10 Key Act 60 Financial Terms Explained

10 Key Act 60 Financial Terms

Understanding Act 60 terminology can help individuals and businesses communicate more effectively with professionals and navigate the incentive landscape. This article provides general definitions of commonly encountered terms.

1. DDEC (Departamento de Desarrollo Economico y Comercio)

The Puerto Rico government agency responsible for administering Act 60 incentives. DDEC processes decree applications, conducts compliance reviews, and issues determinations on eligibility. The annual compliance report is filed with DDEC by November 15 (Section 6020.10(a)(3)).

2. Incentive Decree

The official document granting specific tax benefits under Act 60. Each decree specifies the benefits granted, compliance obligations, validity dates, and any special conditions. Without an approved decree, incentive benefits are not available.

3. Bona Fide Residency

The legal residency status in Puerto Rico, determined primarily under IRS Internal Revenue Code Section 937 (not by Act 60 itself). The determination involves three components: the presence test, no tax home outside Puerto Rico, and no closer connection to the United States or a foreign country than to Puerto Rico. The presence test itself is met by satisfying any one of five alternative conditions, of which 183 days in Puerto Rico is only the first (IRS Publication 570, Chapter 1). This is a federal tax concept, and the IRS may independently evaluate residency claims.

4. Export Services

Services provided to clients located outside Puerto Rico, potentially eligible for the 4% corporate rate under Chapter 3 (Section 2032.01(a)). Common qualifying activities include technology services, professional consulting, financial services, and digital marketing. Documentation of client locations and export ratio is a key compliance element.

5. Economic Substance

The requirement to maintain real and significant operations in Puerto Rico, not merely a legal structure. Elements typically include local employees, physical office space, genuine commercial operations, and decision-making activity on the island. Insufficient economic substance may jeopardize decree benefits.

6. FTE (Full-Time Equivalent)

The standard measure for employment requirements under Act 60 decrees. Per Section 2062.01(j), one FTE equals 2,080 hours worked per year. Two employees working 20 hours per week each would equal approximately one FTE. Only employees resident in Puerto Rico who participate directly in covered activities count toward the requirement.

7. Charitable Contributions

Annual mandatory donations for Chapter 2 (Individual Investor) decree holders. Per Section 6020.10(b), the minimum is $10,000 annually, allocated as follows:

• $5,000 to entities addressing child poverty (from a government-published list)
• $2,500 to other qualifying entities under Section 1101.01 of the Puerto Rico Internal Revenue Code
• $2,500 to the Fondo Especial para la Igualdad Social

Note: The law references entities under Section 1101.01 of the PR Internal Revenue Code, not the US federal 501(c)(3) designation. Profesionales de Dificil Reclutamiento (Section 2021.02) and Medicos Cualificados (Section 2021.03(b)) may be exempt.

8. Compliance

Meeting all obligations and requirements of an Act 60 decree on an ongoing basis. Key areas include annual DDEC reporting (November 15 deadline), tax filings, maintaining required employment levels, physical residency (Chapter 2), and activity documentation. Non-compliance may result in administrative fines of up to $10,000 (Section 6020.10(e)) or decree review.

9. Capital Gains

Profits from the sale of investment assets such as securities, real estate, or business interests. Under Act 60 Chapter 2, the tax treatment depends on:

• When the investor established PR residency relative to when assets were acquired
• Pre-move appreciation: For grandfathered applicants (application on or before Dec 31, 2026), a 5% rate applies where the gain is recognized both after 10 years of residency and before January 1, 2036 (Section 2022.02(a)). Recognized at any other time, it falls under ordinary Puerto Rico Internal Revenue Code treatment.
• Post-move appreciation: For grandfathered applicants, fully exempt where recognized before January 1, 2036 (Section 2022.02(b)). Gain recognized after December 31, 2035 is taxed under the ordinary Code.
• Post-2027 applicants: 5% on pre-move appreciation recognized after 10 years and before January 1, 2056 (Section 2022.02(c)); 4% on post-move appreciation recognized before January 1, 2056 (Section 2022.02(d)).

The 2036 date applies to the exemption, not to the program. It is the date that matters most to a grandfathered holder planning when to sell.

The distinction between pre-move and post-move appreciation is critical and requires careful documentation of asset values at the time of residency establishment.

10. Economic Nexus

The sufficient connection between a business and Puerto Rico that supports the receipt of tax incentives. Elements include physical presence, regular commercial activities, strategic decisions made in PR, and meaningful economic contribution to the island. A strong economic nexus, demonstrated through real operations rather than nominal presence, is generally considered important for long-term decree stability.

How These Terms Connect

These concepts form an interconnected compliance framework:

Chapter 2: Bona fide residency + charitable contributions + compliance reporting = eligibility for capital gains benefits

Chapter 3: Export services + FTE requirements + economic substance + compliance = eligibility for 4% corporate rate

Chapter 6: Manufacturing operations + employment + economic nexus + compliance = eligibility for manufacturing incentives

Frequently Asked Questions

Is the 183-day rule part of Act 60? No, on two counts. The presence component of bona fide residency is established under IRS IRC Section 937, a federal provision; Act 60 requires bona fide residency but does not define the test. And 183 days is not the only way to meet it. It is one of five alternative conditions in IRS Publication 570, Chapter 1, any one of which satisfies the presence test.

What is the difference between DDEC and Hacienda? DDEC administers Act 60 decrees and incentive compliance. Hacienda (Department of Treasury) handles general tax collection, filing, and enforcement through the SURI portal.

Can I lose my decree for non-compliance? Yes. Failure to meet decree obligations, including timely reporting and maintaining required employment or residency, may result in fines, decree review, or revocation.

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Virtus Advisory provides this content solely for informational purposes. Nothing in this article should be construed as a guarantee of any particular tax outcome, an endorsement of any specific tax strategy, or an offer to provide professional services. For personalized guidance, contact a licensed CPA or tax professional.