Act 22 – The Individual Investors Act

“Before I spent 30 percent of my time thinking about taxes, and now I don’t have to do that.” - John Helmers, Act 22 Resident, Money Manager, CEO Long Focus Capital

Puerto Rico’s Acts 20 & 22, tax incentive laws make living and working in Puerto Rico more enticing than ever before for U.S. Citizens. Enacted January 17, 2012, Act 20 and Act 22 provide businesses and investors the opportunity to acquire substantial exemptions simply for relocating.

Act 22 was established to promote the relocation of individual investors to Puerto Rico. To attract these new residents Act 22 provides a total exemption from Puerto Rico income taxes on all passive income realized or accrued after the individual establishes residency.

The IRS has set very specific requirements for individuals to meet to maintain Act 22 status. Due to the specificity of these requirements, and their often evolving nature, it is imperative that individuals have access to tax experts and financial counselors who have substantial knowledge of all current updates as they develop.

Act 22 benefits include:

  • 0% Tax on Dividend and Interest Income for New Puerto Rico Residents
  • 0% Tax on Short-and-Long Term Capital Gains for New Puerto Rico Residents
  • 0% Federal Taxes on Puerto Rico Sourced Income
  • Incredible Tax Savings on Your Investment Portfolio Returns
  • Tax Decree Valid until 2036

The following requirements must be met in order to achieve eligibility for Act 22 benefits:

  • Physical Presence Test :
    • Being physically present in Puerto Rico for at least 168-183 days per year, depending on international travel; or
    • Being present in United States for less than 90 days in the year
  • Tax Home Test :
    • Evaluation of tax established domicile of the taxpayer according to a variety of factors
  • Closer Connections Test :
    • Facts and circumstances test set to determine if you have maintained more significant contacts with Puerto Rico than with the United States of foreign country. Factors considered include, but are not limited to:
      • Where Your Permanent Home is Located
      • Where Your Family is Located
      • Where Your Personal Belongings, such as automobiles, furniture, clothing, and jewelry owned by you and your family are located.
      • Where Your Social, Political, Cultural, Professional, or Religious Organizations Take Place
      • Voter Registration
      • Puerto Rico Driver’s License
      • Conducting Main, Day-to-Day Banking Activities through a Puerto Rico Account
      • Mailing Address for All Legal and Personal Documents
      • Local Affiliations, such as social clubs, organizations and charitable entities
Back to Basics, FAQs and Facts

Bona Fide residency in PR and Act 22

Over the last five years, I have had the opportunity to work on several hundred cases of individuals that have made the move to PR and take advantage of great tax benefits Puerto Rico has to offer. Below is a summary of the most common questions that come up in initial calls with potential new Act 22 Grantees. Answers provided below highlight the provision of relevant US and PR Internal Revenue Code (IRC) Sections, regulations, other IRS Published materials, and practical experience obtained from audit and compliance processes.
1What are the benefits of Act 22?

Act 22 offers individuals a 100% tax exemption on Puerto Rico sourced capital gains, interest and dividend income. Capital Gains are typically sourced to the residence of the taxpayer, however different treatment applies to property (real estate) where the income is sourced to the location of the property. Interest and Dividends are sourced differently, so even though these may be tax exempt in PR, you may still be subject to US taxation on these types of income. Interest is generally sourced to the location of the payor, while dividends are sourced to the domicile of the issuing corporation.

2Any exceptions to the above regarding interests and dividends?

Yes, nonetheless it may be difficult to achieve. for such cases we would need to consider the applicability of certain provisions related to liquidating distributions, swaps, and the Portfolio Interest Exception (“PIE”). These may be used to implement structures which modify the Withholding at source requirements or sourcing provisions, in order to effectively source the income to Puerto Rico and to eliminate US taxation. Special treatment to Swap agreements as well as PIE where enacted to attract foreign investment into the US, since PR is treated as a foreign jurisdiction for tax purposes these benefits may be made available under the appropriate structure.
These strategies have been historically used by mutual funds or other institutional investment operations and normally awards a planning opportunity for Hedge Funds or the like looking to take advantage of Acts 20 and 22, nevertheless an individual would not be barred from implementing a similar strategy.

3Why are residents of PR excluded from paying Federal Taxes to the IRS?

As discussed above, the exclusion is only true for income which is tied to PR sources. That being said, the answer to the question stems from the American Revolution and James Otis’s claim that “There shall be no taxation without representation”. Due to PR’s (and other US possession’s) particular political situation, the lack of delegates with the ability to elect a President and lack of representation in Congress with the ability to vote makes it essentially unconstitutional for the US to impose taxes to possession residents on income from possession sources.

4Can the US eliminate these programs or change this?

While Act 22 is fairly new, established in 2012, tax incentives programs based on the same federal exclusions have been around for decades in both Puerto Rico and the USVI. Historically, there seems to be no incentive for the US and the IRS to specifically target against these programs. Nevertheless, since PR is treated as a foreign jurisdiction for federal tax purposes, changes in the US code that apply to foreign taxpayers that do not specifically exclude PR or the possessions will directly affect PR taxpayers.
Such was the case with the recent tax reform which did not exclude the possessions from provisions such as the Global Intangible Low Taxed Income (GILTI) tax. If PR were to become a state, this would modify the sourcing rules, however experts in the field see this as a remote possibility. Even if this were to happen, the process could take a decade to complete, and it has been suggested that a transition period would be allowed or required to phase out the incentives programs.

5What are the chances of PR eliminating these programs?

PR’s economy has included tax incentives for decades, Act 22 is the first incentives Act specifically addressing individual investors, nevertheless the principles stem from the same sources as its predecessors in taking advantage of PR’s unique political and taxation reality from a US perspective. Since its enactment, Act 22 has been amended and slightly modified on several occasions by different administrations. Amendments have included changes in compliance, the application process, and fees, as well as the recent requirement establishing a minimum charitable contribution to a PR Non-Profit Organization.
Nevertheless, the essence of the Act remains unaltered. More importantly, since each Act 22 Grant is a contract with the government it may not be unilaterally amended by PR, hence benefits and requirements set by your grant should remain consistent throughout the life of the grant (expiring on December 31st, 2035).

6How does one become a PR resident?

Establishing Bona Fide Residency in Puerto Rico
To avail from such benefits, once you relocate to PR, you will have to evaluate your circumstances in order to be certain that you comply with the IRC criteria related to the determination for being considered a PR resident. In order to be treated as a bona fide PR resident as defined in Section 937 of the IRC, an individual must comply with the Physical Presence Test, Tax Home Test, and Closer Connection Tests. If any of these tests are not met, the individual will not be considered a bona fide resident of PR and will be subject to U.S. taxation on PR sourced income.
The Presence Test can be met by complying with any one of the following options (note that these alternatives are listed as “or” – only one of them need be met in each taxable year:

  1. being present in PR for at least 183 days during a tax year;
  2. being present in PR for at least 549 days during the three-year period consisting of the taxable year and the two immediately preceding taxable years (in other words, an average of 183 days during a three-year period) in which the individual was present at least 60 days each year, it is important to note that this test includes a look back period so it may not be applied for the first year but rather may be used on or after the third year of presence in the island;
  3. not being present in the U.S. for more than 90 days during the tax year (there is no minimum day requirement in PR under this alternative;
  4. not earning income over $3,000 from sources within the U.S.; or,
  5. having no significant connection to the U.S
    In order to have no significant connection to the U.S. the individual:
    1. Must not have a permanent home in the U.S
    2. Must not be registered to vote in any political subdivision of the U.S
    3. Must not have a spouse or child who has not attained the age of 18, whose principal home is in the U.S
For Presence Test, days of presence generally mean physical presence but there are exceptions to this rule, such as in the case of natural disasters (normally 14-day award, days spent in the US due to medical treatment and days spent in the US as a Full Time Student).
The Tax Home Test, which effectively is a Tax Domicile Test, can be met by clearly establishing an individual’s principal trade or business in PR.
On the other hand, the Closer Connection Test is a facts-and-circumstances test in which the circumstances of an individual’s social, business, political, religious, cultural, financial dealings will be taken into consideration. This test is met if the individual had a closer connection to PR than to the U.S. or any other foreign country during the tax year, when the individual’s connections to the PR are compared to the aggregate of the individual’s connections with the U.S. and other foreign countries.
The Closer Connection Test will be determined based on a set of facts and circumstances, listed below. It should be proven that when considering the elements of the closer connections test, a majority of the Closer Connections are established in PR on an aggregate basis.
Below is the list of requirements that will be considered in determining if an individual has a closer connection to the PR, or other U.S. possessions:
  1. The location of the individual's permanent home (determined in the same manner as under the presence test discussed previously);
  2. The location of the individual's family;
  3. The location of personal belongings, such as auto-mobiles, furniture, clothing, and jewelry owned by the individual and his family;
  4. The location of social, political, cultural, or religious organizations with which the individual has a current relationship;
  5. The location where the individual conducts his routine personal banking activities;
  6. The location where the individual conducts business activities (other than those that constitute the individual's tax home);
  7. The location of the jurisdiction in which the individual holds a driver's license;
  8. The location of the jurisdiction in which the individual votes;
  9. The country of residence designated by the individual on forms and documents;
  10. The location where the individual holds insurance;

7Has anyone been audited by the IRS?

The tests above are established in the US Treasury regulations. A couple years back we were able to review guidance issued to IRS Auditors on matters relating to confirming Bona Fide Residency. As of 2017, around 1% of the Act 22 community in PR had been Audited by the IRS. Additionally, we have dealt with residency audits in possessions other than PR but applying the same rules.
Both the audit guidance and the information requests sent by the IRS to the audited individuals allowed us to gain further insight on IRS interpretation and stance on the rules.
A frequent misconception is whether the location of the spouse or children will determine whether or not an individual would qualify as a Bona fide Resident of a Possession. There are several matters to take into consideration in this case; the preambles of the regulations regarding bona fide residency discuss how all elements of the closer connections test will carry the same weight when compared to others; The IRS has issued guidance to its Auditors, clearly stating that a person may be deemed a bona fide resident while the spouse is a resident of a State or elsewhere, this is also sustained by the Fact that IRS form 8898 is required to be filed separately by each spouse.

8Can I continue to own or lease a home in the US?

Yes, you may. Although this would not be a deal-breaker on its own, it may weigh negatively against you in the closer connections test. A good pre-emptive alternative is to have the home leased, available for lease and/or on the market for sale.

9Do I need to buy a home in PR?

No. This requirement was briefly set as part of the law but has since been removed. Nevertheless, for purposes of the IRS, you must have your principal permanent home in PR. This requirement could be fulfilled by a lease, but it is highly suggested that the lease be signed for at least 6 months at a time. There should be no gaps between leases as you will need a permanent home available to you at all times throughout the year.

1Can I lease or sublease out my PR home while I am not there?

Although you may, the number of days that the home is rented out to another person may affect your home being deemed your principal permanent home. While the permanent home definition is based on the principles applicable to treating a home as rental property subject to deductions on the income, your home in PR will be subject to a higher standard as this should be your principal permanent home, which for one part should be the place in which you spend most days

2What if my vehicles are registered under a US Company?

Previous IRS residency audits requested information of vehicles which where reasonably available for your use or control, which would include vehicles leased by a company and those that you may freely exercise control of.

3Can I keep my US Bank Accounts?

While you may conserve accounts in the US for certain business or investment purposes, you are required to conduct your routine day-to-day banking from PR. IRS audits have requested statements of all accounts in financial institutions which taxpayers conduct activities. It must be reflected that PR Banks maintain stable balances and are used in day to day banking. Major Banks in PR are FDIC insured and PR banking activities fall within Federal Jurisdiction.

4How long will I have to stay there?

In general, a person must comply with the residency tests mentioned above for the entire calendar year, hence if a person commences their bona fide residence on January 1st of any given year, said residency may end on December 31st of that same year, the rules establish no additional requirement in this case, although it is important to bear in mind how this may affect closer connections.
Notwithstanding the above mentioned, in the case of a person that did not have a tax home and closer connections to the possession as of January 1st of the given year and commences after, if said person seeks to exclude their possession income from federal taxation for that specified year, the person will be required to maintain residency in the possession for an additional 3 years. Failure to do so will require an amendment to the tax return in the year of move to include any excluded income as taxable to the US. This claw-back provision will apply only to the first (partial) year.

5How are travel days accounted for?

Any day you spend in PR for any amount of time will count as a PR day. If you are present in the US for any period of less than 24 hours while traveling to or from PR that day will not count as a US day. In 2016, a determination that in our view seemed as in support of the Act 22 and other possession incentives programs, the IRS modified the presence test requirements to allow that up to 30 days spent in a foreign country (Not US nor PR) be counted as possession days.
This determination has a requirement that, the individual must always spend more days in the possession than in the US, ergo one may not spend 153 days in the Possessions plus 30 days in a foreign country and the balance of 182 days in the US. To fully take advantage of the 30 day allowance, the foreign day count should be, for example, of at least 60 days, that way the 153 PR days would be more than the balance of 152 days in the US.

6Can a Green card holder take advantage of Act 22?

Green card and Visa holders residing in the US are treated as US citizens for tax purposes, in which case they would qualify for exclusion from taxation on possession source income just as any other US Person and subject to the same requirements. PR also offers opportunities for immigration programs such as the EB-5 Investor Visa.

7When do benefits begin?

Possession sourced income begins to accrue as soon as you become a bona fide Resident. Per IRS regulations, residency and subsequent income sourcing, may be retroactive to the beginning of the year in cases where the person moves after January 1st of any given year. Meaning even in the case where a person moves at any point between January 2nd and June 30th of any given year, they will be able to exclude PR sourced income for the entire year from their Federal Tax return. It is also important to note that the date of your move, or rather the day when you ceased to have a tax home in the US and have started to have a tax home in PR is the relevant date in the case of certain gains from the disposition of previously held assets which need be allocated between the US and PR.

8Do I need Act 22 to receive Tax Free Dividends from my Act 20 Company?

No, Act 20 in its own right offers tax free distributions on earnings related to eligible income sources after the 4% tax on the eligible income is calculated.

9Can I apply for an Act 22 grant on my own?

While the answer to this question may offer the opportunity to be self-serving, in candor while the application process may be structured and people may manage to complete on their own, it would be highly advisable to seek council of a qualified professional to properly understand the benefits and consequences, in addition to the fact that having an attorney or accountant in PR may serve as a closer connection. Simply said, the benefits should outweigh the relatively low cost of fees set by the top professionals in the market. If you have any further questions on the items above or additional items particular to your situation, feel free to reach out to us by phone at 787-665-2022 or preferably by email at

Download the Act 22 Overview