How Founders Can Exit A Company Tax-Free Using Puerto Rico Act 60

For many founders, the largest tax event is not annual income. It is the exit.

Selling a company, taking partial liquidity, or completing a major transaction can trigger federal and state taxes on capital gains that can reach 20% or more. In some cases, the total burden is much higher when other factors are included. But there is now a powerful strategy that can reduce or eliminate tax on certain gains. That strategy involves relocating to Puerto Rico under Act 60.

When executed correctly, this approach can deliver a 0% tax rate on post-move capital gains. But, when done incorrectly, the expected benefit may not apply.

This guide breaks down how it works, where founders commonly stumble, and how to build a defensible position with LumaLex Law.

How Puerto Rico Treats Capital Gains

Puerto Rico operates under a different tax system than the mainland United States.

Under Act 60, long-term capital gains that accrue after a person becomes a Puerto Rico resident may be taxed at 0%.

This applies to certain types of assets, including:

Stock in a company
Ownership interests in LLCs
Digital assets such as cryptocurrency

The key limitation is often misunderstood as only post-move appreciation qualifies. Gains earned before relocation remain subject to U.S. tax.

Pre-Move vs Post-Move Gains

The distinction between pre-move and post-move gains is central to this strategy.

If a founder builds a company while living in the United States, a portion of the value is created before relocation. That portion is generally subject to U.S. tax.

Here’s an example of how this works:

Founder builds company from $0 to $10M valuation while living on U.S. mainland
Founded then moves to Puerto Rico with the business
Company later sells for $50M

In this scenario:

Pre-Move: The first $10 million of appreciation would be taxable in the United States
Post-Move: The remaining $40 million may qualify for Puerto Rico tax treatment if all requirements are met

Timing is everything. Moving after most value creation limits the benefit dramatically.

The 5 Steps to Execute This Strategy

Step One: Establish Bona Fide Puerto Rico Residency

Before any tax benefit applies, a founder must qualify as a bona fide resident of Puerto Rico.

This requires meeting three separate tests. The presence test is often the most discussed and generally requires spending at least 183 days in Puerto Rico during the year. The tax home test focuses on where a person’s main place of business is located, while the closer connection test evaluates where personal and economic ties are strongest.

The Internal Revenue Service (IRS) may review where:

The founder lives
Family members are located
Bank accounts and financial relationships exist
Business decisions are made

A founder who meets the day count but maintains stronger ties to the mainland may still fail to qualify. If residency is not properly established, the tax strategy will not be effective.

Step Two: Move Before the Exit Is Underway

Many founders consider moving after a deal becomes likely. At that stage, there may already be:

A signed letter of intent
Active negotiations with a buyer
A clear plan for sale

If the exit strategy is already in motion, the IRS may argue that the gain was earned before the move. This can limit or eliminate the benefit. The stronger position is to relocate before the exit becomes foreseeable. This creates a clearer separation between pre-move and post-move appreciation. Planning early simply gives you more flexibility.

Step Three: Align Business Structure With the Strategy

The structure of the company directly affects how gains are treated. Outcomes can vary depending on whether the founder owns stock in a corporation, operates through an LLC, and how income is generated and reported.

Key questions typically include:

Where the company is managed and controlled
Where the value of the business is created
How income is sourced

If the IRS determines that income remains connected to the mainland United States, the anticipated tax treatment may not apply. In some cases, founders may need to adjust their business structure prior to an exit, which should be done carefully and with a clear understanding of the applicable rules.

Step Four: Know What Qualifies for Capital Gains Treatment

Not all proceeds from a transaction are treated as capital gains. Puerto Rico tax benefits generally apply to gains from the sale of assets. This includes the sale of stock or ownership interests. Income like salary or wages, consulting payments, earnouts tied to future services, and deferred compensation may be taxed as ordinary income rather than capital gains.

That is why deal structuring matters so much. If part of the transaction is tied to ongoing work, it may not qualify for the same tax treatment.

Step Five: Build a Defensible Position

Puerto Rico tax strategies can involve large amounts of money. As a result, they may receive closer review from the IRS. A strong position requires clear documentation and consistent reporting.

Founders should be prepared to show:

Proof of residency and presence in Puerto Rico
Separation between pre-move and post-move gains
Consistent tax filings across jurisdictions
Alignment between business activity and reported income

This is not just about claiming a tax benefit, but about being able to support your claim if it is reviewed.

Common Mistakes Founders Make

Many founders approach this strategy with incomplete information. Common mistakes include:

Moving after a deal is already underway
Failing to separate pre-move and post-move gains
Maintaining strong ties to the mainland United States
Relying on general advice instead of informative legal guidance
Structuring a deal in a way that converts capital gains into ordinary income

Each of these issues can reduce the expected benefit. In some cases, they can remove it entirely.

Why Early Planning Matters

Puerto Rico offers real tax advantages, but it’s not a last-minute play. The best outcomes come from multi-year residency planning, pre-exit business restructuring, and deal terms optimized for tax treatment.

At LumaLex Law, we’re here to make sure you don’t make the same mistakes as countless others. We can help you structure deals and maintain compliance across all areas of your business. Contact us today to see how we can help.

How LumaLex Law Helps Founders

At LumaLex Law, we work with founders and high-income entrepreneurs who are planning for liquidity events. We help clients:

Evaluate Puerto Rico residency strategies
Structure entities for tax alignment
Plan for pre-exit and post-exit scenarios
Review transaction terms for tax treatment
Prepare for potential IRS scrutiny

Our focus is on practical planning that reflects how deals actually happen. A company exit can change a founder’s financial position in a single transaction. The decisions made before that event can affect how much of that value is kept. Puerto Rico can be part of a strong tax strategy, but it requires planning and execution.

If you are considering an exit and want to understand how this approach may apply to your situation, LumaLex Law can help you evaluate your options and plan the next steps.

Contact LumaLex Law to schedule a confidential consultation.

Frequently Asked Questions About Puerto Rico Exit Strategies

Can a founder really pay 0% tax on an exit?

Yes, it is possible for certain post-move capital gains to qualify for a 0% tax rate under Puerto Rico law. This depends on meeting residency and structuring requirements.