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By Dr. James M. Dahle, WCI Founder
For 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!