Act 60 offers significant tax benefits to individuals who relocate to Puerto Rico. But those benefits are available only to individuals who qualify as bona fide residents of Puerto Rico under federal law—specifically, under IRC §937(a) and the Treasury Regulations at §1.937-1. This is the threshold requirement. If you do not satisfy it, the tax benefits do not apply.
The federal definition of bona fide residency consists of three independent tests. You must satisfy all three for the entire taxable year. Failing any one of them means you are not a bona fide resident for that year, and any income exclusion claimed under IRC §933 will be disallowed.
Test 1: The Presence Test
The presence test requires that you demonstrate sufficient physical presence in Puerto Rico during the taxable year. Under Treas. Reg. §1.937-1(c), you can satisfy this test by meeting any one of five alternative standards:
The 183-Day Rule. You are present in Puerto Rico for at least 183 days during the taxable year. This is the most straightforward standard. Any day during which you are physically present in Puerto Rico for any amount of time counts as a day of presence.
The 549-Day Rule. You are present in Puerto Rico for at least 549 days during the current taxable year and the two preceding taxable years, with at least 60 days of presence in each of those three years. This averaging approach gives some flexibility for years in which travel is heavier, provided the overall three-year total is met.
The 90-Day U.S. Limitation. You are present in the United States for no more than 90 days during the taxable year. Note that this counts only days in the U.S.—days spent in foreign countries do not count against you under this standard.
The Earned Income Limitation. You have no more than $3,000 in U.S.-source earned income during the taxable year and are present in Puerto Rico for more days than you are present in the United States. This standard is most commonly relevant to retirees and individuals with minimal active income.
The No Significant Connection Standard. You have no significant connection to the United States during the taxable year. The regulations define “significant connection” narrowly and exclusively as any one of the following: maintaining a permanent home in the United States; being registered to vote in any U.S. state or the District of Columbia; or having a spouse or minor child whose principal place of abode is in the United States. No other factors constitute a significant connection for purposes of this standard. However, having even one of these connections disqualifies you from this particular alternative.
Day-Counting Details That Matter
Presence in Puerto Rico on any day—however brief—counts as a full day of presence. Certain days spent outside Puerto Rico may also count in your favor: days of absence for qualifying medical treatment, days during a period of mandatory evacuation, and—under proposed regulations (REG-109813-11, published August 2015)—up to 30 days spent outside both the U.S. and Puerto Rico (such as international business travel), provided you are present in Puerto Rico for more days than in the United States for the year. Taxpayers may rely on these proposed regulations for tax years beginning on or after August 27, 2015.
Test 2: The Tax Home Test
The second test requires that your tax home be in Puerto Rico throughout the entire taxable year. Under Treas. Reg. §1.937-1(d), “tax home” has the same meaning as under IRC §911(d)(3): your regular or principal place of business, or, if you have no regular or principal place of business, your regular place of abode in a real and substantial sense.
For most Act 60 decree holders, this means that Puerto Rico must be the center of your professional and economic life. If you are actively employed or operating a business, your principal place of business must be in Puerto Rico. If you have business activities in multiple locations, courts apply a multi-factor analysis that considers the amount of time spent at each location, the proportion of income earned at each location, and the degree of business activity conducted at each location.
You must not have a tax home outside Puerto Rico at any point during the residency period. Maintaining a U.S. office or significant mainland business operations can jeopardize this test.
Test 3: The Closer Connection Test
The third test requires that you do not have a closer connection to the United States or any foreign country than to Puerto Rico during any part of the taxable year. Under Treas. Reg. §1.937-1(e), the IRS evaluates this based on the factors listed in Treas. Reg. §301.7701(b)-2(d), which include:
- Location of your permanent home
- Location of your family (spouse and dependents)
- Location of your personal belongings—automobiles, furniture, clothing, jewelry
- Social, political, cultural, and religious organizations in which you participate
- Location of your routine personal banking activities
- Location of your business activities (other than the tax home)
- Jurisdiction of your driver’s license
- Jurisdiction of your voter registration
- Country of residence designated on official forms and documents
- Types of official forms filed with the IRS
No single factor is determinative. The IRS evaluates the totality of the circumstances. Importantly, your connections to the United States and foreign countries are aggregated and compared against your connections to Puerto Rico. This means that having modest connections to several mainland locations can, in the aggregate, outweigh even strong ties to Puerto Rico.
This test is often the most contested element in IRS examinations of Act 60 decree holders. Courts have found that maintaining strong familial, economic, and personal ties to the mainland—even when the individual has genuine presence in Puerto Rico—can defeat a bona fide residency claim.
The Year-of-Move Safe Harbor
If you relocate to Puerto Rico during a taxable year, the regulations at Treas. Reg. §1.937-1(f)(1) provide a safe harbor for the tax home and closer connection tests. Under this safe harbor, you will be treated as satisfying those two tests for the entire year of the move if you meet three conditions: (1) you were not a bona fide resident of Puerto Rico for the three immediately preceding taxable years; (2) you did not have a tax home outside Puerto Rico or a closer connection to the U.S. or a foreign country for the last 183 days of the taxable year; and (3) you are, or intend to become, a bona fide resident for the three immediately following taxable years.
This safe harbor applies only to the tax home and closer connection tests. You must still independently satisfy the presence test in the year of the move.
What Happens If You Fail
If the IRS determines that you were not a bona fide resident of Puerto Rico for a given taxable year, all income exclusions claimed under IRC §933 for that year will be disallowed. The result is full federal income taxation on the previously excluded income, plus applicable interest and potential penalties. The IRS has increased enforcement activity in this area, and Act 60 decree holders should expect potential examination of their residency status.
The Compliance Imperative
The three-part test is not a formality. It is a substantive legal requirement that the IRS enforces. Satisfying it requires genuine relocation, careful planning, meticulous record-keeping, and ongoing monitoring. Documentation of day counts, business activities, residential arrangements, and community ties should be maintained contemporaneously—not reconstructed after the fact.
Individuals and businesses holding Act 60 decrees should engage qualified legal counsel with specific expertise in federal possession-residency rules to evaluate their compliance posture and address any gaps before they become audit issues.
This article is for educational purposes only and does not constitute legal or tax advice. Individual circumstances vary. Consult a qualified tax attorney before making decisions based on this information.
Riefkohl Law advises Act 60 decree holders on residency compliance, income sourcing, and decree maintenance. Schedule a consultation to discuss your specific situation.