federal and state tax rates

Do U.S. citizens living in Puerto Rico have to pay taxes? 

While Puerto Rico is considered part of the United States, it is actually not a state and therefore enjoys fiscal autonomy. This gives Puerto Rico flexibility to innovate with its own laws, independent of those of the U.S. tax legislation. To promote the economy in Puerto Rico, Act 60 was created to attract investors and high-earning companies. 

The purpose is to offer very attractive tax incentives that are not available in the U.S., which EB-5 Visa program participants can also take advantage of. Individuals who take advantage of these programs can benefit from incredible federal income tax exemptions and reduce their fiscal obligations to practically zero on their generated and earned income and assets. However, it’s not that simple.


How you can I lower my federal and state tax rates under the resident tax incentive code

In Puerto Rico, the tax benefits provided in 2012 under Act 20 and Act 22 were compiled into a single code, Act 60 of 2019. This is the most popular program offered by the Puerto Rico government and is known as the Tax Incentive Code (“Incentive Code”). 

The final version of the code preserves most of the existing benefits, modifies some, and incorporates new tax incentives.  One of the most important aspects of this Code is that it grants tax exemptions to those businesses and individuals that relocate to, or are established in, Puerto Rico. These are of particular interest to certain U.S. citizens who relocate to Puerto Rico as their Puerto Rico-source income is not subject to U.S. income taxes, but they still continue to enjoy benefits such as Medicare and Social Security.


What are Puerto Rico Incentives for Individual Investors?

Puerto Rico offers US citizens who become residents to pay only 4% corporate tax, zero capital gains tax, as well as zero tax on dividends. And naturally, this has created a big stir in the offshore world. 

With Section 933 of the U.S. Tax Code it is possible to exclude income earned in Puerto Rico from your U.S. tax return if you are a bona fide resident of Puerto Rico.

With Act 20 you may qualify for the 4% corporate tax rate on any Puerto Rico source income and enjoy a 100% tax exemption from Puerto Rico income taxes on capital gains accrued from Eligible Investments. And cryptocurrency gains are also included.  If you want to know if your line of business or company qualifies, do not hesitate contacting us.

However, be aware that capital gains accrued before becoming a resident and obtained after moving to Puerto Rico may be subject to taxation.

This still doesn’t imply that those who benefit from these incentives do not pay taxes in Puerto Rico. Although they enjoy exemptions on what they make in dividends and, occasionally, on what they make in capital gains, you still need to pay some taxes to take advantage of the program for everything else.

And yes, you do have to spend some time in Puerto Rico, and move your life to the island, to comply with Puerto Rico’s bona fide residency provisions.


Puerto Rico tax incentives eligibility

To qualify for Act 60 tax incentives, it is necessary that business owners and investors become bona fide residents. For this, an individual must live in Puerto Rico. He or she must remain on the island at least 183 days of the year and must not have been a resident of Puerto Rico from 2009 to 2019. 

Other critical factors are not having a tax home outside of Puerto Rico during the taxable year and the absence of a closer connection to the US or a foreign country other than to Puerto Rico. 

We want to make sure you qualify for Act 60 tax incentives. With its unique set of tax laws, very different from those in the United States, a tax incentives eligibility analysis for your business involves a whole new layer of complexity. So, if you want us to guide you through the many legal details that may be involved with Puerto Rico’s tax incentives, feel free to contact us.


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