Puerto Rico’s 4% Corporate Tax Explained: How Act 60 Chapter 3 Really Works
One of the most discussed incentives under Puerto Rico’s Act 60 is the 4% corporate tax rate available to qualifying export service businesses. It sounds simple: Move your business to Puerto Rico, pay 4% corporate tax, and distribute dividends tax-free. But as with most tax incentives, the structure matters more than the headline.
What Is Act 60 Chapter 3?
Act 60-2019, known as the Puerto Rico Incentives Code, consolidated former Act 20 (Export Services Act) into what is now Chapter 3 (Export Services & Commerce). Chapter 3 allows qualifying businesses that provide eligible services from Puerto Rico to clients outside Puerto Rico to benefit from:
4% fixed income tax rate on eligible net income
100% exemption on dividends from exempt operations
75% exemption on property taxes
50% exemption on municipal taxes
The tax exemption is granted through a formal Tax Exemption Decree, which functions as a contract between the business and the Government of Puerto Rico for a (typically) 15-year term (renewable for an additional 15 years). This is not automatic. You must apply and receive approval.
Who Qualifies?
Not all businesses qualify. To qualify, a business must:
Maintain a bona fide office in Puerto Rico
Provide eligible services
Provide those services to non-residents or foreign clients
Generate Puerto Rico-source income
Obtain a formal exemption decree
What Are “Eligible Services”?
Eligible services generally include:
Consulting
Research & Development
Software development
Creative industries (design, media, content creation)
Engineering & architectural services
Legal and accounting services
Investment advisory services
Centralized management services
Data processing and shared services
The key is that the service must be performed in Puerto Rico and exported outside Puerto Rico.
The Most Important Rule: The 4% Rate Applies Only to Puerto Rico–Source Income
The 4% tax rate applies only to net income derived from eligible Puerto Rico-source export services. It does not apply to:
U.S.-source income
Retail inventory sales into the mainland
Income attributable to services performed outside Puerto Rico
Income effectively connected to a U.S. trade or business
If your team is physically working in Miami while billing through a Puerto Rico company, that portion of income may be U.S.-source. In other words: incorporation does not determine sourcing. Activity does.
Employment Requirements
Employment requirements depend on business volume:
If annual business volume exceeds $3 million: at least one full-time Puerto Rico resident employee (can be owner-employee)
If annual business volume is $3 million or less: no employment requirement
Dividend Treatment
Dividends distributed from the exempt operation to a bona fide Puerto Rico resident shareholder are generally 100% exempt from Puerto Rico income tax. However, if the shareholder is not a bona fide Puerto Rico resident, different tax rules may apply. Additionally, Puerto Rico corporations are treated as foreign corporations for U.S. federal income tax purposes. U.S.-source income flowing into the entity may still trigger federal implications.
Common Misconceptions About the 4% Rate
“I can live in Florida and run a Puerto Rico company.” - False. If management and services are performed in the mainland, sourcing may shift to the U.S.
“All business income qualifies.” - False. Only eligible export service income qualifies.Retail e-commerce generally does not.
“The 4% rate eliminates all federal tax.” - False. IRC §933 excludes Puerto Rico-source income for bona fide Puerto Rico residents — not U.S.-source income.
When the 4% Structure Works Best
Act 60 Chapter 3 is most effective for:
Consultants billing high-margin services
Asset managers and fund managers
Technology developers
IP-driven service businesses
Professional firms relocating full operations
It works best when:
The owner relocates legitimately
The team operates from Puerto Rico
The business model is service-based
Growth occurs after relocation
Compliance & Reporting Requirements
Businesses operating under Act 60 must:
Maintain separate accounting for exempt operations
File Puerto Rico income tax returns annually
File annual compliance reports with the Office of Incentives
Maintain employment and office requirements
Failure to comply can result in revocation of the decree. Additionally, improper residency or sourcing positions can create federal audit exposure. The IRS has specifically increased scrutiny of Puerto Rico incentive claims.
Conclusion
If you are evaluating relocating your business to Puerto Rico under Act 60, the analysis should include:
Income sourcing review
Federal trade or business exposure
Corporate structuring
State exit planning
Dividend strategy
Long-term growth modeling
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*This article is provided for informational purposes only, and does not constitute legal advice, counsel or representation.
