Puerto Rico's House of Representatives passed Bill 505 on Wednesday, overhauling the island's controversial tax incentive program for individual investors who establish residency.
The new law replaces the previous 0% tax rate on passive income — which applied to capital gains, dividends, and interest — with a flat 4% rate for new applicants beginning January 1, 2027. Existing beneficiaries will be grandfathered under the old terms for 10 years, after which they will also transition to the 4% rate.
Governor Jesús Manuel Ortiz, who proposed the reform, called it 'a balanced approach that preserves our competitive edge while ensuring the program generates meaningful revenue for the commonwealth.' The previous zero-tax structure, part of Act 60, had drawn criticism from mainland U.S. lawmakers and some Puerto Rican civic groups.
Economic impact projections
The Puerto Rico Department of Economic Development estimates the new 4% rate will still attract high-net-worth individuals, but will generate an additional $180 million annually for the commonwealth's general fund by 2030. Under the zero-tax regime, the program brought in approximately $40 million annually in indirect taxes and fees despite exempting investment income.
Opponents, including some real estate and financial services firms that have marketed the program heavily to mainland investors, warned that the change could make Puerto Rico less attractive compared to other tax havens like the U.S. Virgin Islands or Panama.
This is a balanced approach that preserves our competitive edge while ensuring the program generates meaningful revenue for the commonwealth.
The bill now heads to the Senate, where passage is expected. Ortiz has indicated he will sign it into law promptly. The change comes as the IRS and Treasury Department have increased scrutiny of Act 60 beneficiaries, with some audits alleging improper claims of residency.
