Chief Strategy Officer & Head of Puerto Rico
Puerto Rico’s Act 60 offers significant tax advantages for individuals and businesses willing to establish genuine ties to the island. But as recent enforcement actions make clear, these benefits come with strict Act 60 compliance obligations. In one high-profile case, investor Suresh Gajwani faced federal prosecution after submitting false documentation in an attempt to access Act 60’s incentives improperly .
This blog explores why the IRS is intensifying scrutiny of Act 60 beneficiaries and how the Gajwani case highlights the risks of cutting corners. We’ll break down what compliance really means under Act 60, common mistakes that trigger audits, and the practical steps you can take to ensure your tax strategy is both effective and secure.
1. Understanding the Gajwani Case: A Compliance Wake-Up Call
When it comes to Act 60 compliance, few cases illustrate the risks of misinterpretation and aggressive tax structuring as clearly as the federal prosecution of Suresh Gajwani. At the center of the case was Nimco II Corporation, a Delaware-based C Corporation that held a significant portfolio of Tesla stock—ultimately realizing nearly $80 million in capital gains beginning in late 2019.
After these gains were realized, Gajwani—then still a Florida resident—sought to access Puerto Rico’s Act 60 tax exemptions. Acting on advice from a CPA and an attorney, he attempted to convert Nimco into an S Corporation retroactively, based on the mistaken belief that S Corp status would allow the capital gains to be treated as Puerto Rico-sourced and thus exempt from U.S. federal tax.
The problem wasn’t just the timing of the election—it was the flawed assumption at the heart of the strategy. Being an S Corporation does not automatically qualify income as Puerto Rico-sourced. Moreover, the gains in question had accrued prior to Gajwani establishing bona fide Puerto Rico residency. To effect the conversion, Gajwani submitted IRS Form 2553 with a “reasonable cause” statement falsely claiming that Nimco had intended to elect S Corp status as of January 1, 2019.
The IRS granted the retroactive election—but later determined the filing was intentionally misleading. In 2025, Gajwani was charged under 26 U.S.C. §7206(1) for willfully filing a false statement under penalty of perjury.
What This Means for Investors
The Gajwani case illustrates a critical point:
Tax status alone does not determine income sourcing—and misapplying these rules can result in criminal charges.
Key takeaways:
- S Corporation status is not a shortcut to Puerto Rico sourcing under Act 60.
- Income must be genuinely Puerto Rico-sourced and capital gains accrue only after establishing bona fide residency.
- Filing false or misleading documents—regardless of professional advice—can result in federal prosecution.
Ultimately, the case underscores that Act 60 compliance must be based on substance, not structure. The consequences of getting it wrong can be both severe and lasting.
2. How Act 60 Works
A Brief Overview of Act 60
Puerto Rico’s Act 60 consolidates and expands significant tax incentives designed to attract U.S. citizens and businesses. By relocating to Puerto Rico and establishing bona fide residency, individuals and enterprises can benefit from exceptionally favorable tax conditions, such as:
- Individual Investors:
- 0% tax on dividends, interest, and long-term capital gains sourced in Puerto Rico for all applicants who adhere to Act 60 benefits before 2026. From 2026 onward the tax on capital gains will be raised to 4%.
- Export Service Businesses:
- A fixed corporate tax rate of just 4% on income from exported services.
These powerful incentives present compelling financial advantages for those willing to genuinely invest in life and business on the island.
3. The Compliance Pillars: What You Must Get Right for Act 60 Compliance
Successfully benefiting from Puerto Rico’s Act 60 hinges on getting compliance exactly right. To achieve this, it’s crucial to understand and diligently adhere to the following compliance pillars:
Establishing Bona Fide Residency
Residency is the cornerstone of Act 60. The IRS rigorously enforces these residency rules, meaning your documentation must be detailed and transparent. Specifically, you must meet three clear tests:
- Presence Test:
You must be physically present in Puerto Rico for at least 183 days each tax year. Keeping precise records of your days spent on-island is essential. - Tax Home Test:
Your main place of business—your “tax home”—must be firmly rooted in Puerto Rico. This is not merely a formality; it means actively running your professional life from the island. - Closer Connection Test:
Your strongest personal, economic, and social ties must clearly point to Puerto Rico. The IRS evaluates various indicators, such as family location, primary residence, and voter registration, to ensure your primary connection is genuinely Puerto Rico.
Essential IRS and Puerto Rican Filings
Compliant taxpayers must submit several critical filings each year to maintain Act 60 benefits:
- Form 8898 (IRS Notification):
This form officially notifies the IRS of your relocation to Puerto Rico and establishes the date from which Puerto Rico sourcing rules apply. Misfiling or failing to file Form 8898 can jeopardize your Act 60 status. - Federal and Puerto Rican Income Tax Returns:
Although Puerto Rican-sourced income can be exempted under Act 60, income sourced from mainland activities remains subject to U.S. federal taxation. Clear, consistent reporting of income sources on both sets of returns is crucial.
Annual Reporting to Puerto Rico (DDEC)
Maintaining Act 60 compliance requires submitting an Annual Report to Puerto Rico’s Department of Economic Development and Commerce (DDEC):
- Proof of Compliance:
You’ll need detailed proof demonstrating that you’ve met all residency and operational requirements over the tax year, such as lease agreements, utility bills, and financial transaction records. - Mandatory Compliance Fee:
Each annual filing must include a mandatory $5,000 fee. Missing this report or payment can result in severe penalties, including the potential revocation of your Act 60 tax exemption.
Charitable Contributions
Act 60 also includes an annual charitable donation requirement:
- You must donate a minimum of $10,000 annually to qualified Puerto Rican nonprofit organizations.
- At least half of this ($5,000) must directly address child poverty on the island.
Consistent and timely donations, accompanied by thorough documentation, demonstrate your sincere commitment to Puerto Rico and help solidify your residency status.
4. Common Pitfalls That Trigger IRS Scrutiny
Despite the clear rules outlined in Act 60, some investors still unknowingly—or intentionally—step into pitfalls that can trigger aggressive IRS scrutiny. Avoiding these common mistakes is key to preserving your benefits and protecting yourself from legal exposure.
Misleading or Backdated Filings
As evidenced by the Gajwani case, the IRS pays close attention to paperwork accuracy and integrity. Attempting to backdate corporate status filings, residency documents, or other critical declarations can rapidly turn a tax benefit scenario into a criminal prosecution.
Poor Documentation of Residency
Insufficient evidence of physical presence in Puerto Rico is a frequent compliance mistake. If audited, you must provide precise documentation demonstrating clearly that you met residency requirements. Red flags include:
- Sporadic documentation of daily presence
- Conflicting addresses or unclear residency timeline
- Lack of consistent local transactions or connections
Timing of Capital Gains Realization
The IRS closely watches the timing of major financial transactions, especially the realization of large capital gains immediately after declaring Puerto Rican residency. To avoid suspicion:
- Establish residency clearly before triggering large asset sales.
- Seek professional tax advice before engaging in major financial events after relocation.
Inconsistencies Between Tax Filings
Any discrepancies between your U.S. federal and Puerto Rican tax returns can trigger scrutiny. Consistency is paramount—make sure your income, deductions, and sourcing are clearly and consistently reported across both filings.
Areas of Focus for IRS Audits
Based on previous IRS scrutiny, expect the following areas to be closely examined if audited:
- Sourcing of Capital Gains:
Ensure your capital gains are genuinely Puerto Rico-sourced and clearly documented. - Validity of Business Activities:
For Act 20/60 businesses, documentation of genuine commercial operations and export services is critical. - Residency Legitimacy:
Your lifestyle, financial activity, and personal ties should unquestionably support your claim of Puerto Rican residency.
Being aware of these potential pitfalls and actively working to avoid them significantly reduces your risk profile. Maintaining detailed documentation and clear communication with professional advisors further secures your compliance and peace of mind.
5. Staying on the Right Side of the Law: Practical Steps
Navigating Act 60 successfully requires thoughtful planning, meticulous documentation, and rigorous adherence to compliance rules. Fortunately, there are practical strategies you can implement to ensure you’re fully compliant—and comfortably on the right side of the law.
First, consider using technology to track your presence in Puerto Rico. Mobile apps and digital calendars can precisely record your days spent on the island, providing a reliable audit trail if ever required by the IRS.
Next, align your lifestyle clearly and genuinely with your Puerto Rican residency. Simple steps—such as obtaining a local driver’s license, registering to vote, and establishing community ties through social or local business activities—reinforce the authenticity of your connection to the island.
Most importantly, engage specialized advisors experienced specifically in Act 60 compliance. The required documentation is highly complex, demanding precision in creation, submission, and ongoing management. Amateur efforts or deficient compliance records can lead directly to severe penalties, audits, or even criminal prosecution, as vividly illustrated by the Gajwani case.
Finally, make transparency and integrity your guiding principles. Act 60 provides substantial benefits when utilized correctly, but bending the rules risks severe penalties and lasting reputational damage.
Conclusion
Puerto Rico’s Act 60 represents a powerful opportunity for significant tax savings—but it requires strict adherence to compliance. The case of Suresh Gajwani illustrates clearly that the IRS aggressively pursues abuses of these incentives, viewing intentional misrepresentation as serious criminal conduct.
To fully and safely realize Act 60 benefits, prioritize transparency, integrity, and meticulous documentation. Align your lifestyle genuinely with Puerto Rican residency, maintain consistent and accurate filings, and proactively consult with expert advisors.
Tiempo Capital specializes in advising investors who currently benefit from Act 60 or who have relocated to Puerto Rico and are interested in leveraging these incentives. With extensive experience in both U.S. and Puerto Rican tax matters, our advisors have successfully guided numerous clients through compliance requirements and tax reporting obligations. For personalized guidance and peace of mind, contact Tiempo Capital—we’re here to help you navigate these complexities, ensuring your strategy is sound, compliant, and effective.
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This material is for informational purposes only and does not constitute financial, legal, tax, or investment advice. All opinions, analyses, or strategies discussed are general in nature and may not be appropriate for all individuals or situations. Readers are encouraged to consult their own advisors regarding their specific circumstances. Investments involve risk, including the potential loss of principal, and past performance is not indicative of future results.
Sources:
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF FLORIDA (2025), CASE NO. 25-20117-CR-ALTONAGA, Document 1
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF FLORIDA (2025), CASE NO. 25-20117-CR-ALTONAGA, Document 9
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF FLORIDA (2025) Individual Charged With Filing False S Corp Election Statement, taken from Tax Notes
Government of Puerto Rico (2025), Puerto Rico’s Incentives Code, taken from https://www.investpr.org/why-puerto-rico/tax-benefits-policy/
Tax Natives, Puerto Rico Tax Incentives: Leveraging Benefits and maintaining compliance!, taken from https://taxnatives.com/puerto-rico-tax-incentives-leveraging-benefits-and-maintaining-compliance/
PRelocate (2020), Filing the Act 60 Annual Report, taken from https://relocatepuertorico.com/filing-the-act-60-annual-report/