Puerto Rico Tax Regime

A separate tax jurisdiction inside the United States

Puerto Rico is an unincorporated territory of the United States, but for income tax purposes it operates as a distinct fiscal jurisdiction with its own Internal Revenue Code — the Puerto Rico Internal Revenue Code of 2011 (Codigo de Rentas Internas), as amended, administered by the Departamento de Hacienda (Puerto Rico Treasury Department). Residents and businesses on the island pay Puerto Rico income tax rather than the ordinary US federal income tax on Puerto Rico-source income. This dual system is the single most important feature to understand: the same taxpayer can simultaneously be inside the United States for immigration, currency and citizenship purposes yet outside the ordinary federal income tax net for income earned on the island.

The interaction between the two systems is governed principally by Section 933 of the US Internal Revenue Code. A US citizen or resident who is a bona fide resident of Puerto Rico for the entire taxable year excludes Puerto Rico-source income from US federal gross income. Income that is not Puerto Rico-source (for example, US-mainland-source wages, US-source dividends, or foreign income) generally remains subject to US federal tax, with a foreign/US-territory tax credit mechanism to prevent double taxation. Puerto Rico corporations, meanwhile, are treated as foreign corporations for US federal purposes, which shapes how the US taxes their earnings when distributed to US shareholders.

Why Puerto Rico is prominent in tax planning

Puerto Rico has for decades used its autonomous tax code to attract investment. The current vehicle is Act 60 of 2019 — the Puerto Rico Incentives Code — which consolidated numerous prior statutes (including the former Act 20 export-services and Act 22 individual-investor laws). Act 60 offers export-services and export-commerce businesses a fixed 4% corporate income tax rate, and offers qualifying new residents (the Individual Resident Investor regime) a 0% Puerto Rico rate on Puerto Rico-source capital gains, interest and dividends. Combined with the Section 933 federal exclusion, these regimes can produce very low effective tax on qualifying income — which is precisely why the US IRS has increased enforcement scrutiny of residency and income-sourcing claims.

This handbook states rates and thresholds as of July 2026. Note a significant recent change: Act 38-2026 (originating as House Bill 505), signed in March 2026, extended the Individual Resident Investor program through 2055 but introduced a 4% Puerto Rico rate on investment income for applicants filing on or after 1 January 2027, together with stricter residency conditions. Existing decree holders are grandfathered under their prior 0% terms.

Headline statutory corporate income tax rate for a resident company. Where sub-national (state, provincial, cantonal or municipal) corporate taxes apply, the combined rate reported by the OECD is shown. Projected 2026–2028 rates carry the current rate forward unless a change is already enacted or officially scheduled. As-of 2026.

Top marginal statutory personal income tax rate on employment income for a resident individual. Where sub-national (state, provincial, cantonal or municipal) income taxes are a standard part of the system, the combined top rate is shown. Projected 2026–2028 rates carry the current rate forward unless a change is already enacted or officially scheduled. As-of 2026.

Normal tax and graduated surtax

A Puerto Rico corporation is taxed on its worldwide net income; a foreign corporation is taxed on income effectively connected with a Puerto Rico trade or business and on certain Puerto Rico-source income. The corporate income tax has two components. First, a flat normal tax of 18.5% applies to net taxable income. Second, a graduated surtax applies to 'surtax net income,' which is taxable income reduced by a surtax exemption of USD 25,000 (for members of a controlled group the USD 25,000 exemption must be shared).

The surtax is progressive, ranging from 5% to 19%. At the top of the schedule, the 19% surtax bracket combined with the 18.5% normal tax produces a maximum combined statutory corporate rate of approximately 37.5%. In practice most substantial standalone corporations reach that top combined rate, which is high by international standards and is the main reason Act 60 decrees (fixing 4%) are so widely sought.

Alternative minimum tax and branch profits

Corporations are also subject to an alternative minimum tax (AMT) designed to ensure a minimum contribution where regular tax is reduced by deductions and credits; the AMT operates on an expanded base and taxpayers pay the higher of regular tax or AMT. A branch of a foreign corporation is additionally subject to a branch profits tax (a 10% charge on the dividend-equivalent amount) intended to approximate the tax that would have applied had the branch operated as a subsidiary and distributed dividends.

Act 60 export incentives and the 4% rate

Under Chapter 3 of Act 60 (Export Services and Export Commerce), a business with an approved tax exemption decree that provides eligible services or goods to clients outside Puerto Rico pays a fixed 4% income tax on the net income of the exempt operation, rather than the standard rates. For smaller exempt businesses with annual business volume of USD 3 million or less, the rate is 2% for the first five years and 4% thereafter; a 'Novel Pioneer Activity' can qualify for a 1% rate. Decrees also grant substantial exemptions from dividend distribution tax and property and municipal taxes. Manufacturing operations obtain comparable long-term fixed low rates (historically around 4%) under the industrial-incentives chapters. Decrees are contractual, typically run 15 years (renewable), and require the business to maintain a genuine Puerto Rico nexus, employment and, in many cases, annual charitable contributions.

Residents, ordinary rates and the bracket table

Individuals resident in Puerto Rico are taxed on worldwide income (subject to a foreign tax credit); nonresidents are taxed on Puerto Rico-source income. The regular individual income tax is progressive across five brackets, reaching a top marginal rate of 33% on taxable income above USD 61,500. These brackets have been stable for several years and remain in force for 2025/2026.

Two additional layers affect higher earners. First, a 'gradual adjustment' recaptures the benefit of the lower brackets and the personal exemption once net taxable income exceeds USD 500,000, effectively pushing the marginal rate above the nominal 33% in that range. Second, an alternate basic tax (ABT) — the individual counterpart to the corporate AMT — applies on an expanded income base at rates that reach 24%, ensuring a minimum tax where regular liability is reduced by exemptions and deductions. Employers withhold at source on wages, and self-employed individuals make estimated payments.

Bona fide residents and Section 933

For a US citizen who becomes a bona fide resident of Puerto Rico, IRC Section 933 excludes Puerto Rico-source income from US federal gross income. Bona fide residence is tested under IRC Section 937 through three tests that must all be met: a presence test (generally 183 days in Puerto Rico, or alternative day-count tests), a tax-home test (the individual's principal place of business must be in Puerto Rico), and a closer-connection test (stronger personal ties to Puerto Rico than to the US mainland or abroad). Individuals who begin or end bona fide residence must file IRS Form 8898 if worldwide gross income exceeds USD 75,000; failure carries a USD 1,000 penalty. Puerto Rico-source income excluded federally is instead taxed under the Puerto Rico brackets above (or, for decree holders, at the preferential decree rate).

The Individual Resident Investor regime (Act 60 Chapter 2)

The former Act 22 regime, now Chapter 2 of Act 60, grants qualifying new bona fide residents a 0% Puerto Rico tax rate on Puerto Rico-source interest, dividends and capital gains that accrue after they establish residence. To qualify, an applicant generally must not have been a Puerto Rico resident during the prior years, must become a bona fide resident, purchase residential property in Puerto Rico, make an annual charitable donation, and pay a one-time filing fee and annual compliance charges. Critically, Act 38-2026 changed the terms prospectively: applicants filing on or after 1 January 2027 face a 4% (rather than 0%) Puerto Rico rate on that investment income, a six-year non-Puerto-Rico residency lookback, and a requirement to register a Puerto Rico primary residence in the Property Registry within two years of the decree. Existing decree holders keep their grandfathered 0% terms. Because Section 933 continues to exclude qualifying Puerto Rico-source income federally, the federal layer remains zero under either the old or new rate.

Domestic withholding on payments to nonresidents

Puerto Rico imposes withholding at source on fixed or determinable annual or periodic income paid to nonresident individuals, foreign corporations and foreign partnerships not engaged in a Puerto Rico trade or business. The headline domestic statutory rates are set out below. Dividends to nonresidents are generally subject to a 10% withholding. Interest, royalties and similar payments to nonresidents not engaged in a Puerto Rico trade or business are generally withheld at 29%, though a broad exemption applies to qualifying portfolio-type interest paid to unrelated foreign persons (0%). Payments to nonresident service providers and contractors are subject to separate withholding at rates that depend on the payee's status.

No treaty network — and why

Because Puerto Rico is a US territory rather than a sovereign state, it is not a party to US income tax treaties, and US treaties do not extend to it. There is therefore no reduced treaty withholding to invoke; the statutory domestic rates apply, subject only to Puerto Rico's own domestic exemptions (such as the portfolio-interest exemption) and to decree-based reductions under Act 60. Cross-border planning instead turns on income sourcing rules and on the Section 933 / bona fide residence analysis rather than on treaty benefits.

Interaction with US federal withholding

A bona fide resident of Puerto Rico who receives Puerto Rico-source income generally faces only the Puerto Rico system on that income because of the Section 933 exclusion. Payments flowing from the US mainland to Puerto Rico residents, or from Puerto Rico to the mainland, must be analyzed under both codes: the US treats a Puerto Rico corporation as a foreign corporation, so US-source dividends, interest and royalties paid to it can attract US federal withholding (often 30% absent a statutory exemption), while Puerto Rico separately applies its own rules to Puerto Rico-source flows.

Income sourcing is the pivotal question

Because the Section 933 exclusion and Act 60 benefits depend on income being Puerto Rico-source, sourcing rules are the fulcrum of Puerto Rico international tax. Services income is generally sourced where the services are performed; income from the sale of purchased inventory is sourced where title passes; and gains on personal property follow specialized rules. The IRS applies IRC Section 937 and its regulations to police these boundaries — for example, special rules prevent a new resident from treating built-in gains that economically accrued before the move as Puerto Rico-source. The IRS has publicly identified Act 60 residency and sourcing as an enforcement priority, examining whether taxpayers genuinely meet the presence, tax-home and closer-connection tests and whether income (notably from services performed partly on the mainland, and from cryptocurrency) is properly sourced to Puerto Rico.

CFC, GILTI and the foreign-corporation characterization

For US federal purposes a Puerto Rico corporation is a foreign corporation. Consequently a Puerto Rico operating company owned by US shareholders can be a controlled foreign corporation (CFC), exposing those US shareholders to Subpart F and to the GILTI (global intangible low-taxed income) regime on the corporation's earnings — a material consideration because the low Act 60 corporate rate can otherwise leave earnings lightly taxed. A US shareholder who is himself a bona fide resident of Puerto Rico may, however, be outside the reach of these US anti-deferral rules on Puerto Rico-source earnings by operation of Section 933, which is a key structuring point. Non-bona-fide US owners must model GILTI and Subpart F carefully, as the interaction can eliminate much of the apparent 4% benefit at the US shareholder level.

Domestic anti-avoidance

The Puerto Rico Code contains transfer-pricing and related-party principles, limitations on the deductibility of payments to related foreign persons (historically a disallowance of a portion of related-party expenses, addressed in part by a special excise tax on certain foreign affiliates in the manufacturing sector), and substance requirements embedded in Act 60 decrees (minimum employment, physical presence and local sourcing). Decrees can be revoked for non-compliance, with retroactive loss of benefits.

Sales and use tax (SUT / IVU)

Puerto Rico levies a sales and use tax (SUT, locally 'IVU') at a combined 11.5% on most sales of tangible personal property and certain services — 10.5% to the Commonwealth and 1% to the municipality. Business-to-business services and designated professional services are taxed at a reduced 4% rate. Certain items (for example, unprepared food and prescription medicines) are exempt or subject to reduced treatment. Merchants must register with Hacienda, collect the tax and remit monthly through the SURI portal. The SUT is one of the highest general consumption tax rates in the United States and is a significant revenue source for the Commonwealth.

Municipal license tax (patente)

Municipalities levy a municipal license tax (patente municipal) on business gross volume, not on profit. Rates are set locally and vary by activity and municipality — commonly up to roughly 0.5% of gross revenue for non-financial businesses and up to about 1.5% for financial businesses. The patente is generally assessed on the prior year's volume and paid in two semi-annual installments, with an early-payment discount. Act 60 decrees typically reduce or exempt the patente for the exempt operation.

Real and personal property tax (CRIM)

Real and personal (business) property is taxed by the Centro de Recaudacion de Ingresos Municipales (CRIM). Combined real-property rates vary by municipality and generally fall in a range of roughly 8% to 11.8% applied to assessed value — though assessed values are historically based on 1958 valuation tables, which typically produces a low effective burden relative to market value. Personal property (business inventory, machinery and equipment) is self-assessed and reported annually. Owner-occupied primary residences receive a partial exemption. Other levies include a payroll-based unemployment and disability contribution, and various excise taxes.

Hacienda and the SURI platform

The Departamento de Hacienda administers Puerto Rico income, withholding and sales taxes. Nearly all filings and payments are handled electronically through SURI (Sistema Unificado de Rentas Internas), the unified internal-revenue portal, which is the mandatory channel for registration, returns, informative declarations and payment. CRIM administers property taxes and the municipalities administer the patente, so a business commonly deals with three distinct authorities.

Assessments, audits and appeals

Hacienda may audit and issue a notice of deficiency; the taxpayer can pursue an administrative reconsideration and, if unresolved, litigate the deficiency in the Puerto Rico Court of First Instance, with appeal to the Court of Appeals and ultimately the Supreme Court of Puerto Rico. The ordinary statute of limitations on assessment is generally four years from filing, extended for substantial omissions and unlimited for fraud or non-filing. Interest and penalties apply to late payment and underpayment. Corporations above specified revenue thresholds must file audited financial statements and an Agreed-Upon Procedures report with the income tax return.

US federal overlay

Bona fide residents may still have US federal filing obligations for non-Puerto-Rico-source income, self-employment tax (Puerto Rico residents pay US Social Security and Medicare taxes), and the Form 8898 residency statement. The IRS and Hacienda share information, and the IRS has active campaigns examining Act 60 residency and sourcing, so contemporaneous documentation of days present, tax home and income source is essential.

Principal deadlines

Puerto Rico generally follows a calendar-year cycle for individuals and permits fiscal years for corporations. Key recurring dates are summarized below (dates falling on a weekend or holiday roll to the next business day). Extensions are available on request but do not extend the time to pay.

Choosing and securing an Act 60 decree

Act 60 is contractual: a business or investor applies through the Department of Economic Development and Commerce (DDEC), and an approved decree is a binding agreement fixing the tax treatment for its term. Export-services businesses obtain the 4% corporate rate plus exemptions on dividend distributions, property and municipal taxes; the decree obliges the holder to maintain genuine operations in Puerto Rico, meet employment conditions where applicable, and make annual charitable contributions. Because the benefits hinge on real economic substance, casual or 'paper' structures are increasingly challenged.

Residency substance for individuals

For individuals pursuing the Chapter 2 investor regime, the practical work is proving bona fide residence: physically spending the requisite days on the island, relocating the tax home and closer-connection ties (family, home, banking, licenses), buying a Puerto Rico residence, and — for post-2026 applicants under Act 38-2026 — satisfying the new six-year lookback and Property Registry registration, and accepting the 4% rate on investment income. Prospective residents should also model the US 'exit' consequences: the move can trigger recognition events, and pre-residence built-in gains generally remain US-taxable, so timing of asset sales matters.

Modeling the true effective rate

The headline 4% corporate rate and 0%/4% investor rate are only part of the picture. A US-owned Puerto Rico company must weigh GILTI/Subpart F at the US shareholder level unless the owner is himself a bona fide resident; individuals must weigh the alternate basic tax, the gradual adjustment, US self-employment tax, and Form 8898/8938 compliance. The reliable outcome — near-zero combined income tax — arises when a US citizen genuinely relocates, becomes a bona fide resident, earns Puerto Rico-source income, and holds a valid decree, so that Section 933 zeroes the federal layer and the decree caps the Puerto Rico layer.