Securing a tax decree under Act 60, Puerto Rico can unlock significant financial advantages, ranging from ultra‑low corporate rates to full exemptions on P.R. dividends, capital gains, and local property taxes. But obtaining the decree is just the beginning. True success lies in maintaining compliance with a complex set of legal, operational, and financial obligations.
In this comprehensive guide, we break down each area you need to monitor to avoid losing your benefits or triggering penalties. Whether you’re an investor, entrepreneur, professional services provider, or manufacturer, understanding and executing the following compliance requirements is essential to safeguarding your Act 60 Puerto Rico status.
Key Areas of Act 60 Puerto Rico Compliance
To maintain eligibility under Act 60 Puerto Rico, your compliance must extend across four foundational areas: bona fide residency, business operations, reporting and filing, and financial/legal accountability. Each area carries specific metrics and standards that must be met year after year, with no exceptions. Let’s explore each in depth.
1. Bona Fide Residency
Your Act 60 Puerto Rico perks depend on remaining a legal resident of Puerto Rico—and that means continuing to satisfy the three-part bona fide resident test annually:
Physical Presence Test
You must remain on the island for at least 183 days each taxable year. Document your travel meticulously. Keep boarding passes, vehicle mileage logs, utility bills, and lease agreements. Avoid large blocks of time spent outside Puerto Rico.
Tax Home Requirement
Puerto Rico must serve as your primary economic base. That includes where you conduct professional services, run your business, or actively manage investments. If your main client meetings, payroll processing, or financial systems revert to the U.S. mainland, your tax benefits could be at risk.
Closer Connection Test
Beyond physical presence, your social, professional, and legal ties must centre on Puerto Rico. That means holding a PR driver’s license, voter registration, local memberships, church participation, and having most family or personal relationships based on the island. Maintain proof through receipts, event logs, educational enrollments, and club affiliations demonstrating your rooted status.
Failing any of these tests, even for one day, puts your Act 60 Puerto Rico status in jeopardy. To protect your position, Tax Law and Venture Services helps you build and maintain a “compliance file,” including travel logs, lease documents, utility usage records, and social calendars.
2. Operating a Qualifying Business
For individuals or entities granted under business categories of Act 60 Puerto Rico—such as Export Services, Manufacturing, R&D, and Financial Services—you must ensure your company operates by decree requirements:
Personnel Obligations
Most business decrees require at least one full-time employee who is a bona fide resident of Puerto Rico. Larger deductions or special incentives may demand more. Maintain payroll accuracy, employment contracts, benefit enrollment, and social service contributions. You must work from Puerto Rico and have people working from Puerto Rico.
Physical Premises
You must maintain bona fide operations in Puerto Rico. That includes offices, production facilities, or labs. Even for service providers like consultancies or IT providers, a genuine Puerto Rican office with desk space, utilities, and local staff is required.
Revenue Sourcing
Income must derive from clients or customers based outside Puerto Rico. If significant sales or services are directed toward Puerto Rican residents or entities, your decree may be revoked or renegotiated. Routine intercompany transfers are generally acceptable.
Business Activity Documentation
Maintain formal invoices, signed client agreements, delivery records, timesheets, shipping logs, and licenses or permits. These records confirm your business is actively fulfilling its obligations and meeting economic substance rules.
Tax Law and Venture Services can set up your payroll, document contracts, certify employment levels, and manage HR to ensure alignment with Act 60 Puerto Rico rules, year after year.
3. Reporting & Filing Obligations
Compliance is an ongoing commitment. Deadlines and forms exist at both the Puerto Rico and U.S. levels:
Puerto Rico Income Tax Returns
Even if income is exempt, you must file Puerto Rico returns that declare the decreed benefits. Use Attachment D1 if you’re an individual resident, or forms specific to corporations.
IRS Annual Filings
U.S. citizens and green card holders must still file federal tax returns unless their income qualifies for the Section 933 exclusion or standard deductions. Tax Law and Venture Services coordinates with your CPA to ensure correct treatment of exempt income, accurate reporting, and timely federal filings, leaving no room for misinterpretation.
4. Financial & Legal Accountability
Maintaining Act 60 in Puerto Rico requires an organised financial and legal structure:
Accurate Accounting Systems
Implement bookkeeping platforms that track revenues, payroll, expenses, and contributions accurately and efficiently. Records should be audit-ready. Use established accounting firms to maintain ledgers aligned with GAAP and local standards. Puerto Rico has very specific withholding income tax requirements applicable to all business on service payment.
Audits & Ongoing Review
While not every grant requires annual audits, many do. Puerto Rico’s Incentives Office or Treasury may request random reviews. Being proactive with internal audits builds confidence and helps catch discrepancies early.
Compliance with Decree Terms
Your decree may include specific revenue minimums, job creation targets, or sector-specific obligations. Any changes, like business model shifts or ownership changes, require legal updates and potential modification of your grant.
Tax Law and Venture Services partners with accounting and audit specialists to validate records, prepare formal audit responses, and take corrective actions when necessary, protecting your Act 60 Puerto Rico compliance status.
Common Pitfalls & How to Prevent Them
Many businesses violate Act 60 without knowing it. Here’s a quick look at typical missteps and how to avoid them:
Incomplete Residency Documentation
Keeping just a driver’s license or bank account doesn’t suffice. Catchall logs—utility bills, mileage, event records—protect your residency status.
Combining Business and Personal Finances
Don’t process business transactions through U.S. accounts or make personal purchases with corporate funds.
Revenue Misrepresentation
Treating Puerto Rican clients or intercompany affiliates as qualifying revenue can lead to audit outcomes and revocation.
Payroll Shortcomings
Under-staffed operations or informal employment arrangements can breach the decree terms.
Late or Inaccurate Filing
Avoid penalties, including monetary fines and incentive loss, by tracking due dates and working with professionals for accurate submission.
Conclusion
Achieving your Act 60 Puerto Rico benefits is a significant milestone, but the journey doesn’t end there. Long-term success lies in dedicated compliance across residency, business operations, financial systems, and reporting discipline. With consistent execution, you not only protect your tax advantages but you also build a solid foundation for growth and sustainability on the island.
Tax Law and Venture Services provides a comprehensive compliance blueprint, encompassing annual reviews, residency verification, payroll infrastructure, reporting management, and audit preparedness, to help you maintain your incentives with confidence.
To ensure your long-term eligibility and thrive under Act 60, schedule a consultation with our team of tax and legal specialists today.
Frequently Asked Questions
1. What happens if I fail the residency test for one year?
Your decree can be revoked retroactively, which may result in back taxes, interest, and penalties spanning all years in violation.
2. Can I split time between Puerto Rico and the U.S.?
No. We do not recommend splitting time. You should avoid large blocks of time outside of Puerto Rico.
3. Are exemptions permanent once granted?
No. Most decrees last 10–20 years, but renewal depends on continued compliance with all Act 60 Puerto Rico terms.