By Dr. Jim Dahle, WCI FounderFor those of you who are geographically challenged, Puerto Rico is part of the United States. It is a US territory, located on an island in the Caribbean. You do not need a passport to visit, and you spend US dollars there. The vast majority of people speak Spanish as their primary language, although about 50% of the island also speaks English.
Why in the world am I writing about a Caribbean Island on The White Coat Investor blog? No, I am not talking about a recent adventure I might have taken. No, I am not cautioning premeds against attending offshore medical schools. I'm talking about the biggest tax break you've never heard of: Act 60.
What Is Act 60?
Act 60 (formerly known as Acts 20 and 22) allows certain people to avoid both federal and state income taxes on their income. With a few changes in your life, you could be one of those people.
Act 20 came from the Export Services Act of 2012. Basically, it provided tax incentives for Puerto Rican companies that exported services outside of Puerto Rico. Act 22 was also passed in 2012 and is called the Individual Investors Act. It allows for federal tax exemption on interest and dividends for Puerto Rico residents. Act 60 was passed in 2019, and it basically updated both of these prior acts.
Puerto Rico Act 60 Tax Incentives
Puerto Rico is not a very rich place, and it wants rich people and their companies to come to Puerto Rico. So, it's going to bribe them to do so. States and municipalities do this all the time, so it should be no surprise to see a territory doing it. US territories already have a pretty unique tax structure. If you were a 100% resident of these places, you either filed a US federal return or a return in that territory. Puerto Rico's tax code is a bit complex, but as a general rule, you have much lower tax brackets. They range from 7%-33% for most income, but if you are self-employed and offering services only, they range from 6%-20%.
Suffice it to say, there is a pretty large difference in your tax bill when you drop the top tax bracket from 37% to 20%. In addition, Act 60 (and its predecessors) basically exempts all of your passive income from taxation. You don't have to pay taxes in the US on it and you don't have to pay taxes in Puerto Rico on it. Catching on yet?
Stop Paying Taxes on Passive Income
Once you live in Puerto Rico, your passive income is now “Puerto Rico source income,” and Section 933 of the Internal Revenue Code says you don't have to pay federal taxes on Puerto Rico source income. Act 60 says you don't have to pay Puerto Rico taxes on passive income.
More information here:
10 Tax Loopholes for Real Estate Investors
Act 60 Puerto Rico Requirements
How long do you have to live in Puerto Rico to qualify for Act 60? You must spend at least 183 days per year in Puerto Rico. That means you can still spend the entire hurricane season somewhere else.
Puerto Rico Act 60 and Capital Gains
Interest and dividends are 100% tax-exempt. So are capital gains that occur AFTER you become a resident. If you buy shares for $10, they appreciate to $20, you move to Puerto Rico and sell them, you will pay capital gains. But if they appreciate from $20 to $40 after you move to Puerto Rico, you only pay capital gains on $10 per share, the amount they appreciated before you moved. Unless you hold them for 10 years after moving; then you only pay 5% capital gains on them. If you establish a company in Puerto Rico to handle your direct real estate investments located on the mainland, those rents also become Puerto Rico-sourced, tax-free, passive income.
More information here:
6 Ways Passive Income Beats Active Income
The Catch with Act 60
There has to be a catch, right? Yes, there's a catch. A few of them actually.
- This only lasts through 2035. After that, you'll owe taxes on that passive income.
- You have to apply. It costs $750. If you are accepted, you have to pay $5,000 more.
- You have to make a $10,000 charitable contribution, submit a report, and pay $300 each year.
Still, you can imagine there are an awful lot of people thinking about moving to Puerto Rico.
How to Apply for Act 60
Once you establish residency (home, driver's license, bank accounts, etc.), you apply on the Single Business Portal for business-related tax breaks. Individual investors apply. You don't even have to do it on your own. It's not like this hasn't been done before; thousands of people have relocated to Puerto Rico for these tax benefits. There are English-speaking companies that (for a fee) will walk you through the process.
Puerto Rico Act 60 Business Incentives
Besides just individual investors, lots of businesses are considering moving to Puerto Rico, too. These are qualifying export services businesses. Incentives include:
- 4% corporate tax rate
- 100% tax exemption on distributions from earnings and profits
- 50% tax exemption on municipal taxes
- 75%-100% tax exemption on municipal and state property taxes (depending on the size of the business)
Note that you are required to pay yourself a reasonable salary which is taxed at regular Puerto Rico tax rates.
Entrepreneurship Community in Puerto Rico
There is a rapidly growing community of entrepreneurs in Puerto Rico taking advantage of Act 60. Tech companies, financial services companies, and real estate investors are concentrating and growing exponentially there. I'm told it is pretty welcoming. There are obviously some challenges, but if you are retired or can do location-independent work and love the islands, this could be a match made in heaven.
More information here:
Entrepreneurship and Passive Income
5 Financial Considerations for American Doctors Wishing to Live Abroad
Is Act 60 Worth Geographic Arbitrage?
We've talked about geographic arbitrage before, and the Puerto Rico Act 60 does have residency requirements. Most people think we're talking about going from California to Texas or Nevada. But in reality, there is an even bigger arbitrage available to you—all found conveniently in a little Caribbean paradise. ¡Vamonos!
If you need help with tax preparation or you’re looking for tips on the best tax strategies, hire a WCI-vetted professional to help you figure it out.
What do you think? Would you relocate to Puerto Rico primarily for tax reasons? Why or why not? Would this geographic arbitrage be worth it? Comment below!
The unelected Junta Fiscal changed the rules back in 2021 and it no longer applies to doctors. Just to the ones who previously had embraced it. Any workaround? 😡
I think Jim is referring to Act 60 in his article (previously Act 20/22): it was not halted by the Federal Oversight Board. On the other hand, Act 14 (4% tax on physicians) is different and it is only for physicians: this was a actually halted to apply by Oversight Board on 2021. But many people who actually applied and were given the incentive (about 6,000 physicians), take advantage of this tax benefit. Plus, we don’t pay most of the federal taxes. Great!
Define “it” please.
Are social security and annuitized income qualifying passive income? If so, wow!!
Jim,
I’m a proud listener of your podcast and follower of your page for the past 10 years. Thanks for what you do. Act 60 is great for many people to invest in PR but they have to live in Puerto Rico for half a year. It is very attractive for continental US citizens here but there is a growing negative sentiment among locals because they are driving real estate and cost of life a bit too high compared to natives. I also wanted to mention that there is a local tax incentive for many physicians living in the island. It was available to apply from 2016-2021 (applications were halted by the Fiscal Oversight Board) and consisted of an tax incentive, paying only 4% state tax (and no federal taxes) for 15 years. Many of the physicians that were able to apply are taking advantage of this tax incentive. You only have to do community service for certain hours, work with the state insurance plan or work at a academic center. And obviously, only practice in Puerto Rico. The objective was to keep physicians from leaving the island (there is actually a shortage of many specialties). Let me know if you would like to talk more about! PR is actually a great place to practice medicine! Take care.
Dr. Elias J. Sobrino Najul
Hematology/Oncology Physician
Here is a English website describing the details:
https://ferraiuoli.com/news/act-no-14-2017-known-incentives-act-retention-return-medical-professionals/
Thanks for the additional details!
How about a high income retired physician, would it work to be a snowbird to Puerto Rico for 183 days per year each winter?
Let’s say you have 800k in income from RMDs, dividends, passive business income, and real estate rental income. And let’s assume you live in a high tax state so that your marginal tax rate is around 50% combined, between federal, state, and NIIT. It sounds like you could enjoy the warm weather and the beach each winter, and reduce your taxes by a six figure amount.
Yes it will work.
Ziggy, you need to read up on Publication 570 and make sure you meet ALL of the requirements to become a ‘bona fide’ Puerto Rico resident. I would not recommend claiming you are a ‘snowbird’ as it suggests you are not truly a resident of PR but are visiting for extended periods (even if for 183 days).
In addition, none of the passive income you described would be eligible under the Act 60 Resident Individual Investor decree. RMD’s from your retirement is US sourced and not eligible, dividends are sourced to the situs of the payor (likely the US, and only ‘PR sourced’ dividends are eligible under Act 60), and passive business income is sourced to the situs of the payor (though a portion of capital gains from the sale of ‘personal property’ may be eligible under Treas. Regs 1.937-2), and US rental income is US sourced.
I can see this rule changing and the tax advantage being taken away in the next few years.
Why? Territorial status allows it. Part of not been a state and persistently been treated as a colony and second class citizens. At least, there are some advantages to it.
The only constant is change.
Hello
What about Roth conversions?
Can you elaborate how that would look like?
If you live in PR they’d be subject to PR taxes I believe. But I’m no PR tax prep expert.
Any US sourced income (i.e. funds contributed to retirement accounts while working on the mainland) would still be subject to US federal taxes.
Puerto Rico is not a mirror of the US when it comes to retirement plans, and there is not a ‘trustee to trustee’ rollover provision between the US and PR. Your question is too vague to offer any insight.
There is so much misinformation in there about PR tax incentives.
Mind pointing out exactly what’s not correct?
Some inaccuracies.
1. Annually, 15k
10k charity (some deductions on this),
+5k annual filing report
(FYI, this was raised from $375 years ago, which raised a stink but seems to have passed scrutiny of PR judges; and, this has raised questions about whether they could renege and do it again, raising it higher… as the $375 fee was not successfully ‘grandfathered’ for earlier contract holders)
2. Almost nobody files the application by themselves. It’ll cost $2000-2500 with Prelocate, which is probably best, most turnkey solution. That includes the $750 to gov, IIRC. The government has/had been waving the 5k “after acceptance”, and probably still is. But upfront costs shouldn’t be a relevant factor.
3. There’s a way to renew the contract after the 10 or 15 years it grants. The law underpinning the contracts may or may not expire (not sure, but if so, it’s good chance it gets renewed). For now at least, the particulars of how contracts are written is always threatened and tweaked (or law amended), but in reality, it’s popular for both parties and will remain.
Please know that only ~ 10k total have done this and are still in PR. The yearly numbers are approx 2k in bound, but there’s also a ~ 50% attrition rate. The comment about rising house prices is nonsense. Only perhaps among high end properties, like in Dorado. Those locals able to buy there aren’t the locals that are upset about rising prices. It wouldn’t be surprising if “everything” gets blamed on colonialism among the locals that are complaining (some merits to this), but there’s no shortage of houses in disrepair in PR because of the diaspora that’s left and the demographics issues. In short, if you want to live in a shack, plenty of cheap options, and if prices rose it ain’t because gringos are buying those up. Inheritance laws, no cost of carry, and sentimental reasons do get in way of home sales. Most places being bought up are by local entrepreneurs that FIX the abandoned, neglected place and airBNB it, or flip it. They’re adding supply not removing it.
Thanks for the additional info, correction, and clarification.
Hello, Can you elaborate on “ If you establish a company in Puerto Rico to handle your direct real estate investments located on the mainland, those rents also become Puerto Rico-sourced, tax-free, passive income.” I am under the impression that rental income is sourced at location of property. So, it will be taxed as US source income?!
You may be right. I don’t know if business structure would make a difference too. Probably worth a discussion with your tax preparer before doing it.
You are correct. US situs real property income is US sourced and not eligible for Act 60. Both Export Services and Resident Individual Investors cannot effectively get US real estate rental income or capital gains included as eligible income. There are narrow exceptions, such as property management services IF they are actual services provided from Puerto Rico, or perhaps a REIT can characterize income from US real estate that could be eligible.
Assuming one sets up a qualified service as a sole proprietor and moves to Puerto Rico, is the 4% tax levied on the revenue or the profit? How much salary should the owner draw himself, if at all? I believe the salary is subject to Puerto Rico income tax.
Taxes generally only apply to profit and salary. How much salary depends more on other factors than this. If you’re an S corp, it has to be a reasonable salary, but there is a wide range of reasonable.
Under Export Services, the tax is on the profit after expenses including salary. A ‘reasonable’ salary must be paid and will be taxed as ordinary income in PR. There is not a ‘S Corp’ election in PR, and under the Act 60 decree there is no need to have one as dividends are tax free. Most decree holders use an LLC taxed as a C Corp, or a C Corp as the entity having the decree.
Wondering if this would work for telemedicine back to individual states
I don’t know if medicine would be a “qualifying export services businesses.” It seems like it would be to me.
Telemedicine is a great way to benefit from Act 60 Export Services. I have helped many radiologists get set up in Puerto Rico under Act 60, and some have also taken advantage of my ROBS Act 60 strategy to accumulate tax-free dividends into their Roth 401(k).