Is Puerto Rico a Tax Haven for U.S. Citizens?

While not officially designated as a tax haven, Puerto Rico offers tax advantages for U.S. citizens, creating an environment with haven-like characteristics. The island’s status as a U.S. territory grants it the authority to establish its own tax laws, separate from the Internal Revenue Code. This autonomy allows it to provide incentives to Americans, who can relocate without having to renounce their U.S. citizenship. This arrangement provides access to a stable U.S. legal framework while benefiting from a distinct local tax system designed to attract investment and stimulate economic activity.

Understanding Puerto Rico’s Tax Incentives

Puerto Rico’s Incentives Code, or Act 60, provides tax reductions through two primary programs designed for individual investors and service-based businesses.

A major component is the Individual Resident Investor incentive. For residents approved for this incentive before the end of 2025, the provision offers a 0% tax rate on all passive income. Due to recent reforms, a 4% tax on passive income will be imposed for new applicants who apply after December 31, 2025. This tax exemption covers interest, dividends, and capital gains accrued after the individual establishes residency.

For assets owned before becoming a resident, the tax treatment is bifurcated. Any appreciation that occurred prior to the move remains subject to U.S. federal taxes upon sale, but any gains realized after establishing residency fall under the Puerto Rican tax rate.

The second pillar is the Export Services incentive, which targets businesses that relocate to Puerto Rico and export their services. These eligible businesses benefit from a 4% corporate income tax rate. Smaller businesses with annual income under $3 million may qualify for an initial 2% rate for their first five years of operation, after which the rate adjusts to 4%.

Eligible services include consulting, software development, data processing, financial management, and marketing. The primary requirement is that the service is performed for non-Puerto Rican individuals or entities, thereby bringing new revenue into the island’s economy.

Qualifying as a Bona Fide Resident

Securing Puerto Rico’s tax benefits requires qualifying as a “bona fide resident” in the eyes of the Internal Revenue Service (IRS). This status is not granted automatically and requires satisfying tests outlined in Internal Revenue Code Section 937. Failing these tests means an individual remains subject to full U.S. federal taxation on their worldwide income, regardless of a tax decree from the Puerto Rican government.

The first requirement is the Presence Test. An individual must be physically present in Puerto Rico for at least 183 days during the taxable year. The 183-day rule is the most common and definitive measure used to establish physical presence.

An individual must also satisfy the Tax Home Test, which requires that a person’s tax home be in Puerto Rico for the entire taxable year. The IRS defines a “tax home” as the general area of one’s main place of business or employment. If a person does not have a regular place of business, their tax home is where they regularly live.

Finally, the Closer Connection Test examines an individual’s personal, social, and economic ties to determine their center of life. To meet this test, a person must demonstrate that their life is genuinely centered in Puerto Rico. The IRS considers several factors to determine if an individual has a closer connection to the U.S. or another country:

• The location of family members
• The location of personal belongings, such as furniture and automobiles
• The jurisdiction where one is registered to vote
• The location of primary banking relationships
• The issuing jurisdiction of the individual’s driver’s license
• Participation in local social, cultural, or religious organizations
• The address used on official documents and correspondence

Key Requirements for Act 60 Decrees

In addition to IRS residency tests, individuals and businesses must meet specific obligations imposed by the Puerto Rican government to receive and maintain their Act 60 tax decree. Failure to meet these ongoing duties can result in the revocation of the tax decree.

A requirement under the Individual Resident Investor incentive is an annual charitable contribution. Decree holders must donate a minimum of $10,000 each year to a registered Puerto Rican non-profit organization. At least $5,000 of this amount must be directed to an organization focused on eradicating child poverty.

Those qualifying under the Individual Resident Investor incentive must also purchase a residential property. This purchase must be made within two years after receiving the tax decree, and the property must serve as the individual’s primary residence.

All decree holders must file an annual report with the Office of Industrial Tax Exemption. This report, accompanied by a $5,000 filing fee, demonstrates that the individual or business continues to meet all terms of their tax grant, including the residency, donation, and property ownership requirements.

The Application Process for Tax Incentives

The application process begins with gathering documents, including proof of identity, a criminal background check, and detailed information about the sources of income or the nature of the business services to be exported.

The application is submitted with a non-refundable filing fee through Puerto Rico’s Single Business Portal. This platform directs the application to the Office of Industrial Tax Exemption (OITE), which is responsible for reviewing and approving all Act 60 tax decrees.

After submission, the OITE reviews the application, which can take several months and may include requests for additional information. Upon approval, the OITE issues a tax exemption decree, which is a formal contract between the applicant and the government outlining the benefits and obligations.

Federal Tax and Reporting Obligations

Even after becoming a bona fide resident of Puerto Rico, U.S. citizens retain tax and reporting obligations with the IRS. Under Internal Revenue Code Section 933, bona fide residents can exclude income from sources within Puerto Rico from their U.S. federal income tax. This exemption does not apply to all income.

Income generated from sources within the United States remains fully subject to U.S. federal income tax. For example, if a resident of Puerto Rico owns a rental property in Florida, the income is U.S.-sourced and must be reported to and taxed by the IRS. This requires careful record-keeping to separate Puerto Rico-sourced from U.S.-sourced income.

To formalize the change in residency status, individuals must file Form 8898, “Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession.” This form is filed with their standard U.S. federal income tax return for the year of the move. It officially notifies the IRS of the change and establishes the start date of bona fide residency.