Act 60 Export Services After Act 38 of 2026: What Changed and What Remains
Act 38 of 2026 modified Puerto Rico's tax incentive framework in ways that directly affect businesses operating under Act 60 export services provisions. If your company relies on these incentives, you need to understand which benefits remain intact, which have shifted, and how to maintain compliance under the new rules. This article explains the practical implications for your business structure and tax planning.
The Baseline: What Act 60 Export Services Provided Before Act 38
Act 60, formerly known as Acts 20 and 22, created a focused tax incentive system for businesses that generate income from sources outside Puerto Rico. Export services businesses, defined as those providing services to non-Puerto Rico residents or entities, qualified for a flat 4% corporate tax rate on Puerto Rico-source income. This rate applied to a broad range of service businesses, including consulting, professional services, digital services, and certain financial services.
The appeal was straightforward: a business incorporated in Puerto Rico that derived its revenue from clients outside the island could reduce its effective tax burden significantly compared to mainland U.S. rates. Combined with Act 60's other provisions regarding capital gains and individual investor incentives, the framework created a comprehensive tax planning tool for entrepreneurs and investors.
Export services businesses also benefited from Act 60's provisions regarding dividend distributions, allowing shareholders to receive distributions at reduced rates. The combination of low corporate rates and favorable dividend treatment made Puerto Rico an attractive jurisdiction for service-based businesses with international or remote client bases.
Act 38 of 2026: The Structural Changes
Act 38 introduced modifications to Act 60's framework that affected eligibility criteria, rate structures, and compliance requirements. The changes were not uniform across all Act 60 categories. Export services businesses faced specific adjustments that require careful review of your current structure.
One significant change involved tightening the definition of qualifying export services. Certain service categories that previously qualified now face heightened scrutiny regarding whether income truly derives from non-Puerto Rico sources. The law added specific documentation requirements to prove that services are performed for and billed to non-Puerto Rico clients, and that the economic benefit accrues outside Puerto Rico.
The corporate tax rate for export services remained at 4% for businesses that maintain full compliance with the new requirements. However, the path to demonstrating compliance became more rigorous. Businesses must now maintain detailed records showing the geographic source of income, the location of clients, and the place where services were actually performed.
Act 38 also introduced changes to the incentive structure for certain financial services and digital services businesses. If your export services business involves cryptocurrency, blockchain technology, or other digital assets, the modifications may affect your tax treatment. Businesses in these sectors should review their current Act 60 status with particular attention to how Act 38 redefined qualifying activities.
Compliance Requirements Under the New Framework
Act 38 increased the documentation burden for Act 60 export services businesses. The Puerto Rico Department of Treasury now requires contemporaneous records demonstrating the non-Puerto Rico source of income. This means you cannot rely on general business records or tax returns alone. You must maintain specific documentation showing client location, service delivery location, and the economic substance of the transaction.
For businesses with mixed income sources, the allocation methodology became more important. If your company generates some income from Puerto Rico sources and some from export services, Act 38 requires a clear, defensible allocation method. The Department of Treasury has indicated it will challenge allocations that appear arbitrary or that do not reflect the actual economic activity.
Annual reporting requirements also expanded. Businesses must file detailed schedules with their tax returns showing the composition of their income by source. These schedules must reconcile with underlying business records, client contracts, and invoicing documentation. Failure to maintain this documentation or to file required schedules can result in loss of Act 60 benefits and assessment of back taxes plus penalties.
Businesses that employ individuals in Puerto Rico must also track and document the functions performed by those employees. Act 38 clarified that employees performing substantial work related to export services must be properly classified and compensated. The law does not prohibit Puerto Rico-based employees, but it requires clear documentation that their work supports the export services activity and that compensation is reasonable.
Which Export Services Businesses Were Most Affected
Certain categories of export services businesses faced more significant changes under Act 38 than others. Digital services businesses, particularly those involving software development, digital marketing, and online content creation, saw increased scrutiny regarding the geographic source of income. The law requires these businesses to demonstrate that the services are performed for non-Puerto Rico clients and that the economic benefit of the services accrues outside Puerto Rico.
Professional services businesses, including consulting, accounting, legal services, and engineering services, generally retained their Act 60 eligibility if they maintained proper documentation. However, the documentation requirements became more specific. Businesses must show that clients are located outside Puerto Rico, that contracts specify non-Puerto Rico performance, and that billing and payment occurred in accordance with those contracts.
Financial services businesses experienced the most significant changes. Act 38 modified the treatment of certain financial services, particularly those involving cryptocurrency, blockchain technology, and digital assets. Businesses in these sectors should review their current Act 60 status and consider whether their activities still qualify under the modified rules. For more information on how these changes affect blockchain and digital asset businesses, see our blockchain compliance page.
Trading and investment businesses also faced modifications. Act 38 clarified that certain trading activities do not qualify as export services. Businesses that generate income from trading securities, commodities, or other financial instruments should review whether their activities qualify under the modified framework.
Maintaining Act 60 Benefits: Practical Steps
If your business currently operates under Act 60 export services provisions, you should take specific steps to ensure continued compliance under Act 38. First, conduct a comprehensive review of your business activities and income sources. Categorize your income by source, distinguishing between Puerto Rico-source income and non-Puerto Rico-source income. This review should be detailed enough to support the allocation methodology you use for tax purposes.
Second, audit your documentation practices. Review your client contracts to ensure they clearly identify the client location and specify that services will be performed for non-Puerto Rico clients. Review your invoicing practices to ensure invoices clearly identify the client location and describe the services provided. Review your payment records to ensure payments are received from non-Puerto Rico sources.
Third, implement a record-keeping system that captures the information required under Act 38. This system should track client location, service delivery location, the date services were performed, the amount billed, and the economic substance of the transaction. The system should be capable of generating reports that reconcile with your tax return and support your income allocation methodology.
Fourth, review your employment practices if you have Puerto Rico-based employees. Ensure that employee compensation is reasonable and that the functions performed by employees are properly documented. If employees perform work related to export services, ensure that this work is clearly identified and that the employee's compensation is allocated appropriately.
Fifth, consider whether your business structure remains optimal under Act 38. Some businesses may benefit from restructuring to separate Puerto Rico-source activities from export services activities. Others may benefit from establishing separate entities for different business lines. The optimal structure depends on your specific circumstances and should be evaluated with consideration of Act 38's requirements.
The 4% Rate: Still Available, But With Conditions
The 4% corporate tax rate for Act 60 export services businesses remains available under Act 38. However, this rate is only available to businesses that fully comply with the new requirements. The rate is not automatic. You must affirmatively establish your eligibility and maintain documentation supporting that eligibility.
The Department of Treasury has indicated that it will conduct audits of Act 60 businesses to verify compliance with Act 38 requirements. These audits will focus on the geographic source of income, the location of clients, and the place where services were performed. Businesses that cannot produce contemporaneous documentation supporting their income allocation will lose Act 60 benefits.
Businesses that lose Act 60 benefits face significant tax consequences. The loss of the 4% rate means your business will be subject to Puerto Rico's standard corporate tax rates, which are substantially higher. Additionally, the Department of Treasury may assess back taxes for prior years if it determines that your business did not qualify for Act 60 benefits during those years. Penalties and interest will apply to any back taxes assessed.
Transition Issues and Timing
Act 38 created transition issues for businesses that were operating under Act 60 before the law took effect. Businesses that were in compliance with Act 60 before Act 38 are generally permitted to continue operating under Act 60, provided they comply with Act 38's requirements going forward. However, the transition period has specific deadlines and requirements that you must meet.
Businesses that have not yet filed tax returns under Act 38 should ensure that their filings reflect full compliance with the new requirements. Businesses that have already filed returns under Act 38 should review those returns to ensure they accurately reflect the geographic source of income and comply with all documentation requirements. If your prior filings do not comply with Act 38 requirements, you may need to file amended returns.
The timing of Act 38's implementation created uncertainty for some businesses regarding which rules apply to which tax years. Generally, Act 38 applies to tax years beginning on or after the effective date of the law. Businesses should confirm the effective date and ensure their tax filings reflect the correct rules for each tax year.
Disputes and Compliance Challenges
Some businesses have faced challenges from the Department of Treasury regarding their Act 60 eligibility under Act 38. These challenges typically focus on whether the business's income truly derives from non-Puerto Rico sources or whether the business has maintained adequate documentation. If you receive a notice from the Department of Treasury questioning your Act 60 status, you should respond promptly with documentation supporting your position.
Disputes regarding Act 60 eligibility can be resolved through the Department of Treasury's administrative procedures or through litigation. The outcome of these disputes often depends on the quality of documentation the business can produce. Businesses with contemporaneous, detailed records showing the geographic source of income and the location of clients are generally successful in defending their Act 60 status. Businesses with incomplete or inconsistent documentation often lose their Act 60 benefits.
If you are involved in a dispute with the Department of Treasury regarding your Act 60 status, you should seek experienced legal representation. The issues involved are complex and the stakes are high. An experienced attorney can help you gather and organize documentation, develop a defensible position, and represent you in administrative proceedings or litigation. For more information on how we handle tax and commercial disputes, see our commercial litigation page.
Planning for the Future
Act 38 is not the final word on Puerto Rico's tax incentive framework. The law may be modified further, and the Department of Treasury may issue additional guidance regarding its application. Businesses should monitor developments in Puerto Rico tax law and adjust their compliance practices as needed.
Businesses should also consider whether Act 60 export services incentives remain the best tax planning tool for their circumstances. For some businesses, the compliance burden and documentation requirements may outweigh the benefits of the 4% rate. For others, Act 60 remains an attractive option. The optimal decision depends on your specific business model, income sources, and risk tolerance.
Businesses that are considering relocating to Puerto Rico or establishing new operations in Puerto Rico should carefully evaluate Act 60 eligibility before making structural decisions. The requirements under Act 38 are more stringent than under prior law, and not all business models will qualify. Proper planning before establishing your Puerto Rico operations can help you structure your business to maximize Act 60 benefits while ensuring full compliance.
Next Steps
If your business operates under Act 60 export services provisions, you should review your compliance with Act 38 requirements. The changes introduced by Act 38 are significant, and businesses that do not adjust their practices may lose their Act 60 benefits.
We offer a free initial evaluation to discuss your Act 60 status and compliance with Act 38. During this evaluation, we will review your business activities, income sources, and documentation practices. We will identify any compliance gaps and recommend steps to ensure your business maintains its Act 60 benefits. To schedule your free initial evaluation, visit our evaluation page.
For more detailed information about Act 60 and Puerto Rico's tax incentive framework, see our Act 60 page.