primary banking there, getting a Puerto Rican driver’s license, and joining some local organizations. 

Additional qualifications

One of the above-mentioned tax benefits of Act 60 also has further qualifications. To be eligible for zero taxes on capital gains, interest, dividends, and royalties, individuals need to purchase a primary residence in Puerto Rico and make an annual charitable donation of $10,000 or more. 

Final thoughts

Enjoying the full benefits of Puerto Rico’s latest economic incentives will likely require moving your life and business operations to the island. But with some planning, you can complete the process of residency fairly quickly. You could take full advantage of Puerto Rico’s business-friendly atmosphere—along with its sunny beaches, tropical climate, and rich cultural heritage—within the first year of your relocation. 

This has been a brief overview of the bona fide residency process rather than an exhaustive review of the numerous restrictions, exceptions, and special rules that may apply. For more information, you can read Publication 570, the IRS’s Tax Guide for Individuals with Income from U.S. Possessions. You can also email us at invest@lifeafarcapital.com to learn more about relocating to Puerto Rico and how you can invest in this island paradise.

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