Puerto Rico Act 60: The Tax Strategy Explained

Puerto Rico sits inside the U.S. tax system but outside the IRS's standard reach, which creates a legal opening that no state can match. Under Act 60, qualifying residents pay a 4% flat income tax rate and owe zero federal tax on Puerto Rico-sourced capital gains.

What Act 60 Actually Does

Act 60, formally called the Incentive Code of Puerto Rico, consolidated several older incentive laws in 2019. It has two chapters that matter most to individuals: Chapter 2 (formerly Act 20) for export services businesses, and Chapter 3 (formerly Act 22) for individual investors.

Under Chapter 2, a qualifying export services business pays a 4% fixed corporate tax rate. Under Chapter 3, individual investors pay 0% on long-term capital gains accrued after establishing Puerto Rico residency. Both benefits are locked in by a tax grant with a 15-year term, currently extendable through 2035.

The Residency Requirements Are Strict

The IRS uses a three-part test to determine whether someone is a bona fide Puerto Rico resident. You must pass all three.

First, the presence test: you must spend at least 183 days per year in Puerto Rico. Second, the closer connection test: Puerto Rico must be your primary home, meaning your driver's license, voter registration, bank accounts, and social ties are centered there. Third, the tax home test: your primary place of business must be Puerto Rico.

The IRS audits Act 60 participants aggressively. Keeping a home in California or New York while claiming Puerto Rico residency is a documented audit trigger. California, specifically, taxes residents on worldwide income and does not recognize your departure as final until you sever all significant ties, including property ownership and professional licenses.

The Real Costs of Qualifying

Act 60 is not free to access. The fees are fixed and non-negotiable.

Individual investor decree applications (Chapter 3) cost a $5,005 filing fee. After approval, you pay an annual compliance fee of $10,000. You are also required to make a $10,000 annual donation to a Puerto Rico-based charity. That puts the minimum annual carrying cost at $20,000, before accounting for the cost of actually relocating and maintaining a genuine primary residence.

Chapter 2 business decrees carry a separate $1,000 application fee for small businesses, with additional costs depending on entity type and the services exported.

On the capital gains side, the 0% rate applies only to gains that accrue after you establish residency. Gains that accrued before your move are still taxed at standard U.S. federal rates. If you hold appreciated stock and move to Puerto Rico, only the appreciation from your move date forward is exempt.

Who This Strategy Actually Works For

Act 60 makes mathematical sense for a narrow but well-defined group of people.

The clearest candidates are high-income remote workers or consultants who can genuinely relocate their business operations, and investors sitting on large unrealized capital gains who plan to hold assets for years after moving. A fund manager with $10 million in future gains saves roughly $2.38 million in federal tax at the 23.8% long-term capital gains rate, more than covering decades of compliance costs.

For comparison, even the most tax-friendly U.S. states cannot eliminate federal capital gains tax. States like Florida, Texas, and Nevada have no state income tax, as covered in our breakdown of states with no income tax in 2026, but residents still owe the federal rate on capital gains. Puerto Rico's Act 60 eliminates both layers on qualifying income, which is the core of the argument.

For investors focused specifically on capital gains exposure, our capital gains tax by state breakdown shows why the combined federal and state rate in high-tax states like California (37.1% combined) makes the Puerto Rico comparison even more dramatic.

Act 60 is a worse fit for W-2 employees whose employer withholds income in a mainland state, retirees drawing mostly Social Security and pension income, or anyone who cannot realistically maintain 183 days per year in Puerto Rico.

Use our relocation tax calculator to model your specific tax situation before making any decisions.

Key Takeaways

• Act 60 Chapter 3 investors pay 0% Puerto Rico tax on capital gains accrued after establishing residency, with a minimum annual cost of $20,000 in fees and required donations.
• Residency requires 183 days per year in Puerto Rico, a genuine tax home there, and a closer connection to Puerto Rico than any U.S. state. The IRS audits this actively.
• The 4% flat income tax rate under Chapter 2 applies to export services businesses only. W-2 income from a mainland employer does not qualify.

If Act 60 does not fit your situation, compare state-by-state tax profiles on Live or Die Here to find where your income and assets are taxed least.