Why Individuals and Corporations from High-Tax States Should Consider Moving to Puerto Rico: A Strategic Financial Advantage

As tax burdens continue to rise in many U.S. states, particularly those with progressive tax systems like California, New York, New Jersey, and Illinois, individuals and businesses are actively seeking strategies to legally reduce their tax liabilities. One of the most compelling opportunities lies in Puerto Rico, a U.S. territory that offers unparalleled tax incentives for both individuals and corporations under the Puerto Rico Incentives Code (formerly Acts 20 and 22, now consolidated under Act 60). This page explores the financial advantages of relocating to Puerto Rico, highlighting the tax benefits, residency requirements, and long-term opportunities for wealth preservation and business growth.

The High-Tax State Dilemma

• State Income Tax Rates: As high as 13.3% in California, 10.9% in New York
• Capital Gains Taxes: Combined federal and state rates can exceed 37%
• Corporate Taxes: Up to 8-12% in addition to federal corporate taxes
• High Cost of Living: Including housing, healthcare, and regulatory compliance

These conditions erode disposable income and corporate profit margins, often prompting a search for more favorable tax jurisdictions.

Why Puerto Rico?

Puerto Rico provides a unique opportunity for tax relief without renouncing U.S. citizenship. Although a U.S. territory, Puerto Rico has its own tax code, allowing it to offer generous tax incentives to attract residents and investors:

• No Federal Income Tax on Puerto Rico-sourced income for bona fide residents
• Act 60 Incentives Code: Includes tax benefits for individual investors and businesses exporting services
• Strategic Location: Access to U.S. markets while offering international proximity
• Affordable Lifestyle: Lower cost of living compared to most high-tax U.S. states

Tax Benefits for Individuals (Formerly Act 22)

• 0% Tax on Long-Term Capital Gains accrued after becoming a resident
• 0% Tax on Puerto Rico-Sourced Dividends and Interest Income
• Exemption from Puerto Rican Income Taxes on passive income derived from Puerto Rico sources
• No State or Local Taxes: Unlike in most U.S. states

Requirements include:

• Establishing bona fide residency (183-day rule, tax home test, and closer connection test)
• Applying for and maintaining an annual compliance report and filing with the Puerto Rico Department of Economic Development and Commerce (DDEC)

Tax Benefits for Businesses (Formerly Act 20)

• 4% Corporate Tax Rate on eligible export services income
• 100% Tax Exemption on dividends from Puerto Rico entities to bona fide residents
• 90% Real and Personal Property Tax Exemption for business-related assets
• Reduced Withholding Rates on specific transactions

Eligible businesses include:

• Consulting and advisory services
• Software development and IT support
• Financial services and asset management
• Marketing and creative services

Economic and Lifestyle Advantages

• Lower Housing Costs: Compared to major metropolitan areas
• Growing Business Ecosystem: Co-working spaces, venture capital interest, and expat communities
• Robust Infrastructure: Internet, transportation, and access to U.S. goods and services
• Cultural Vibrancy: Spanish and English bilingualism, rich history, and arts

Remote workers, digital nomads, and entrepreneurs find the lifestyle in Puerto Rico both affordable and enriching.

Compliance and Legal Considerations

• Fulfill all residency requirements annually
• File necessary tax documents with both the IRS and Puerto Rico’s Hacienda (Treasury Department)
• Maintain substantial presence and genuine ties to Puerto Rico (e.g., home, bank accounts, voter registration)
• Work with qualified tax advisors and legal counsel familiar with U.S. and Puerto Rican tax law

Penalties for non-compliance can include loss of tax benefits and retroactive taxation.

Next Steps

Puerto Rico presents a powerful solution for those seeking to legally minimize tax obligations while maintaining ties to the United States. The tax incentives under Act 60 are designed to attract high-earning individuals and export-based businesses that want to grow in a pro-business environment.

Actionable Next Steps:

• Consult with a Tax Specialist: Review your current tax exposure and evaluate potential savings.
• Visit Puerto Rico: Explore neighborhoods, business hubs, and meet local professionals.
• Apply for Act 60 Decrees: Through the DDEC portal with the help of a local legal firm.
• Plan a Strategic Move: Build a timeline that aligns with tax year planning.

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