What Is the Tax Treatment of Export Services Under Act 60?
Imagine you run a consulting firm from a condo in Condado. Every client is in New York or London, and someone tells you Act 60 could cut your tax bill sharply. Then you open the actual law and get lost in decrees, eligible services, and residency tests. This guide explains how export services income is taxed under Act 60, step by step and without the jargon.
How Act 60 Export Services Taxation Actually Works
When I first started looking into the export services incentive, I assumed it was a simple switch: move to the island, flip the “Act 60” setting, and pay less tax. It is not that simple. Once you understand the logic behind it, though, the rules make sense, and you can plan around them instead of feeling ambushed.
Act 60 is Puerto Rico’s Incentives Code. It pulled together a long list of older incentive laws into one framework. The export services chapter replaced what many long-time residents still call “Act 20.” The idea is economic: Puerto Rico wants businesses on the island that bring money in from outside. If your company sits in Puerto Rico, employs people here, and sells services to clients beyond the island, the government is willing to tax that business income at a preferential fixed rate. In return, you commit to certain obligations through a formal agreement.
For the big-picture view of every incentive category, including the individual investor side, see Understanding Act 60 Tax Incentives in Puerto Rico: The Full Guide (2026).
What Counts as an Export Service
The core test is about where your client is, not where you are. An export service is one you perform from Puerto Rico for a person or company that is not a Puerto Rico resident and is not doing business in Puerto Rico. It also covers services connected to a foreign or mainland market. The work has to physically happen here, because the incentive rewards activity on the island.
The law lists eligible service categories, and the list is broad. It includes:
- Consulting and advisory services, including management, economic, and strategic consulting
- Software development, IT services, and technology support
- Marketing, advertising, public relations, and creative design
- Research and development
- Accounting, bookkeeping, and certain legal services
- Call centers and shared service centers
- Investment banking, asset management, and related financial services
- Engineering, architecture, and project management for projects outside Puerto Rico
Take Daniela, a graphic designer in Santurce. She builds brand identities for startups in Austin and Toronto. Her clients are off-island and she does the work at her desk on Calle Loíza, so her design income fits the export services concept well. Now take her friend Marco, who runs a bookkeeping practice in Caguas where nearly every client is a local bakery or auto shop. Marco does not have export income, because his clients are in Puerto Rico. Same island, same profession type, completely different tax outcome.
The Decree Is a Contract, Not a Status
This part changed how I think about the whole thing. You do not simply “qualify” for Act 60 the way you qualify for a standard deduction. You apply to the Department of Economic Development and Commerce, known locally as DDEC. If you are approved, you receive a decree. That decree is a binding agreement between your business and the government of Puerto Rico.
The decree spells out your preferential rate, the activities it covers, the term of the agreement, and the conditions you must meet to keep it. Because it is a contract, the terms in your specific decree are what govern your tax treatment. Two businesses that received decrees under different versions of the rules may have different terms. That is why you should always read your own decree rather than relying on what a friend at a Dorado networking event says about theirs.
For a detailed explanation of how these agreements are drafted and negotiated, see Understanding the Tax Closing Agreement (Decree) Process in Puerto Rico.
Why the Business Entity Matters
The export services incentive is granted to a business, not to you personally. You will almost always operate through a Puerto Rico entity, typically a corporation or a limited liability company organized under Puerto Rico law. The entity holds the decree, earns the eligible income, and pays the preferential tax at the business level.
This is also why entity formation comes first in the process. You organize and register your Puerto Rico entity with the Department of State, get it set up with Hacienda, and only then submit the decree application to DDEC. Proof of the entity’s legal formation goes in with that application. If you have not formed your company yet, the step-by-step walkthrough in How to Register a Corporation or LLC in Puerto Rico covers it from the first filing to the certificate of formation.
The Tax Benefits Broken Down Layer by Layer
Here is where it gets interesting, and also where I see the most anxiety in expat Facebook groups. The export services incentive does not hand you a single tax break. It touches several layers of taxation, and each one behaves differently. The cleanest approach is to look at each layer on its own.
Income Tax on Eligible Export Income
The headline benefit is a fixed, preferential income tax rate on the entity’s eligible export income. Without a decree, a Puerto Rico corporation pays tax at the regular graduated corporate rates, which add up quickly as profits grow. With a decree, eligible income is taxed at the flat rate written into your agreement.
The key word is “eligible.” Only income from qualifying export activity gets the preferential rate. If your marketing agency in Hato Rey has one client in Chicago and another client that is a hotel in Isla Verde, the Chicago revenue can be export income, while the Isla Verde revenue is local income taxed under the regular rules. Your bookkeeping needs to separate these streams clearly from day one. Retrofitting the split at year end is miserable, and I say that from personal experience.
Passive income generally sits outside the decree’s preferential treatment. Interest on cash reserves, investment gains in a brokerage account held by the company, and similar items usually fall under the regular Puerto Rico rules.
Distributions and Dividends to Owners
The second layer is what happens when profits leave the company and reach you. Under the export services chapter, distributions that come from the earnings and profits generated by eligible export income are generally exempt from Puerto Rico income tax at the shareholder level. This is the part that makes the incentive so powerful for owner-operators: the business pays its preferential rate, and the money you then take out as a distribution of those export earnings is not taxed again by Puerto Rico.
There is a catch you need to understand. Salary is not a distribution. If you pay yourself wages from the company, those wages are compensation and are taxed under Puerto Rico’s regular individual income tax rules, with withholding through payroll. Many owners pay themselves a reasonable salary for the work they do and take the rest as distributions. Getting that balance right is a real planning decision, and it is worth working through with a Puerto Rico CPA rather than guessing.
Municipal and Property Tax Relief
The third layer is local. Puerto Rico municipalities charge a municipal license tax called the patente, based on business volume, and businesses also face property tax through CRIM on business assets. Export services decrees typically include partial exemptions from these local taxes. The exact scope depends on your decree.
Partial is the important word. You still register with your municipality, still file your patente declaration, and still deal with CRIM. The decree reduces what you owe; it does not erase your filing obligations. See How Do I Pay My Municipal License Tax (Patente) in Puerto Rico? for the practical side of that annual filing, including the municipal office visit that seems to exist mainly to test your patience.
Summary Table of How Each Income Type Is Treated
| Income or Tax Type | Treatment With an Export Services Decree | What You Still Need to Do |
|---|---|---|
| Eligible export income earned by the entity | Taxed at the preferential fixed rate set in the decree | Track it separately from local income and report it on the entity’s Hacienda return |
| Income from clients inside Puerto Rico | Taxed at regular graduated corporate rates | Keep separate books and invoices for local clients |
| Passive income held in the entity | Generally taxed under regular Puerto Rico rules | Report it outside the decree’s eligible income |
| Distributions from export earnings and profits | Generally exempt from Puerto Rico income tax for the owner | Document which earnings the distribution comes from |
| Owner salary paid by the entity | Taxed as regular wages under individual income tax rules | Run payroll and withholding properly |
| Municipal license tax, the patente | Partial exemption as defined in the decree | File the annual municipal declaration |
| Business property tax through CRIM | Partial exemption as defined in the decree | Keep CRIM filings current |
How Federal Tax Fits Into the Picture
This is the section that keeps people up at night, and I understand why. You can have a perfect Puerto Rico decree and still get an unpleasant surprise from the IRS if the federal side is not aligned. Puerto Rico is a US territory, and federal tax law treats it in a very particular way.
Bona Fide Residency Is the Foundation
Under federal law, a US citizen who is a bona fide resident of Puerto Rico for the entire tax year can generally exclude Puerto Rico-source income from federal income tax. That exclusion is what lets the local Act 60 benefits actually reach your pocket. Without it, the IRS would tax your income as a regular US taxpayer and the decree would do far less for you.
Bona fide residency is not something you declare. You have to meet three tests: the presence test, the tax home test, and the closer connection test. Presence is about the days you spend on the island. Tax home is about where your main place of work is. Closer connection is about where your life is centered: your home, your car registration, your driver’s license, your bank accounts, your doctor, your voter registration, even where your dog goes to the vet. For the full breakdown, see Bona Fide Residency in Puerto Rico: The Definitive Tax Guide (2027).
Here is a scenario that often plays out. Kevin moves his software consultancy to Rincón, gets his decree, and feels great. But he keeps his Florida house, his Florida license, and spends long stretches back in Miami for family reasons. On paper his company is in Puerto Rico. In reality his closer connection may still point to Florida. If he fails the residency tests, his income can lose the federal exclusion, and the decree’s local benefit does nothing about that.
Where the Work Is Performed Determines the Source
For federal purposes, income from services is generally sourced to the place where the services are physically performed. Work you do while sitting in Puerto Rico produces Puerto Rico-source income. Work you do while sitting in a hotel in Denver produces mainland-source income, even if your Puerto Rico company sends the invoice.
This matters enormously for people who travel. If you fly to the mainland for a two-week client engagement, the income tied to that on-site work is generally US-source and subject to federal tax. Some decree holders keep a simple travel log that notes which days were worked on the island and which were worked elsewhere. That log does double duty: it supports your presence test and your income sourcing. See How Do I Track My Days for the Puerto Rico Presence Test? for practical tracking methods.
Federal Filing Obligations Do Not Disappear
Even with the exclusion, you are still a US citizen, and the federal system still has expectations. You may still need to file a federal return, especially if you have income from sources outside Puerto Rico, investment income held in mainland accounts, or self-employment income. Social Security and Medicare taxes generally still apply to Puerto Rico residents. Depending on how your entity is classified for federal purposes, there may also be informational returns for foreign corporations or foreign financial accounts, since a Puerto Rico corporation is generally treated as foreign for certain federal purposes.
Plenty of decree holders hire two kinds of professionals: a Puerto Rico CPA who handles the Hacienda side and the decree compliance, and a US tax preparer who handles the federal return. Taxes for Expats is one firm people use for the federal side, because cross-border situations with Puerto Rico income, mainland income, and foreign entity reporting are its everyday territory. Whoever you choose, make sure your Puerto Rico and federal preparers talk to each other. Contradictions between the two returns are exactly what draws scrutiny.
Applying For and Keeping Your Export Services Decree
Getting the decree is a project, and keeping it is an ongoing commitment. Many people treat approval as the finish line. It is really the starting gun.
The Application Process Step by Step
The order of operations matters, so here it is as a sequence:
- Move to Puerto Rico and start building your bona fide residency, including your local address, driver’s license, and bank relationships.
- Form your Puerto Rico corporation or LLC with the Department of State and obtain its formation documents.
- Get the entity’s employer identification number and register with Hacienda through the SURI portal, including your merchant registration if it applies.
- Open a business bank account in the entity’s name so that export revenue flows through the company from the start.
- Prepare a business plan describing your eligible export services, your client base outside Puerto Rico, and your projected operations on the island.
- Submit the decree application through DDEC’s online system, attaching proof of the entity’s legal formation and the supporting documents, and pay the application filing fee.
- Respond to any follow-up questions from DDEC and review the draft decree carefully before signing.
- Sign the decree and keep a copy wherever you keep your most important records, because you will refer to it every year.
For each of those stages in more detail, see How Do I Get an Act 60 Tax Decree in Puerto Rico?. To understand the costs involved, including government fees and the professional fees most people end up paying, see How Much Does Act 60 Cost to Apply for in Puerto Rico?.
On the banking side, many decree holders bank locally with Banco Popular, Oriental, or FirstBank, which helps with the closer connection test. Many export businesses also get paid by clients in other countries. Wise is a practical tool here: you can receive client payments in pounds, euros, or Canadian dollars and convert them at the mid-market rate. Check Wise’s own pricing page for current fees before relying on it for large transfers. Your Puerto Rico operating account should still be the main hub so the entity’s books stay clean.
Annual Compliance Obligations
Once you have the decree, you owe the government proof that you are living up to it. Export services decree holders generally file an annual report with DDEC. It describes the business activity, the eligible income, employment on the island, and other details the decree requires, and it comes with a filing fee. You also keep filing the entity’s regular income tax return with Hacienda through SURI, your municipal patente declaration, and CRIM filings for business property.
Larger businesses may face employment requirements, such as hiring a certain number of full-time employees residing in Puerto Rico once revenue passes a threshold set in the rules. Check your decree for the specific conditions that apply to you. For more on annual obligations, including the separate requirements that apply to individual investor decrees, see Understanding the Act 60 Annual Donation and Compliance Requirements.
A practical tip from my own routine: put every compliance deadline in a shared calendar with your accountant at the start of each year. Hacienda deadlines, DDEC deadlines, and municipal deadlines do not line up neatly, and missing one can trigger penalties or put your decree in question.
Solo Freelancers and Small Operators
A common question in the San Juan expat groups is whether a one-person operation can use the export services incentive. Generally, yes. A solo consultant, developer, or designer can operate through their own Puerto Rico entity and apply for a decree, provided the services are eligible and performed from the island for clients outside it.
The trade-off is overhead. A solo operator still pays for entity formation, an accountant, the application, annual reports, and municipal filings. For a freelancer with modest income, those fixed costs can eat a meaningful share of the savings. For a freelancer whose export income is substantial, the math can be very favorable. Run the numbers with a Puerto Rico CPA before you commit. For the freelancer-specific angle, see Can I Get Act 60 Benefits as a Freelancer in Puerto Rico?.
Pros and Cons Worth Weighing Honestly
| Advantages | Drawbacks |
|---|---|
| Preferential fixed tax rate on eligible export income | Requires a Puerto Rico entity and ongoing administrative work |
| Distributions from export earnings generally exempt from Puerto Rico tax | Owner salary is still taxed at regular individual rates |
| Partial relief from municipal and property taxes | Local client income and passive income get no preferential rate |
| Tax certainty through a contractual decree with a fixed term | Annual DDEC reporting, fees, and possible employment conditions |
| Works for solo operators as well as larger firms | Federal benefit depends entirely on keeping bona fide residency |
The honest verdict from someone who has lived here a while: the export services incentive is real, legal, and valuable, but it rewards people who genuinely build their business and their life in Puerto Rico. If you are willing to live here, document your days, keep clean books, and respect the compliance calendar, it can be one of the most favorable tax frameworks available to a US citizen. If you are hoping to keep your mainland life and just route invoices through an island address, it will not hold up.
Disclaimer
This article is for general informational purposes only and does not constitute professional advice. Laws, prices and regulations vary by location and change over time. Consult a qualified professional for guidance on your specific situation.
