High-net-worth investors, fund managers, and entrepreneurs considering relocation to Puerto Rico now face a narrowing window to secure the most favorable tax benefits under the island’s Resident Individual Investor program (formerly Act 22). New legislation extends the program through 2055 but introduces a 4% tax on certain investment income for applicants beginning January 1, 2027, marking the first meaningful change to the program’s historically tax-free treatment. These changes to the Puerto Rico Incentives Code (Act 60-2019) are intended to preserve the program while introducing a modest tax rate for new participants.

Investors evaluating a move to Puerto Rico should carefully assess how these changes affect the timing of a relocation, the structure of their investments, and the documentation needed to support Puerto Rico residency before key deadlines approach.

Key Changes

Program Extended to 2055

The legislation extends the Resident Individual Investor program’s expiration date from 2035 to 2055, providing greater long-term certainty for investors considering relocation to Puerto Rico.
Existing decree holders will continue to retain the benefits currently provided under their decrees.

New 4% Tax Rate for Future Applicants

Historically, qualifying investors could receive 0% Puerto Rico tax on interest, dividends, and post-relocation capital gains.

Under the new law for applications submitted on or after January 1, 2027:

• Interest and dividends: subject to a 4% preferential income tax rate
• Post-relocation capital gains: subject to a 4% tax rate
• If a more favorable tax treatment is available under other provisions of Puerto Rico law, that treatment may still apply.

These changes represent the first meaningful adjustment to the program’s tax rate since its creation.

Grandfathering for Existing and Near-Term Applicants

Investors who apply for and obtain their decree on or before December 31, 2026, retain the current structure:

• Interest and dividends: generally 0% Puerto Rico tax until January 1, 2036
• Capital gains realized after becoming a Puerto Rico resident: generally 0% Puerto Rico tax if recognized before January 1, 2036.

Capital gains attributable to appreciation that occurred before relocation to Puerto Rico remain subject to special rules, including a 5% rate after a 10-year holding period in certain circumstances.

New Prior Non-Residency Requirement

For applications submitted after December 31, 2026, an applicant must demonstrate that they were not a Puerto Rico resident for at least six years prior to relocating to Puerto Rico.

This requirement does not apply to applications filed on or before the 2026 deadline.

Mandatory Primary Residence Requirement

Resident Individual Investors must provide evidence that they acquired Puerto Rico real estate as their primary residence within two years of obtaining their decree, either individually or jointly with a spouse.

For post-2026 applicants, the ownership must be recorded (or pending recording) in the Puerto Rico Property Registry.

IRS Enforcement and Documentation Considerations

At the U.S. federal level, the IRS has continued to focus enforcement efforts on taxpayers claiming Puerto Rico residency and related tax benefits, including through its audit campaign targeting individuals who have relocated to the island.

For individuals considering relocation, it is important to understand that Puerto Rico tax incentives do not eliminate U.S. federal income tax considerations. Proper planning is essential to determine how income will be sourced and taxed under U.S. federal law.

An IRS audit should not be viewed as a deterrent to relocation, but taxpayers should approach the process proactively. Individuals relocating to Puerto Rico should ensure they maintain clear documentation supporting their Puerto Rico residency and tax reporting positions, including records relating to:

• physical presence in Puerto Rico
• tax home and closer-connection factors
• relocation timing and residency status
• sourcing of income and capital gains
• compliance with Act 60 decree requirements

Establishing appropriate tax planning and maintaining proper documentation at the outset can significantly reduce risk in the event of an IRS inquiry.

Practical Implications

The legislation reflects Puerto Rico’s effort to balance continued investment attraction with increased tax contribution from new program participants. Key takeaways include:

• The program will remain available through 2055.
• Investors considering relocation may wish to evaluate applying before December 31, 2026 to preserve current tax benefits.
• Future participants will continue to benefit from preferential tax treatment, although at a 4% rate.

How This May Affect Investors

Individuals considering relocation to Puerto Rico—particularly entrepreneurs, investment fund managers, and high-net-worth investors—should evaluate:

• timing of relocation and decree application
• interaction with U.S. federal tax rules
• sourcing of capital gains and investment income
• compliance with Puerto Rico residency requirements
• documentation needed to support residency in the event of an IRS audit

Note: Although Act 38 was signed by the governor, it is pending final endorsement from the Fiscal Oversight and Management Board for Puerto Rico.

Our Team

Procopio’s tax and international planning team regularly advises investors, founders, and investment professionals on relocation planning, Act 60 decrees, and cross-border tax structuring. Learn more.