Puerto Rico Tax Breaks: Proposed Changes and Impacts Explained

First Citizens Wealth INTEL: Insights and News—Taxation, Election & Legislation

Each month, we'll cover time-sensitive updates on tax, election and legislation developments that could affect you.

Enacted in 2012, Puerto Rico's Act 22 was initially designed to attract real estate investment and promote economic development on the island. It allows relocating individuals to avoid both local and federal taxes on Puerto Rico-sourced income after meeting qualifying requirements.

However, the program's tax incentives have raised concerns among lawmakers and residents due to increasing housing prices and potential tax avoidance issues. In October 2024, House Democrats introduced the United with Puerto Ricans Opposed to Act 22 Risks, or UPROAR, Act.

Who is impacted

With congressional scrutiny intensifying, these stakeholders must prepare for potential changes to the program's structure and benefits.

Individuals

Act 22 makes Puerto Rico appealing because some investors and higher-income individuals relocate there to benefit from exemptions on local taxes for income, interest, dividends and capital gains—as well as US Tax Code Section 933's federal exemption for income derived from within Puerto Rico.

Businesses

Businesses exporting services from Puerto Rico benefit from a reduced 4% corporate tax rate. This is far lower than the combined federal and state rates on the mainland, where companies are subject to a 21% federal corporate tax, plus a state tax, which varies.

Cryptocurrency investors

Act 60 incorporated Act 22 in 2019 and introduced additional tax advantages for cryptocurrency investors. Under the Individual Investors Act, qualified individuals pay no tax on capital gains, compared to US federal rates of up to 37% for short-term gains and 20% for long-term gains.

Others

The potential closing of the Act 22 tax loophole also impacts the following individuals and groups:

• Puerto Rican residents facing significant housing affordability challenges—with local rents increasing 600% since 2022
• Real estate investors and developers whose market strategies rely on Act 22-driven demand
• Federal tax authorities concerned about program compliance and potential revenue loss

What action is required

If you're currently benefiting from Act 22 or considering moving to Puerto Rico for its tax advantages, we recommend the following next steps.

Review residency compliance: To qualify for the benefits of Act 22, new residents must purchase a home within 2 years, live on the island for at least 6 months each year and contribute $10,000 to a local nonprofit annually. Due to these requirements, it's important to maintain clear records of your physical presence on the island.

Assess investment exposure: You should review your real estate holdings and business operations—and document all transactions. Consider diversification strategies given potential regulatory changes. If you're an entrepreneur or business owner, you should also evaluate how any changes to Act 22 may impact your tax advantages.

Strengthen tax documentation: Ensure you have records of income sources between the US and Puerto Rico to ensure compliance with increased IRS scrutiny.

Monitor legislative developments: Stay current on the UPROAR Act's progress, and prepare potential contingency plans for changes to Act 22's benefits.

Who should you talk to now

There are two conversations we recommend having if this proposed legislation impacts you. The first is with a tax advisor experienced in Puerto Rican and US federal tax law to evaluate your current strategy and explore alternative approaches if Act 22 benefits change.

We also recommend discussing your personal situation with a wealth consultant due to the potential wide-ranging impacts of this legislation. Your First Citizens Wealth consultant can also help assess how this legislation may influence your financial plan and impact your tax planning strategies, investment decisions and long-term goals.