Puerto Rico Act 60 Capital Gains Benefits Tightened
Under Puerto Rico's Act 60 for individual investors, applications made before December 31, 2026, can lock in a 0% local tax rate on capital gains, interest, and dividends until 2035. From 2027, new applications will be subject to a 4% rate extended until 2055.
According to Section 933 of the U.S. Internal Revenue Code and the Puerto Rico Incentives Code, eligible U.S. citizens or green card holders who become bona fide residents can reduce local corporate income tax for compliant export service businesses to about 4%. The benefits only cover income generated on the island after relocation, while appreciation before relocation and U.S.-sourced income are typically still subject to federal tax.
Mandatory requirements include residing on the island for at least 183 days each year, purchasing a primary residence within two years of approval, donating about $10,000 annually to local charities, and ongoing reporting and compliance costs. New applicants in 2027 must also prove they have not resided on the island for the six years prior to relocation.
In recent years, the homicide rate has been about 14 to 15 per 100,000 people, higher than the U.S. mainland average. There are adaptation costs related to hurricanes, a Spanish-speaking environment, public services, and online shopping convenience.
Market mechanism: The benefits attract capital and high-net-worth residents through reduced local tax rates, while binding local consumption and compliance spending to residency, property ownership, and donation requirements; at the federal level, U.S.-sourced income is still taxed, making net benefits dependent on asset source and realization timing; tightening terms after 2027 reduces short-term arbitrage opportunities, shifting focus to longer-term residents.
Source: Public information
ABAB AI Insight
Since Act 22/20, Puerto Rico has attracted new residents through its incentives code, later consolidated into Act 60. Act 38-2026, passed in March 2026, clearly delineates two systems based on application dates: applications before the end of 2026 lock in old terms, while new tax rates and longer validity periods apply thereafter.
On the capital path, individuals obtain local income tax reductions by meeting residency and property ownership conditions, while export service companies benefit from a lower corporate income tax rate. Earnings primarily come from newly generated capital gains and passive income after relocation, with federal exclusion relying on Puerto Rico source determination. Compliance costs include annual donations and reporting, constituting ongoing cash outflows.
This approach is similar to practices in other U.S. territories or low-tax states to attract residents, and resembles structures in some countries that offer preferential tax rates in exchange for residency. The current phase is a transition between the closure of old benefits and the implementation of new terms.
Essentially, it involves a transfer of pricing power and regulatory changes: the local government attracts capital by lowering tax rates while exchanging residency and spending requirements for local economic activity. The mechanism maintains the federal taxing authority over U.S.-sourced income, with local benefits only applying to eligible Puerto Rico-sourced income; the setting of deadlines and application cut-off dates reduces short-term relocation arbitrage opportunities, with long-term residents' net benefits depending on the comparison of asset growth and compliance costs.
ABAB News · Law of Cognition
- The 0% tax rate has a cut-off date, while the 4% rate offers a longer duration.
- Appreciation after relocation can benefit from the tax rate, while appreciation before relocation remains subject to federal tax.
- Residing for 183 days is just a threshold; donations and property ownership are the ongoing costs.