Act 60 Scenarios and the December 31, 2026 Grandfathering Deadline

Act 60 in Practice: How Tax Incentives May Apply

Since 2012, Puerto Rico's tax incentive programs (originally Acts 20 and 22, now consolidated under Act 60) have attracted investors, entrepreneurs, and professionals from various industries. This article provides hypothetical illustrations of how Act 60 structures may apply to different business scenarios.

Program Context: the grandfathering deadline

The date that decides which regime applies to you is December 31, 2026. A decree application filed on or before that date is grandfathered; an application filed from January 1, 2027 onward falls under the new rates. The deadline is often written as "January 1, 2026", which is a year early. The threshold is the end of 2026, not the start of it.

Act 60 runs into the 2050s, but the fully exempt treatment and the preferential-rate treatment carry different end dates. Interest and dividends are fully exempt for grandfathered applicants on income earned before January 1, 2036 (Section 2022.01(a)); for applications from 2027 onward the same income is taxed at a 4% flat rate through income earned before January 1, 2056 (Section 2022.01(b)). Key current provisions:

• Applications on or before December 31, 2026: May qualify for grandfathered rates under Section 2022.01(a)
• Applications from January 1, 2027: Generally subject to a 4% flat rate on passive income under Section 2022.01(b)
• Six-year requirement: Post-2026 applicants must demonstrate non-PR residency for at least six years prior (Section 1020.02(a)(4), Ley 38-2026)
• Export services: 4% corporate rate may apply under Section 2032.01(a)

Illustrative Scenario: Individual Investor (Chapter 2)

Profile: An individual with a substantial investment portfolio considering establishing bona fide residency in Puerto Rico.

Potential structure: Under Chapter 2, qualifying individual investors who establish bona fide residency (as determined under IRS IRC Section 937) may be eligible for preferential rates on investment income. For applications filed on or before December 31, 2026, interest and dividends are fully exempt on income earned before January 1, 2036 (Section 2022.01(a)), and post-move capital gain is fully exempt where recognized before that same date (Section 2022.02(b)). Both revert to ordinary Puerto Rico Internal Revenue Code treatment afterward.

Key requirements: The presence test under IRC Section 937 (met by any one of five alternative conditions, of which 183 days in PR is the first), no tax home outside PR, no closer connection elsewhere, $10,000 annual charitable contribution (allocated per Section 6020.10(b): $5,000 child poverty, $2,500 other nonprofit, $2,500 Fondo Especial), purchase of residential property within 2 years.

Compliance obligations: DDEC annual report by November 15 (Section 6020.10(a)(3)), annual filing fee of $5,000, federal and PR tax returns.

Illustrative Scenario: Export Services Company (Chapter 3)

Profile: A technology or professional services firm providing services primarily to clients outside Puerto Rico.

Potential structure: Under Chapter 3, qualifying export services businesses may be eligible for a 4% corporate tax rate on net income from export services (Section 2032.01(a)). Distributions to shareholders may also receive favorable treatment.

Key requirements: Services must be provided primarily to clients outside Puerto Rico. Employment minimums apply based on decree terms. Physical office and genuine operations in PR are required. Documentation of export ratio and client locations is essential.

Compliance obligations: DDEC annual report with employment and export documentation by November 15, corporate tax filings, quarterly employment reports, ongoing economic substance documentation.

Illustrative Scenario: Manufacturing Operation (Chapter 6)

Profile: A manufacturing company establishing or relocating production operations to Puerto Rico.

Potential structure: Chapter 6 may provide a preferential corporate tax rate on qualifying manufacturing income, along with potential property tax exemptions and import duty considerations on qualifying equipment.

Key requirements: Active manufacturing operations in PR, meeting investment and employment thresholds, environmental and safety compliance, ongoing production reporting.

Illustrative Scenario: International Investor

Profile: A foreign investor seeking US market access with competitive tax treatment.

Potential structure: Foreign investors may combine Act 60 business incentives with Puerto Rico's position as a US territory, which provides access to US banking, legal framework, and markets. Entity structuring (subsidiary, holding company, or joint venture) depends on the specific investment activities.

Key considerations: US treaty network implications, transfer pricing requirements, federal reporting obligations, and proper entity structuring.

Factors Contributing to Successful Outcomes

Based on general industry observations, decree holders who maintain successful long-term relationships with the program tend to share certain characteristics:

• Genuine relocation: Establishing real personal and professional roots in Puerto Rico, not merely nominal presence
• Community integration: Meaningful participation in local economic and social life
• Proactive compliance: Exceeding minimum requirements rather than operating at the margins
• Professional guidance: Working with experienced local tax and legal professionals
• Long-term commitment: Viewing Puerto Rico as a permanent home rather than a temporary arrangement

Economic Impact

The Act 60 program and its predecessors have contributed to Puerto Rico's economic development through job creation, capital investment, real estate demand, and philanthropic contributions. The specific economic impact of the program is tracked by DDEC through the annual reporting process.

Frequently Asked Questions

Are the examples in this article based on real clients? No. The scenarios presented are hypothetical illustrations of how Act 60 structures may work in general terms. Actual results depend on individual circumstances, decree terms, and compliance.

Can anyone achieve these types of results? Outcomes vary significantly based on individual circumstances, the nature and scale of business activities, compliance with all requirements, and market conditions. There are no guaranteed outcomes under Act 60.

What is the most important factor for success under Act 60? Genuine compliance with all program requirements, particularly bona fide residency (for Chapter 2) and real economic substance (for Chapters 3 and 6), is generally considered the foundation of successful participation.

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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. Any actions taken based on this information are at the reader's own risk. For personalized guidance, contact a licensed CPA or tax professional.