Bona Fide Residency Requirements: Guide for Act 60 Individual Decree

Bona Fide Residency: Foundation of the Act 60 Individual Decree

Bona fide residency is the most critical, and most misunderstood, requirement for Act 60 Chapter 2 (individual decree) beneficiaries. This article provides an overview of the requirements and considerations involved.

The Legal Framework

Bona fide residency in Puerto Rico is determined primarily under federal law, specifically IRS Internal Revenue Code Section 937. It is not defined by Act 60 itself. The determination involves three key components:

1. The Presence Test: satisfied by meeting any one of five alternative conditions, described below
2. Tax Home: no tax home outside Puerto Rico
3. Closer Connection: no closer connection to the United States or a foreign country than to Puerto Rico

For applications submitted after December 31, 2026, Section 1020.02(a)(4) (as amended by Ley 38-2026) additionally requires that applicants demonstrate they were not residents of Puerto Rico for at least six years prior to relocating. That is a Puerto Rico decree requirement, separate from the federal residency test.

The Five Ways to Meet the Presence Test

The 183-day figure is the best known route, but it is one of five. Per IRS Publication 570, Chapter 1, a US citizen or resident alien satisfies the presence test for a tax year by meeting any one of the following:

1. Present in Puerto Rico for at least 183 days during the tax year
2. Present in Puerto Rico for at least 549 days across the current and two preceding tax years, with at least 60 days in each of those years
3. Present in the United States for no more than 90 days during the tax year
4. US earned income of no more than $3,000 in total, and more days present in Puerto Rico than in the United States
5. No significant connection to the United States during the tax year

This matters in both directions. Someone who spends well under 183 days in Puerto Rico may still qualify under condition 3 or 5, and someone who clears 183 days can still fail the separate tax home or closer connection tests. Treating the day count as the whole question is the most common misreading of this area.

How Presence Days Are Counted

The IRS uses specific rules under IRC Section 937 for counting presence days:

• Arrival day: Generally does not count (not present for the full day)
• Departure day: Generally does count (present at the start)
• Partial days: Only departure days typically count as presence

Strategic Presence Planning

Where an individual is relying on the 183-day condition, many practitioners suggest targeting 200+ days rather than the minimum, which provides margin for unexpected travel, business trips, family emergencies, and documentation gaps. An individual relying on one of the other four conditions should document that condition on its own terms rather than counting Puerto Rico days.

Tax Home Establishment

Tax home is generally where the principal place of business or employment is located. For Act 60 beneficiaries, this typically involves:

• Maintaining primary office in Puerto Rico
• Conducting the majority of business activities from PR
• Using PR address on business documents
• Receiving compensation through PR-based accounts

Closer Connection Test

The closer connection test examines where the most significant ties are located. Key factors include:

Additional factors include driver's license location, vehicle registration, bank account locations, religious affiliation, and recreational memberships.

Building Connection to Puerto Rico

Initial Actions (typically months 1-3)

• Obtaining Puerto Rico driver's license
• Registering vehicles in Puerto Rico
• Opening Puerto Rico bank accounts
• Registering to vote in Puerto Rico
• Updating mailing address

Ongoing Integration

• Joining local organizations
• Establishing local medical and dental providers
• Building local professional and personal networks
• Participating in community activities

Documentation Practices

Travel Records: Flight itineraries, boarding passes, passport stamps, car rental records

Financial Records: Credit card statements showing PR purchases, bank statements, utility bills, property tax payments

Personal Records: Medical and dental appointments, gym usage logs, local service invoices

Documentation is generally recommended on a daily basis with monthly reviews and annual compilation for potential review.

Audit Considerations

Factors that may increase the likelihood of residency scrutiny include:

• Presence days close to the 183-day minimum
• Principal economic activity outside PR
• Immediate family living outside PR
• Significant properties maintained outside PR
• Inconsistent travel patterns

Charitable Contribution Requirements

Under Act 60, individual decree holders generally contribute $10,000 annually to qualifying nonprofits:

• $5,000 to child poverty nonprofits (from government-approved 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: Profesionales de Dificil Reclutamiento (Section 2021.02) and Medicos Cualificados (Section 2021.03(b)) may be exempt from this requirement.

Compliance and Reporting

DDEC annual reports are generally due November 15 (Section 6020.10(a)(3)). The annual filing fee is $5,000 (Section 6020.10(d)). Maximum administrative fine for non-compliance is $10,000 (Section 6020.10(e)).

Conclusion

Bona fide residency determination involves a comprehensive evaluation of multiple factors under federal law. The physical presence test is one component, but the tax home and closer connection tests carry significant weight. Thorough documentation and genuine integration into Puerto Rico life are generally considered essential for maintaining compliant residency status.

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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.