Puerto Rico Shift From Zero to Low Tax Rate Enhances Viability

Puerto Rico has recalibrated one of its most closely watched tax incentive programs. House Bill 505 replaces the 0% tax framework for new individual resident investor applicants with a 4% fixed rate beginning in 2027. It also strengthens residency and ownership requirements and extends the program through 2055.

For tax advisers and cross-border planners, the shift signals a transition from a zero-tax headline to a more politically durable low-tax regime, not a retreat from Puerto Rico’s incentive model. The island is preserving its competitive structure while addressing fiscal sustainability and long-term viability.

Although the amendment ends Puerto Rico’s zero-tax positioning for new applicants, the 4% rate is comparatively modest relative to mainland capital gains exposure. The legislature appears to have chosen recalibration rather than repeal, preserving competitiveness while improving optics and revenue predictability.

The amendments arrive alongside broader US economic shifts, including tariff policy changes and renewed interest in reshoring.

Incentives Framework

Puerto Rico codified its incentives framework in Act 60-2019, also known as Act 60 or the Puerto Rico Incentives Code. Act 60 consolidated more than 70 prior economic incentive laws into a single unified regime governing tax exemptions for individuals and businesses.

The individual resident investor program, enacted as Act 22 in 2012 and later incorporated into Act 60, provides preferential Puerto Rico tax treatment to qualifying individuals who relocate their primary residence to the island.

A key feature underlying the program is Section 933 of the Internal Revenue Code, which generally provides that bona fide Puerto Rico residents aren’t subject to US federal income tax on Puerto Rico-source income.

When combined with Puerto Rico’s local tax incentives, this structure created a 0% Puerto Rico tax environment for certain categories of post-relocation income. House Bill 505 modifies that local tax component, but leaves the federal framework intact.

Under prior law, qualifying resident investors were eligible for:

• 0% Puerto Rico income tax on interest and dividends
• 0% Puerto Rico tax on capital gains accrued and realized after becoming a resident.

Applications filed on or before Dec. 31, 2026, remain eligible for that 0% framework. Applications filed on or after Jan. 1, 2027, will be subject to a 4% fixed Puerto Rico income tax rate on post-relocation interest, dividends, and capital gains recognized before Jan. 1, 2056.

For pre-2027 applicants, post-relocation appreciation recognized before 2036 remains fully exempt. For post-2026 applicants, those gains generally fall below the new 4% rate.

Extension Through 2055

House Bill 505 extends the program’s sunset from Dec. 31, 2035, to Dec. 31, 2055.

This extension may be more significant than the rate change. A 30-year statutory horizon reduces policy uncertainty and enhances modeling stability for long-term relocation and estate planning strategies.

Existing decree holders remain under the terms in effect at the time their decrees were granted. The legislation allows certain decree holders to ask for modifications if they want to transition into the revised 4% structure in exchange for extended treatment through 2055. Pending applications filed on or before Dec. 31, 2026, may opt into the new 4% regime.

The message is clear: Puerto Rico intends to institutionalize, not dismantle, its incentive framework.

Strengthened Residency Requirement

House Bill 505 introduces a revised residency safeguard. For applications filed on or after Jan. 1, 2027, an applicant must demonstrate that they weren’t a Puerto Rico resident for at least six years immediately preceding relocation.

This change narrows eligibility to individuals genuinely relocating to the island and may limit strategies involving prior residents requalifying under earlier statutory gaps.

Expect increased attention to domicile analysis, physical presence documentation, and sourcing determinations.

Primary Residence Ownership

The legislation also clarifies the primary residence requirement.

Individual resident investors must acquire ownership of a Puerto Rico residential property within two years of receiving their decree, and the property must serve as their principal residence throughout the decree term.

For applications filed on or after Jan. 1, 2027, the title must be held directly by the individual (alone or jointly with a spouse) or through certain qualifying trusts, and must be registered—or pending registration—in the Puerto Rico Property Registry.

The statutory language may be interpreted to exclude indirect ownership through entities for new applicants. This emphasizes personal relocation and substance over entity-based structuring. Further administrative guidance should be expected from the Department of Economic Development and Commerce to clarify how the amended statutory language will interact with existing regulations that presently allow title to be held through Puerto Rico entities.

Corporate Incentives

Beyond individual investors, Act 60 provides corporate tax incentives across industries including export services, manufacturing, financial services, tourism, and creative industries.

Qualifying exempt businesses may obtain corporate tax rates as low as 4%, along with potential tax credits for research and development, manufacturing, and other designated activities. Grants are typically issued for 15 years, with possible 15-year extensions.

Puerto Rico-based businesses also benefit from US legal and regulatory compatibility and access to US capital markets. Businesses operating exclusively in Puerto Rico and not engaged in a US trade or business generally aren’t subject to US federal income tax on Puerto Rico-source income.

In the context of heightened global tariff exposure, Puerto Rico’s territorial status—combined with Act 60 incentives—positions the island as a domestic alternative for certain manufacturing and service activities seeking US alignment without full mainland tax burdens.

Strategic Considerations

The 0% application window remains open through Dec. 31, 2026, and the approaching transition date is likely to accelerate filings as taxpayers evaluate securing treatment under the existing framework.

At the same time, the extension through 2055 enhances long-term planning stability and reduces perceived political fragility.

House Bill 505 marks the end of Puerto Rico’s zero-tax chapter for new applicants. But the broader incentive framework remains firmly in place—recast as a durable low-tax regime embedded within the US system.

For practitioners, the focus now shifts from questioning the program’s survival to recalibrating planning strategies under the 4% framework.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Jeanelle Alemar-Escabí is the principal of JAE-LAW in San Juan, Puerto Rico, with practice areas in international, federal, and local taxation and tax incentives.

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