Oct 11, 2024
How to Become a Bona Fide Puerto Rico Resident to Qualify for Act 60 Tax Incentives
Puerto Rico’s Act 60, also known as the “Puerto Rico Incentives Code,” offers enticing tax benefits for individuals and businesses seeking to establish themselves on the island. To take advantage of these incentives, such as reduced income tax rates and exemptions on capital gains, you must meet the requirements to be considered a bona fide resident of Puerto Rico. Here’s a comprehensive guide on what it takes to establish your residency and qualify for the Act 60 tax benefits.
1. Understanding Act 60
Act 60 consolidates various tax incentives into one comprehensive code aimed at attracting investors, entrepreneurs, and businesses to Puerto Rico. For individual investors and business owners, Act 60 provides:
• A 4% corporate income tax rate for eligible businesses.
• 100% tax exemption on Puerto Rico-sourced dividends and interest.
• 0% capital gains tax for individuals who qualify as bona fide residents.
However, to fully benefit from these incentives, establishing bona fide residency is key.
2. What Does It Mean to Be a Bona Fide Puerto Rico Resident?
To qualify as a bona fide Puerto Rico resident under the U.S. Internal Revenue Code (IRC) Section 937, you must meet three main tests:
• The Presence Test
• The Tax Home Test
• The Closer Connection Test
Let’s break down each one.
3. The Presence Test
The Presence Test requires that you spend a significant portion of the year in Puerto Rico. You must meet one of the following criteria:
• Spend at least 183 days in Puerto Rico during the tax year.
• Spend at least 549 days over a three-year period, averaging a minimum of 183 days per year, while spending no more than 90 days in the U.S. in any given year.
• Spend more days in Puerto Rico than in the U.S. during the tax year.
• Have no significant connections with the U.S. (e.g., a closer connection to the island, which would involve not having a permanent home or business in the U.S.).
Maintaining detailed records of your time spent in Puerto Rico versus the U.S. is crucial, as this may be subject to audit.
4. The Tax Home Test
Your primary place of business, employment, or economic activity (your “tax home”) must be located in Puerto Rico. This means:
• Conducting business from Puerto Rico for at least 183 days of the year.
• Ensuring that your primary economic ties are with the island.
For retirees, your primary residence must be in Puerto Rico, and your income should be primarily derived from Puerto Rican sources.
5. The Closer Connection Test
You must show that you have stronger personal and economic ties to Puerto Rico than to the U.S. This involves factors such as:
• Primary Residence: Owning or leasing a home in Puerto Rico.
• Family Ties: Having close family members residing on the island.
• Business Connections: Operating a business or being employed in Puerto Rico.
• Social, Cultural, and Religious Ties: Participating in Puerto Rican social, cultural, and religious activities.
• Banking and Financial Accounts: Holding bank accounts, investments, or other financial assets primarily in Puerto Rico.
Meeting the Closer Connection Test reinforces your commitment to establishing Puerto Rico as your primary residence.
6. Practical Steps to Establish Residency
To become a bona fide resident of Puerto Rico, follow these actionable steps:
• Purchase or Lease a Home: Having a primary residence in Puerto Rico is essential to demonstrate your intent to reside on the island.
• Spend Time on the Island: Ensure you spend the necessary number of days in Puerto Rico. Keep thorough records, such as flight itineraries and accommodation receipts, to document your presence.
• Establish Local Financial Accounts: Open bank accounts and transfer your finances to Puerto Rican institutions.
• Change Your Tax Filing Address: Update your address with the IRS and other financial institutions.
• Participate in Local Life: Get involved in local communities, social activities, and organizations.
• Register for Act 60: Submit your application for Act 60 incentives and pay the corresponding fees. Approval is required to begin enjoying the benefits.
7. Common Pitfalls to Avoid
To ensure compliance with the residency requirements and avoid complications:
• Avoid Frequent Travel to the U.S.: Limit your time in the U.S. to ensure you meet the Presence Test.
• Document Everything: Keep meticulous records of your time spent in Puerto Rico, your financial activity, and your social connections to the island.
• Do Not Maintain U.S. Domiciles: If you still own property in the U.S., make sure it is clear that Puerto Rico is your primary residence.
8. Conclusion
Puerto Rico’s Act 60 offers significant tax benefits, but the process of becoming a bona fide resident is rigorous. Meeting the Presence, Tax Home, and Closer Connection tests ensures that you qualify for these tax incentives. By taking the necessary steps to establish your residency and fulfill the requirements, you can enjoy a more favorable tax environment while embracing the lifestyle and culture that Puerto Rico offers.
For more information on establishing residency or finding the perfect property in Puerto Rico to start your journey, contact us at BrainThemePark Real Estate. Email Walter Rivera Santos at Events@BrainThemePark.com