Puerto Rico's Act 60: Tax Incentives and Enforcement

Puerto Rico's Act 60 offers some of the most significant tax benefits available to U.S. citizens and businesses willing to become bona fide residents of Puerto Rico, but heightened IRS scrutiny means that proper structuring and compliance are critical to those seeking to call the island home for business or investment purposes.

Holland & Knight's multidisciplinary team of tax attorneys has a thorough understanding of the statute and guides individuals, businesses and their advisors on how to access Act 60 benefits while minimizing audit exposure and litigation risk.

Who Benefits from Act 60?

Act 60 was designed to attract investment and talent to Puerto Rico by providing substantial tax incentives to a wide range of taxpayers.

• Entrepreneurs and closely held businesses who relocate operations to Puerto Rico may qualify for a reduced corporate tax rate of as low as 4 percent, along with significant exemptions on property taxes and municipal levies.
• High-net-worth individuals who establish bona fide residency in Puerto Rico can benefit from zero percent tax on certain capital gains, interest and dividends earned after relocation.
• Cryptocurrency investors and digital asset holders represent a growing segment of Act 60 beneficiaries. The IRS has identified crypto as a priority enforcement area, and taxpayers holding digital assets in Puerto Rico face unique scrutiny regarding gain recognition, sourcing and residency timing relative to asset appreciation.

Certified public accountants (CPAs), financial advisors and estate planners who counsel clients with ties to Puerto Rico need to understand both the planning opportunities and risk profile their clients assume. Holland & Knight's Puerto Rico Act 60 Team works alongside referring professionals to help ensure clients are in compliance from Day 1.

IRS Enforcement Landscape

The IRS is actively challenging taxpayers who claim Act 60 benefits, and the pace of enforcement actions, both criminal and civil, is accelerating. Recent government filings – including public disclosures of criminal investigations, plea agreements and recent U.S. Tax Court petitions attaching statutory notices of deficiency – reveal that the IRS is prepared to assert substantial adjustments and penalties against Act 60 claimants who are out of compliance.

The enforcement environment includes audits and formal notices of deficiency targeting Act 60 filers, challenges to whether taxpayers have genuinely established bona fide residency in Puerto Rico, aggressive income-sourcing positions asserting that income was earned in the U.S. rather than Puerto Rico, assessment of penalties – including those related to accuracy – and, in some cases, civil fraud and criminal charges.

The IRS has deployed specialized resources, including dedicated experts focused on digital assets, to identify and challenge taxpayers in this space.

Areas of IRS Focus

• Residency: Eligibility for Act 60 benefits depends on satisfying strict "bona fide resident" requirements under Section 937 of the Internal Revenue Code. The IRS frequently challenges whether taxpayers have a true tax home in Puerto Rico, maintain closer connections to a U.S. state or spend sufficient time on the island. These determinations are highly fact-intensive and often disputed.
• Income Sourcing: The IRS also scrutinizes whether income is properly sourced to Puerto Rico. Service-based income, intellectual property income and gains from the sale of personal property all raise distinct questions that can determine whether Act 60 benefits apply.
• Cryptocurrency and Digital Assets: The IRS is specifically targeting crypto investors who relocate to Puerto Rico and subsequently dispose of appreciated digital assets. Issues include whether the taxpayer's gains accrued before residency was established, the taxpayer's activities constitute a trade or business, and sourcing rules support Puerto Rico treatment.
• Documentation: Taxpayers must maintain clear, contemporaneous records supporting their residency, sources of income and timelines of asset acquisition and disposition. Gaps in documentation are routinely exploited by the IRS in examination and litigation.

How We Can Help

Holland & Knight's Puerto Rico Act 60 Team supports you and your advisors at every stage of IRS review.

• Residency and Sourcing Analysis: We provide detailed analysis of whether a client's facts support bona fide residency and their income streams are properly sourced to Puerto Rico under applicable law.
• Audit Defense and Investigations: When the IRS initiates an examination, we represent clients through the audit process, respond to information and document requests, and negotiate with revenue agents to resolve issues at the earliest possible stage.
• Tax Controversy and Litigation: When matters cannot be resolved administratively, we represent taxpayers before the U.S. Tax Court and other federal courts, including defending against challenges to notices of deficiency and penalty assertions.
• Advisor Coordination: We work closely with CPAs, wealth managers and other professionals who refer clients to ensure a seamless, coordinated approach to compliance and defense.

Our Puerto Rico Experience

Our team brings together professionals with deep experience in federal tax controversy, international tax planning and IRS enforcement – including former government attorneys who have worked on the very issues affecting Act 60 participants. We offer bilingual capabilities, facilitating communication with clients, local counsel and Puerto Rican government agencies. Our attorneys also maintain real-time awareness of IRS enforcement trends, emerging case law and regulatory developments that affect Act 60 taxpayers.

Contact us to evaluate your risk profile and better protect your position.