The purpose of Act 60 Resident Individual Investors is to attract new residents to Puerto Rico
Act 60 is a consolidation and harmonization of many previous Puerto Rico economic development programs. While almost all other economic development programs focus on incentives for businesses, this program is designed for individuals that relocate to the Commonwealth of Puerto Rico, a U.S. Territory. Formerly known as Act 22 of 2012 ("Act to Promote the Relocation of Individual Investors to Puerto Rico"), the Act 60 Resident Individual Investor program provides a total exemption from Puerto Rico income taxes on Puerto Rico sourced passive income realized or accrued after such individuals become bona fide residents of Puerto Rico. The large number of incoming Act 60 Resident Individual Investor participants has resulted in new local investments in real estate, services and other consumption products, and in capital injections to the Puerto Rico banking sector, all of which accelerate the economy of Puerto Rico. The Act 60 Resident Individual Investor program complements other Act 60 incentives, which are for active income from eligible services or trade activities, and can be used in tandem by Act 60 program participants. Very often, however, the Act 60 Resident Individual Investor program is used stand-alone by individual investors that do not participate in Act 60 Export Services or Act 60 Export Trade activities, or various other economic development programs.
Below is the description of the Act 60 Resident Individual Investor program as provided by the Puerto Rico Department of Economic Development and Commerce (DDEC).
Act 60 Resident Individual Investor Overview - Section 2021.01
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ELIGIBILITY
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RESIDENCY
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PASSIVE INCOME
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EXEMPTION PERIOD
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INVESTMENT
ELIGIBLE INDIVIDUALS
Resident Individual Investor.- Section 1020.02 defines Resident Individual Investor as an individual eligible to receive the benefits provided in Sections 2022.01 and 2022.02 of this Code and who is a Resident Individual of Puerto Rico, but has not been a Resident Individual of Puerto Rico for the last ten (10) taxable years prior to the effective date of this Code (2008 to 2018), and becomes a Resident Individual of Puerto Rico not later than the Taxable Year ending December 31, 2035.
Students studying abroad who resided in Puerto Rico prior to leaving to pursue an education, the personnel working outside of Puerto Rico temporarily for the Government of Puerto Rico, its agencies and instrumentalities, and individuals similarly situated, shall not be considered Resident Individual Investors, given that, in such cases, their domicile continues to be Puerto Rico for the period during which they reside outside of our jurisdiction.
EXEMPT BUSINESS INCLUDES RESIDENT INDIVIDUAL INVESTOR
The term Exempt Business or Eligible Business when used in the language of Act 60, not only includes those individuals (shareholders) or business activities that qualify for the incentives under a Decree, but also includes Resident Individual Investors who relocate to Puerto Rico and qualify for the benefits as provided for under the Puerto Rico Incentives Code.
RESIDENT INDIVIDUAL - PR CODE
A Resident Individual of Puerto Rico is defined in Section 1010.01 (a)(30) of the Puerto Rico Internal Revenue Code as:
The term “resident individual” means an individual who is domiciled in Puerto Rico. An individual shall be presumed to be a resident of Puerto Rico if she has been present in Puerto Rico for a period of one hundred eighty-three (183) days during the calendar year. The Secretary shall establish through regulations to that effect the factors to be considered in the determination of domicile for purposes of this paragraph.
Generally, an individual that is simply 'present' in Puerto Rico for 183 days per calendar year is presumed to be a Resident Individual for Puerto Rico Internal Revenue Code purposes.
'BONA FIDE' RESIDENT - US CODE
To be eligible for the Resident Individual Investor tax incentives, and be exempt from US federal income tax, a US citizen or resident alien must be a Bona Fide Resident of Puerto Rico for the entire taxable year (not considering exceptions). Bona Fide Residency requires satisfying three tests during the year.
PRESENCE TEST
You satisfy the presence test for the tax year if you meet one of the following conditions.
- You were present in Puerto Rico for at least 183 days during the tax year.
- You were present in Puerto Rico for at least 549 days during the 3-year period that includes the current tax year and the 2 immediately preceding tax years. During each year of the 3-year period, you must be present in the relevant territory for at least 60 days.
- You were present in the United States for no more than 90 days during the tax year.
- You had earned income in the United States of no more than a total of $3,000 and were present for more days in Puerto Rico than in the United States during the tax year. Earned income is pay for personal services performed, such as wages, salaries, or professional fees.
- You had no significant connection to the United States during the tax year.
Generally, you are treated as being present in the United States or in Puerto Rico on any day that you are physically present in that location at any time during the day. If, during a single day, you are physically present in the United States and in Puerto Rico, that day is considered a day of presence in Puerto Rico. There are additional considerations for attributing days present in Puerto Rico due to qualifying medical treatment, if a Federal emergency or disaster is declared, or constructive travel (30 days), participating in a charitable sports competition, or as a student.
TAX HOME TEST
Your tax home is your regular or main place of business, employment, or post of duty regardless of where you maintain your family home. If you do not have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live. If you do not fit either of these categories, you are considered an itinerant and your tax home is wherever you work.
You will have met the tax home test if you did not have a tax home outside Puerto Rico during any part of the tax year.
CLOSER CONNECTION TEST
You will be considered to have a closer connection to Puerto Rico than to the United States or to a foreign country if you have maintained more significant contacts with Puerto Rico than with the United States or foreign country. In determining if you have maintained more significant contacts with Puerto Rico, the facts and circumstances to be considered include, but are not limited to, the following.
- The location of your permanent home.
- The location of your family.
- The location of personal belongings, such as automobiles, furniture, clothing, and jewelry owned by you and your family.The location of social, political, cultural, professional, or religious organizations with which you have a current relationship.
- The location where you conduct your routine personal banking activities.
- The location where you conduct business activities (other than those that go into determining your tax home).
- The location of the jurisdiction in which you hold a driver's license.
- The location of the jurisdiction in which you vote.
- The location of charitable organizations to which you contribute.
- The country of residence you designate on forms and documents.
- The types of official forms and documents you file, such as Form W-8BEN or Form W-9.
YEAR OF MOVE EXCEPTION
Move TO Puerto Rico
The Tax Home and Closer Connection tests are effectively as of January 1 of the tax year as they are met if you do not have a tax home or closer connection outside of Puerto Rico during ANY PART of the tax year. However, if you move to Puerto Rico after January 1st, but before there are less than 183 days remaining in the tax year, you will satisfy the tax home and closer connection tests in the tax year of changing your residence to Puerto Rico if you meet all of the following.
- You have not been a bona fide resident of Puerto Rico in any of the 3 tax years immediately preceding your move.
- In the year of the move, you do not have a tax home outside Puerto Rico or a closer connection to the United States or a foreign country than to Puerto Rico during any of the last 183 days of the tax year.
- You are a bona fide resident of Puerto Rico for each of the 3 tax years immediately following the tax year of your move.
Move FROM Puerto Rico
You will be considered a bona fide resident of Puerto Rico for the part of the tax year preceding the date on which you move if you:
- Are a U.S. citizen,
- Are a bona fide resident of Puerto Rico for at least 2 tax years immediately preceding the tax year of the move.
- Cease to be a bona fide resident of Puerto Rico during the tax year,
- Cease to have a tax home in Puerto Rico during the tax year, and
- Have a closer connection to Puerto Rico than to the United States or a foreign country throughout the part of the tax year preceding the date on which you cease to have a tax home in Puerto Rico.
ELIGIBLE INCOME - Interest, Dividends, Capital Gains
Section 2022.01 and 2022.02 of Act 60 describe the type of passive income eligible for tax exemption under the Resident Individual Investor program.
Section 2022.01 - Interest and Dividends
The income derived from all sources by a Resident Individual Investor after becoming a resident of Puerto Rico, but before January 1, 2036, consisting of interest and dividends. Included is interest and dividends from registered investment companies, and interest, dividends, financing charges, or partnership interest received from International Banking Entities.
Section 2022.02 - Capital Gains
Capital gain generated by a Resident Individual Investor attributable to any appreciation of the Securities or other Assets owned by such Resident Individual Investor. Recognizing a recent and emerging industry worldwide, commodities, coins, and any digital assets based on blockchain technology shall be eligible for the incentive applicable to the capital gains of Resident Individual Investors.
The long term capital gain on investments accrued before becoming a Resident Individual Investor, which is realized 10 years after becoming a Resident Individual and before January 1, 2036, shall be subject to a 5% tax.
Short or long term capital gain of investments made and accrued after becoming a Resident Individual and realized before January 1, 2036, shall be fully exempt from income taxes in Puerto Rico (including alternate basic tax).
SOURCE OF INCOME
To determine the source of income eligible under the Act 60 Resident Individual Investor program, we also need to understand the US Internal Revenue Service general rules and exceptions for the types of investment income received by individuals in Puerto Rico.
U.S. income rule. This rule states that income is not Puerto Rico source income if, under the rules of Internal Revenue Code sections 861–865, it is treated as income:
- From sources within the United States, or
- Effectively connected with the conduct of a trade or business within the United States.
For the typical types of investment income that generate interest, dividends and capital gains provided for under the Resident Individual Investor program, the general rules for determining the source of income are:
ITEM of INCOME | FACTOR DETERMINING SOURCE |
|---|---|
Interest | Residence of Payer |
Dividends | Where corporation created or organized |
Sale of Marketable Securities (securities actively traded on a regulated established financial market) | Seller's Tax Home (Territory holding period rules apply, special election required) |
Sale of Personal Property (stocks, bonds, commodities, coins, digital currency or assets) | Seller's Tax Home (Territory holding period rules apply, special election required) |
Sale of Real Property | Location of Property |
SPECIAL ELECTION
SPECIAL RULES
If you are a US citizen or resident alien that moves to Puerto Rico that owns certain investment property owned prior to becoming a bona fide resident of Puerto Rico, you are subject to special rules for the disposition of gains from the sale of the investment property if,
- For the tax year for which the source of the gain must be determined, you are a bona fide resident of Puerto Rico.
- For any of the 10 years preceding that year, you were a citizen or resident alien of the United States (other than a bona fide resident of Puerto Rico).
Generally, if you meet these two conditions, gains from the disposition of this property will not be treated as income from sources within Puerto Rico for purposes of the Internal Revenue Code, and will not be eligible for the Resident Individual Investor tax exemption... UNLESS the Resident Individual Investor makes a Special Election that overrides the special rules.
SPECIAL ELECTION
You can choose to treat the part of gain (or loss) attributable to the time you held the property while a bona fide resident of Puerto Rico (the territory holding period) as gain (or loss) from sources within Puerto Rico. Make the election by reporting the gain attributable to the territory holding period on your income tax return for the year of disposition.
US Treasury regulation 26 CFR § 1.937-2 -Income from sources within a possession, tells us how to calculate the territory holding period when choosing to treat part of the gain of investment property as attributable to the Resident Individual Investor as from sources within Puerto Rico.
There are two methods for calculating the gain for the territory holding period, one for marketable securities and the other for other types of investments, such as personal property.
MARKETABLE SECURITIES - Mark to Market based
Marketable securities are those actively traded on an established (regulated) financial market, such as stock in a publicly held corporation. Under the special election, allocate the gain (or loss) by figuring the appreciation separately for yourPuerto Rico and U.S. holding periods.
Your territory holding period begins on the first day you do not have a tax home outside of Puerto Rico (NOT the entire tax year if using the Year of Move exception), usually the date you move and change your tax home to Puerto Rico. The gain (or loss) attributable to the territory holding period is the difference in fair market value (such as mark to market) of the security at the close of the market on the first day (day you changed your tax home to Puerto Rico) and last days of this holding period (day you sold the marketable security). This is your gain (or loss) that is treated as being from sources within Puerto Rico and eligible under your Resident Individual Investor decree. If you were a bona fide resident of Puerto Rico for more than one continuous period, combine the gains (or losses) from each territory holding period.
The gain from the initial acquisition of the marketable security to the day your tax home changes to Puerto Rico will be taxed as US source income.
PERSONAL PROPERTY - Time Based
For personal property other than marketable securities, use a time-based allocation. Figure the gain (or loss) attributable to the territory holding period by multiplying your total gain (or loss) by the following fraction.
Number of days in the territory holding period
___________________________________________________
Total number of days in your holding period
The resulting fraction, expressed as a percentage, is your gain (or loss) that is treated as being from sources within Puerto Rico.
The gains eligible for the territory holding period for personal property, other than marketable securities, are not correlated to when the appreciation occurred, as with marketable securities. Investments held for a long period prior to becoming a Resident Individual Investor and sold shortly after will not have a different ratio even if large portion of appreciation occurs during the territory holding period.
EXEMPTION PERIOD
The exemption period of the decree for most Act 60 incentives is for15 years, and may be renegotiated for an additional 15 year period.
However, the Resident Individual Investor program tax exemption period is from the time the Individual becomes a resident individual of Puerto Rico until it expires on December 31, 2035. The Resident Individual Investor program expires for all participants (grantees), whether under the previous Act 22 or the current Act 60, on December 31, 2035.
TERMINATION
The Act 60 Resident Individual Investor Grant shall remain in effect only if Grantee continues being a Bona Fide Resident under US Internal Revenue Code §937, which qualifies them as a Resident Individual under the Puerto Rico Revenue Code §1010.01(a)(30) and remains compliant with the terms and conditions of the Resident Individual Investor Decree, as defined by the Act, and the Puerto Rico Code and all regulations promulgated thereunder.
The Act 60 Resident Individual Investor Grant shall automatically terminate if Grantee ceases to be a resident of Puerto Rico, provided, that the Grantee must notify the Office of Incentives in writing, within sixty (60) days of the fact of and date of the Grantee’s termination of residence., otherwise, if Grantee does not comply to file income tax returns in Puerto Rico and file its Annual Reports for this Grant, for any tax year, the termination could be effective as of the first day of noncompliance, which may be a prior date.
ADMINISTRATIVE FEES
ANNUAL REPORT FILING FEE
In 2020, the governor of Puerto Rico signed into law Act 40-2020, that increased from $300 to $5,000 the annual report filing fee that Act 22 and Act 60 Resident Individual Investor decree holders are subject to pay. The fee was immediately enforceable, and retroactively applied to the 2019 tax year, so all decree holders are obligated to pay the fee in 2020.
Of the $5,000 in the annual report filing fee amount, $300 is allocated to the Department of Economic Development and Commerce, while the remaining $4700 is allocated to the Department of Internal Revenue (known as Hacienda).
ADMINISTRATIVE FINES
Upon notice from the concerned agency, the Secretary of the DEDC may impose a ten thousand dollar ($10,000) administrative fine on any Exempt Business (includes by definition Resident Individual Investors) holding a Decree under this Code that fails to file any of the reports required by the Secretary of the Treasury, the Secretary of the DEDC or the Insurance Commissioner or that files such reports after the due date. Filing an incomplete report shall be deemed to be a failure to file said report, if the concerned agency notifies the Exempt Business of any omission on the required report and said Exempt Business does not submit the missing information within fifteen (15) days from the date of such notice, or does not reasonably justify the reason for such missing information.
CHARITABLE CONTRIBUTION REQUIREMENT
Starting on the second year of effectiveness, each Resident Individual Investor shall evidence an annual payment of at least ten thousand dollars ($10,000) to nonprofit entities that operate in Puerto Rico, are certified under Section 1010.01 of the Puerto Rico Internal Revenue Code, and are not controlled by the same person holding the Decree, nor his ascendants or descendants. The evidence of payment of the annual contributions to nonprofits shall be included as part of the annual report required of participants.
• $5,000 toward Eradicating Child Poverty
Regardless of any contribution over the minimum annual contribution of at least ten thousand dollars ($10,000), five thousand dollars ($5,000) shall be allocated to nonprofit entities operating in Puerto Rico under Section 1101.01, and which appear on a list to be published by the Special Joint Committee on Legislative Funds for Community Impact on or before December 31st of every year of the organizations whose work plan addresses the eradication of child poverty.
• $5,000 toward Other services rendered directly to the Community
The remaining five thousand dollars ($5,000) shall be allocated to any other nonprofit entities operating in Puerto Rico under Section 1101.01, and which is not included in the list published by the Special Joint Committee on Legislative Funds for Community Impact. The Exempt Business shall certify to the Incentives Office that the selected nonprofit entity is an entity that renders services directly to the community.
Any contribution in excess of the required ten thousand dollars ($10,000) mentioned above, can be destined to any other nonprofit entities operating in Puerto Rico under Section 1101.01 of the Code.
PRIMARY RESIDENCE PURCHASE REQUIREMENT
Resident Individual Investors shall submit proof of having acquired by purchase, as sole owner or jointly with his spouse, within two (2) years after obtaining the Decree under the provisions of this Code, the ownership of real property in Puerto Rico, from an owner, whether such owner is a person or company that is completely separate and unrelated to the person holding a Decree under this Code, that shall serve as his primary residence in the jurisdiction of Puerto Rico and he shall attest in the annual Report that he maintains sole and exclusive ownership of real property that serves as principal residence, whether by himself or jointly with his spouse, during the effective period of the Decree.
Act 60 Resident Individual Investor Overview - Section 2021.01
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ELIGIBILITY
-
RESIDENCY
-
PASSIVE INCOME
-
EXEMPTION PERIOD
-
INVESTMENT
ELIGIBLE INDIVIDUALS
Resident Individual Investor.- Section 1020.02 defines Resident Individual Investor as an individual eligible to receive the benefits provided in Sections 2022.01 and 2022.02 of this Code and who is a Resident Individual of Puerto Rico, but has not been a Resident Individual of Puerto Rico for the last ten (10) taxable years prior to the effective date of this Code (2008 to 2018), and becomes a Resident Individual of Puerto Rico not later than the Taxable Year ending December 31, 2035.
Students studying abroad who resided in Puerto Rico prior to leaving to pursue an education, the personnel working outside of Puerto Rico temporarily for the Government of Puerto Rico, its agencies and instrumentalities, and individuals similarly situated, shall not be considered Resident Individual Investors, given that, in such cases, their domicile continues to be Puerto Rico for the period during which they reside outside of our jurisdiction.
EXEMPT BUSINESS INCLUDES RESIDENT INDIVIDUAL INVESTOR
The term Exempt Business or Eligible Business when used in the language of Act 60, not only includes those individuals (shareholders) or business activities that qualify for the incentives under a Decree, but also includes Resident Individual Investors who relocate to Puerto Rico and qualify for the benefits as provided for under the Puerto Rico Incentives Code.
RESIDENT INDIVIDUAL - PR CODE
A Resident Individual of Puerto Rico is defined in § 1010.01 (a)(30) of the Puerto Rico Internal Revenue Code as:
The term “resident individual” means an individual who is domiciled in Puerto Rico. An individual shall be presumed to be a resident of Puerto Rico if she has been present in Puerto Rico for a period of one hundred eighty-three (183) days during the calendar year. The Secretary shall establish through regulations to that effect the factors to be considered in the determination of domicile for purposes of this paragraph.
Generally, an individual that is simply 'present' in Puerto Rico for 183 days per calendar year is presumed to be a Resident Individual for Puerto Rico Internal Revenue Code purposes.
'BONA FIDE' RESIDENT - US CODE
To be eligible for the Resident Individual Investor tax incentives, and be exempt from US federal income tax, a US citizen or resident alien must be a Bona Fide Resident of Puerto Rico for the entire taxable year (not considering exceptions). Bona Fide Residency requires satisfying three tests during the year.
PRESENCE TEST
You satisfy the presence test for the tax year if you meet one of the following conditions.
1. You were present in Puerto Rico for at least 183 days during the tax year.
2. You were present in Puerto Rico for at least 549 days during the 3-year period that includes the current tax year and the 2 immediately preceding tax years. During each year of the 3-year period, you must be present in the relevant territory for at least 60 days.
3. You were present in the United States for no more than 90 days during the tax year.
4. You had earned income in the United States of no more than a total of $3,000 and were present for more days in Puerto Rico than in the United States during the tax year. Earned income is pay for personal services performed, such as wages, salaries, or professional fees.
5. You had no significant connection to the United States during the tax year.
Generally, you are treated as being present in the United States or in Puerto Rico on any day that you are physically present in that location at any time during the day. If, during a single day, you are physically present in the United States and in Puerto Rico, that day is considered a day of presence in Puerto Rico. There are additional considerations for attributing days present in Puerto Rico due to qualifying medical treatment, if a Federal emergency or disaster is declared, or constructive travel (30 days), participating in a charitable sports competition, or as a student.
TAX HOME TEST
Your tax home is your regular or main place of business, employment, or post of duty regardless of where you maintain your family home. If you do not have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live. If you do not fit either of these categories, you are considered an itinerant and your tax home is wherever you work.
You will have met the tax home test if you did not have a tax home outside Puerto Rico during any part of the tax year.
CLOSER CONNECTION TEST
You will be considered to have a closer connection to Puerto Rico than to the United States or to a foreign country if you have maintained more significant contacts with Puerto Rico than with the United States or foreign country. In determining if you have maintained more significant contacts with Puerto Rico, the facts and circumstances to be considered include, but are not limited to, the following.
• The location of your permanent home.
• The location of your family.
• The location of personal belongings, such as automobiles, furniture, clothing, and jewelry owned by you and your family.The location of social, political, cultural, professional, or religious organizations with which you have a current relationship.
• The location where you conduct your routine personal banking activities.
• The location where you conduct business activities (other than those that go into determining your tax home).
• The location of the jurisdiction in which you hold a driver's license.
• The location of the jurisdiction in which you vote.
• The location of charitable organizations to which you contribute.
• The country of residence you designate on forms and documents.
• The types of official forms and documents you file, such as Form W-8BEN or Form W-9.
YEAR OF MOVE EXCEPTION
Move TO Puerto Rico
The Tax Home and Closer Connection tests are effectively as of January 1 of the tax year as they are met if you do not have a tax home or closer connection outside of Puerto Rico during ANY PART of the tax year. However, if you move to Puerto Rico after January 1st, but before there are less than 183 days remaining in the tax year, you will satisfy the tax home and closer connection tests in the tax year of changing your residence to Puerto Rico if you meet all of the following.
• You have not been a bona fide resident of Puerto Rico in any of the 3 tax years immediately preceding your move.
• In the year of the move, you do not have a tax home outside Puerto Rico or a closer connection to the United States or a foreign country than to Puerto Rico during any of the last 183 days of the tax year.
• You are a bona fide resident of Puerto Rico for each of the 3 tax years immediately following the tax year of your move.
Move FROM Puerto Rico
You will be considered a bona fide resident of Puerto Rico for the part of the tax year preceding the date on which you move if you:
• Are a U.S. citizen,
• Are a bona fide resident of Puerto Rico for at least 2 tax years immediately preceding the tax year of the move.
• Cease to be a bona fide resident of Puerto Rico during the tax year,
• Cease to have a tax home in Puerto Rico during the tax year, and
• Have a closer connection to Puerto Rico than to the United States or a foreign country throughout the part of the tax year preceding the date on which you cease to have a tax home in Puerto Rico.
ELIGIBLE INCOME - Interest, Dividends, Capital Gains
Section 2022.01 and 2022.02 of Act 60 describe the type of passive income eligible for tax exemption under the Resident Individual Investor program.
§2022.01 - Interest and Dividends
The income derived from all sources by a Resident Individual Investor after becoming a resident of Puerto Rico, but before January 1, 2036, consisting of interest and dividends. Included is interest and dividends from registered investment companies, and interest, dividends, financing charges, or partnership interest received from International Banking Entities.
§2022.02 - Capital Gains
Capital gain generated by a Resident Individual Investor attributable to any appreciation of the Securities or other Assets owned by such Resident Individual Investor. Recognizing a recent and emerging industry worldwide, commodities, coins, and any digital assets based on blockchain technology shall be eligible for the incentive applicable to the capital gains of Resident Individual Investors.
The long term capital gain on investments accrued before becoming a Resident Individual Investor, which is realized 10 years after becoming a Resident Individual and before January 1, 2036, shall be subject to a 5% tax.
Short or long term capital gain of investments made and accrued after becoming a Resident Individual and realized before January 1, 2036, shall be fully exempt from income taxes in Puerto Rico (including alternate basic tax).
SOURCE OF INCOME
To determine the source of income eligible under the Act 60 Resident Individual Investor program, we also need to understand the US Internal Revenue Service general rules and exceptions for the types of investment income received by individuals in Puerto Rico.
U.S. income rule. This rule states that income is not Puerto Rico source income if, under the rules of Internal Revenue Code §861–§865, it is treated as income:
• From sources within the United States, or
• Effectively connected with the conduct of a trade or business within the United States.
For the typical types of investment income that generate interest, dividends and capital gains provided for under the Resident Individual Investor program, the general rules for determining the source of income are:
ITEM of INCOME | FACTOR DETERMINING SOURCE |
|---|---|
Interest | Residence of Payer |
Dividends | Where corporation created or organized |
Sale of Marketable Securities (securities actively traded on a regulated established financial market) | Seller's Tax Home (Territory holding period rules apply, special election required) |
Sale of Personal Property (stocks, bonds, commodities, coins, digital currency or assets) | Seller's Tax Home (Territory holding period rules apply, special election required) |
Sale of Real Property | Location of Property |
SPECIAL ELECTION
SPECIAL RULES
If you are a US citizen or resident alien that moves to Puerto Rico that owns certain investment property owned prior to becoming a bona fide resident of Puerto Rico, you are subject to special rules for the disposition of gains from the sale of the investment property if,
• For the tax year for which the source of the gain must be determined, you are a bona fide resident of Puerto Rico.
• For any of the 10 years preceding that year, you were a citizen or resident alien of the United States (other than a bona fide resident of Puerto Rico).
Generally, if you meet these two conditions, gains from the disposition of this property will not be treated as income from sources within Puerto Rico for purposes of the Internal Revenue Code, and will not be eligible for the Resident Individual Investor tax exemption... UNLESS the Resident Individual Investor makes a Special Election that overrides the special rules.
SPECIAL ELECTION
You can choose to treat the part of gain (or loss) attributable to the time you held the property while a bona fide resident of Puerto Rico (the territory holding period) as gain (or loss) from sources within Puerto Rico. Make the election by reporting the gain attributable to the territory holding period on your income tax return for the year of disposition.
US Treasury regulation 26 CFR § 1.937-2 -Income from sources within a possession, tells us how to calculate the territory holding period when choosing to treat part of the gain of investment property as attributable to the Resident Individual Investor as from sources within Puerto Rico.
There are two methods for calculating the gain for the territory holding period, one for marketable securities and the other for other types of investments, such as personal property.
MARKETABLE SECURITIES - Mark to Market based
Marketable securities are those actively traded on an established (regulated) financial market, such as stock in a publicly held corporation. Under the special election, allocate the gain (or loss) by figuring the appreciation separately for yourPuerto Rico and U.S. holding periods.
Your territory holding period begins on the first day you do not have a tax home outside of Puerto Rico (NOT the entire tax year if using the Year of Move exception), usually the date you move and change your tax home to Puerto Rico. The gain (or loss) attributable to the territory holding period is the difference in fair market value (such as mark to market) of the security at the close of the market on the first day (day you changed your tax home to Puerto Rico) and last days of this holding period (day you sold the marketable security). This is your gain (or loss) that is treated as being from sources within Puerto Rico and eligible under your Resident Individual Investor decree. If you were a bona fide resident of Puerto Rico for more than one continuous period, combine the gains (or losses) from each territory holding period.
The gain from the initial acquisition of the marketable security to the day your tax home changes to Puerto Rico will be taxed as US source income.
PERSONAL PROPERTY - Time Based
For personal property other than marketable securities, use a time-based allocation. Figure the gain (or loss) attributable to the territory holding period by multiplying your total gain (or loss) by the following fraction.
Number of days in the territory holding period
___________________________________
Total number of days in your holding period
The resulting fraction, expressed as a percentage, is your gain (or loss) that is treated as being from sources within Puerto Rico.
The gains eligible for the territory holding period for personal property, other than marketable securities, are not correlated to when the appreciation occurred, as with marketable securities. Investments held for a long period prior to becoming a Resident Individual Investor and sold shortly after will not have a different ratio even if large portion of appreciation occurs during the territory holding period.
EXEMPTION PERIOD
The exemption period of the decree for most Act 60 incentives is for15 years, and may be renegotiated for an additional 15 year period.
However, the Resident Individual Investor program tax exemption period is from the time the Individual becomes a resident individual of Puerto Rico until it expires on December 31, 2035. The Resident Individual Investor program expires for all participants (grantees), whether under the previous Act 22 or the current Act 60, on December 31, 2035.
TERMINATION
The Act 60 Resident Individual Investor Grant shall remain in effect only if Grantee continues being a Bona Fide Resident under US Internal Revenue Code §937, which qualifies them as a Resident Individual under the Puerto Rico Revenue Code §1010.01(a)(30) and remains compliant with the terms and conditions of the Resident Individual Investor Decree, as defined by the Act, and the Puerto Rico Code and all regulations promulgated thereunder.
The Act 60 Resident Individual Investor Grant shall automatically terminate if Grantee ceases to be a resident of Puerto Rico, provided, that the Grantee must notify the Office of Incentives in writing, within sixty (60) days of the fact of and date of the Grantee’s termination of residence., otherwise, if Grantee does not comply to file income tax returns in Puerto Rico and file its Annual Reports for this Grant, for any tax year, the termination could be effective as of the first day of noncompliance, which may be a prior date.
ADMINISTRATIVE FEES
ANNUAL REPORT FILING FEE
In 2020, the governor of Puerto Rico signed into law Act 40-2020, that increased from $300 to $5,000 the annual report filing fee that Act 22 and Act 60 Resident Individual Investor decree holders are subject to pay. The fee was immediately enforceable, and retroactively applied to the 2019 tax year, so all decree holders are obligated to pay the fee in 2020.
Of the $5,000 in the annual report filing fee amount, $300 is allocated to the Department of Economic Development and Commerce (known as DEDC), while the remaining $4700 is allocated to the Department of Internal Revenue (known as Hacienda).
ADMINISTRATIVE FINES
Upon notice from the concerned agency, the Secretary of the DEDC may impose a ten thousand dollar ($10,000) administrative fine on any Exempt Business (includes by definition Resident Individual Investors) holding a Decree under this Code that fails to file any of the reports required by the Secretary of the Treasury, the Secretary of the DEDC or the Insurance Commissioner or that files such reports after the due date. Filing an incomplete report shall be deemed to be a failure to file said report, if the concerned agency notifies the Exempt Business of any omission on the required report and said Exempt Business does not submit the missing information within fifteen (15) days from the date of such notice, or does not reasonably justify the reason for such missing information.
CHARITABLE CONTRIBUTION REQUIREMENT
Starting on the second year of effectiveness, each Resident Individual Investor shall evidence an annual payment of at least ten thousand dollars ($10,000) to nonprofit entities that operate in Puerto Rico, are certified under Section 1010.01 of the Puerto Rico Internal Revenue Code, and are not controlled by the same person holding the Decree, nor his ascendants or descendants. The evidence of payment of the annual contributions to nonprofits shall be included as part of the annual report required of participants.
• $5,000 toward Eradicating Child Poverty
Regardless of any contribution over the minimum annual contribution of at least ten thousand dollars ($10,000), five thousand dollars ($5,000) shall be allocated to nonprofit entities operating in Puerto Rico under Section 1101.01, and which appear on a list to be published by the Special Joint Committee on Legislative Funds for Community Impact on or before December 31st of every year of the organizations whose work plan addresses the eradication of child poverty.
• $5,000 toward Other services rendered directly to the Community
The remaining five thousand dollars ($5,000) shall be allocated to any other nonprofit entities operating in Puerto Rico under §1101.01, and which is not included in the list published by the Special Joint Committee on Legislative Funds for Community Impact. The Exempt Business shall certify to the Incentives Office that the selected nonprofit entity is an entity that renders services directly to the community.
Any contribution in excess of the required ten thousand dollars ($10,000) mentioned above, can be destined to any other nonprofit entities operating in Puerto Rico under §1101.01 of the Code.
PRIMARY RESIDENCE PURCHASE REQUIREMENT
Resident Individual Investors shall submit proof of having acquired by purchase, as sole owner or jointly with his spouse, within two (2) years after obtaining the Decree under the provisions of this Code, the ownership of real property in Puerto Rico, from an owner, whether such owner is a person or company that is completely separate and unrelated to the person holding a Decree under this Code, that shall serve as his primary residence in the jurisdiction of Puerto Rico and he shall attest in the annual Report that he maintains sole and exclusive ownership of real property that serves as principal residence, whether by himself or jointly with his spouse, during the effective period of the Decree.
