In the 1990s, Microsoft manufactured software the way you'd manufacture a toaster: on an assembly line in Puerto Rico, stamping CDs. The tax logic behind that factory never went away. It just moved from physical discs to IP licensing — and today the same territory offers a version of it to individuals, under a law called Act 60.

The Microsoft Structure

Puerto Rico is a US territory with its own tax framework, and Microsoft has used it for decades: first for CD and DVD manufacturing, the physical fulfilment of software, and later for IP licensing once physical media stopped mattering. The company has faced repeated IRS scrutiny over the arrangement, and that scrutiny hasn't gone away: in 2023, the IRS issued Microsoft a proposed adjustment of roughly $28.9 billion in additional tax, tied specifically to the Puerto Rico manufacturing and IP cost-sharing structure described above — one of the largest transfer-pricing disputes in IRS history. Microsoft is disputing the assessment, and as of today the matter remains open and unresolved. It is not a settled case, and nobody should read the structure's decades of use as proof it survives IRS challenge intact.

The Individual Version: PR Act 60

For US individual founders, Puerto Rico Act 60 (formerly Acts 20 and 22) offers something related but different from what Microsoft built. An Individual Investor decree gives 0% Puerto Rico tax on qualifying capital gains and interest or dividend income that arises after bona fide PR residence begins. An Export Services decree offers a 4% corporate tax rate on qualifying export services performed from the island.

The catch is real: you have to become a genuine bona fide resident, not a paper one. That means physical presence of 183-plus days a year, a tax home in Puerto Rico, and closer personal and economic connections to Puerto Rico than to anywhere else.

Why This Works for US Citizens

Puerto Rico is a US territory, and under Section 933 of the US tax code, federal income tax generally doesn't apply to Puerto Rico-source income earned by bona fide PR residents. Combine that with Puerto Rico's own favourable rates for qualifying activity, and you get one of the very few routes available to a US citizen to substantially reduce US tax without renouncing citizenship.

What FTR Sees

For US-citizen entrepreneurs with a business or portfolio generating meaningful capital gains (a SaaS founder ahead of a sale, a crypto investor, a hedge fund principal), Act 60 is often the single best available move. It requires genuine relocation, not a mailing address; ongoing physical presence; real economic activity in Puerto Rico for the corporate-side benefits; and careful timing around when assets are actually realised.

The pitfalls are specific and repeat often: relocating after a major sale already closed, so most of the gain stays US-taxable; not clearing the physical presence bar; failing the bona fide residency tests on a technicality; or keeping enough ongoing US business activity that it creates effectively connected income back in the mainland.

Before You Move

If you're a US-citizen founder within a year or two of a liquidity event, Puerto Rico is worth ten minutes of your time before it's worth nothing. Book a scoping call and bring your expected exit timeline — the planning window matters more than almost anything else here.

General information. Act 60 requires genuine relocation and careful, individualised planning. Nothing here is personal legal or tax advice.