Puerto Rico’s Act 60, known as the Tax Incentives Code, has attracted significant attention from entrepreneurs, investors, and cryptocurrency traders seeking favorable tax treatment. The statute provides substantial benefits for bona fide residents of Puerto Rico, but recent enforcement actions underscore the importance of adhering strictly to U.S. Internal Revenue Code (IRC) sourcing rules.
Key Benefits Under Act 60
- Corporate incentives: Eligible Puerto Rican corporations may qualify for a reduced 4% corporate tax rate.
- Individual incentives: Bona fide residents enjoy exemptions on Puerto Rico‑sourced dividends and interest, and a 0% tax rate on capital gains accrued after establishing residency.
Income Sourcing Framework
The IRC and Treasury regulations establish clear sourcing rules that determine whether income qualifies for Puerto Rico’s tax incentives:
- Services income: Sourced to the location where services are physically performed. Work conducted in Puerto Rico qualifies; services performed elsewhere remain U.S.-sourced.
- Investment income:
- Capital gains are sourced to the taxpayer’s residence at the time of sale.
- Dividends and interest are sourced to the payer’s location.
- Cryptocurrency is treated as property, with gains sourced in the same manner as stock sales.
- Ten-year rule: Gains from property owned prior to establishing Puerto Rico residency may remain U.S.-sourced if sold within ten years of the move.
IRS Enforcement Trends
Recent cases, including United States v. Suresh Gajwani, highlight the IRS’s focus on taxpayers attempting to improperly source income to Puerto Rico. Key enforcement themes include:
- Residency requirements: Taxpayers must demonstrate genuine residency through physical presence, a Puerto Rico tax home, and closer personal ties to Puerto Rico.
- Documentation: Detailed records such as travel logs, contracts, and brokerage statements are essential to substantiate sourcing claims.
- Timing considerations: Gains realized before residency or within the ten-year lookback period remain subject to U.S. taxation.
- Entity structures: Pass-through entities may complicate sourcing and expose U.S. residents to federal tax liability.
- Cryptocurrency transactions: Gains are treated consistently with stock sales, and the IRS has signaled heightened scrutiny in this area.
Conclusion
Act 60 offers extraordinary tax advantages for those who comply fully with residency and sourcing requirements. However, the IRS has demonstrated a willingness to challenge taxpayers who attempt to exploit the statute without meeting its strict conditions. Careful planning, rigorous documentation, and adherence to IRC rules are essential to secure the benefits while minimizing enforcement risks.
