Act 60 Annual Obligations: 2026 Compliance Overview

Act 60 Annual Obligations: 2026 Compliance Overview

Maintaining an Act 60 decree generally requires ongoing compliance with a series of annual obligations. These obligations vary by chapter and by the specific terms of each decree. The following overview summarizes the most commonly applicable requirements.

Recent Developments

Act 60 runs into the 2050s, but the full exemption on interest and dividends for grandfathered applicants covers income earned before January 1, 2036 (Section 2022.01(a)), while applications from 2027 onward are taxed at a 4% flat rate on that income through January 1, 2056 (Section 2022.01(b)). DDEC has updated certain reporting requirements. Individual Investor applicants filing on or before December 31, 2026 may qualify for grandfathered rates (0% on interest and dividends). Applications filed from January 1, 2027 onward are generally subject to a 4% flat rate on passive income under Section 2022.01(b) of the Incentives Code. Additionally, post-2026 applicants must demonstrate that they were not residents of Puerto Rico for at least six years prior to relocating (Section 1020.02(a)(4), as amended by Ley 38-2026).

Key Deadlines

The November 15 deadline applies to businesses with a calendar year. Businesses with a different fiscal year generally file by the 15th day of the 11th month following the close of their tax year.

Chapter 2: Individual Investor Obligations

Bona Fide Residency

Act 60 Chapter 2 beneficiaries are generally expected to maintain bona fide residency in Puerto Rico. The bona fide residency determination is governed by IRS Internal Revenue Code Section 937, not by Act 60 itself, and involves three components:

• Presence Test: met by satisfying any one of five alternative conditions, the best known being 183 days in Puerto Rico during the tax year. The others are 549 days across three years with at least 60 in each, no more than 90 days in the United States, US earned income of $3,000 or less combined with more Puerto Rico days than US days, or no significant connection to the United States (IRS Publication 570, Chapter 1)
• Tax Home: no tax home outside Puerto Rico
• Closer Connection: no closer connection to the United States or a foreign country than to Puerto Rico

Where the 183-day condition is the one being relied on, many practitioners recommend maintaining a margin above the minimum to account for unexpected travel or documentation gaps.

Charitable Contributions

Section 6020.10(b) of the Incentives Code requires an annual minimum contribution of $10,000 to qualifying nonprofits. The law specifies a mandatory allocation:

• $5,000 to entities addressing child poverty, selected from a list published by the Comision Especial Conjunta de Fondos Legislativos para Impacto Comunitario
• $2,500 to other qualifying entities under Section 1101.01 of the Puerto Rico Internal Revenue Code that provide direct community services
• $2,500 to the Fondo Especial para la Igualdad Social

Important: The law references entities under Section 1101.01 of the Puerto Rico Internal Revenue Code, not the US federal 501(c)(3) designation. These are related but distinct classifications.

Exemptions: Profesionales de Dificil Reclutamiento (Section 2021.02) and Medicos Cualificados (Section 2021.03(b)) may be exempt from this contribution requirement.

DDEC Annual Report

The annual compliance report is generally due November 15 and typically includes residency documentation, charitable contribution receipts, and a declaration of investment activity. The annual filing fee is $5,000 (Section 6020.10(d)), allocated $300 to a DDEC special fund and $4,700 to Puerto Rico's General Fund.

Tax Filings

Chapter 2 beneficiaries generally file both a Puerto Rico individual income tax return and a US federal return (Form 1040) with applicable exclusions. FBAR filing may also be required depending on individual circumstances.

Chapter 3: Export Services Obligations

Employment Requirements

Employment minimums vary by decree terms. The law defines "direct employees" as individuals resident in Puerto Rico who participate directly in covered activities. Full-time equivalency is generally calculated by dividing total hours worked by 2,080 (Section 2062.01(j)).

Export Ratio

Export services businesses are generally expected to derive a substantial portion of their income from clients outside Puerto Rico. Documentation typically includes client contracts showing location, detailed invoices, and evidence that services are performed from Puerto Rico.

Economic Substance

Chapter 3 decree holders generally maintain physical offices in Puerto Rico (not P.O. boxes), conduct strategic decision-making in PR, and hold board meetings on the island.

Reporting

The DDEC annual report for Chapter 3 typically includes operations and export documentation, employment verification, and financial statements. The November 15 deadline applies.

Chapter 6: Manufacturing Obligations

Manufacturing decree holders generally maintain active production operations, meet employment commitments based on investment levels, comply with environmental and safety certifications, and submit detailed production and employment reports.

Compliance Considerations

Documentation Practices

Maintaining thorough documentation on an ongoing basis is generally considered essential. This may include daily presence logs, financial records showing PR-based transactions, employment and payroll records, and all communications with DDEC.

Common Compliance Gaps

Practitioners frequently observe these areas of concern:

Marginal compliance: Meeting exact minimums (e.g., exactly 183 days) without margin may increase scrutiny risk.

Incomplete donation documentation: The specific allocation requirements under Section 6020.10(b) are sometimes overlooked.

Late reporting: The November 15 deadline is firm. Late or incomplete submissions may trigger administrative penalties.

Outdated procedures: Regulatory requirements evolve. Staying current with DDEC circulars and administrative orders is generally advisable.

Penalties

Section 6020.10(e) authorizes administrative fines of up to $10,000 for failure to file required reports or for filing after the deadline. An incomplete filing may be treated as not filed if the deficiency is not corrected within 15 days of notification.

Frequently Asked Questions

When is the DDEC annual report due? For businesses with a calendar year, the compliance report is generally due November 15 of the following year (Section 6020.10(a)(3)). For example, the 2025 report would be due November 15, 2026.

Where do the charitable donations go? The $10,000 annual contribution is allocated among child poverty nonprofits ($5,000), other qualifying entities ($2,500), and the Fondo Especial para la Igualdad Social ($2,500), as specified in Section 6020.10(b).

What happens with late filings? Late submissions may incur administrative penalties up to $10,000 per Section 6020.10(e). Multiple compliance failures could trigger a decree review.

Is the 183-day requirement in Act 60? No. The presence component of bona fide residency is established under IRS Internal Revenue Code Section 937, not under Act 60 itself, and 183 days is one of five alternative ways to meet it (IRS Publication 570, Chapter 1). The determination also involves the separate tax home and closer connection tests.

Are all decree holders required to make the $10,000 donation? Most Chapter 2 beneficiaries are subject to this requirement. However, Profesionales de Dificil Reclutamiento and Medicos Cualificados may be exempt under Sections 2021.02 and 2021.03(b) respectively.

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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.