Act 65-2025 (the “Act 65”), signed into law on July 17th, 2025, by Governor Jennifer González-Colón, includes an amendment to Section 1021.02 of the Puerto Rico Internal Revenue Code of 2011, as amended (“PR Code”) to exempt from the Alternative Basic Tax (“ABT”) total distributions from qualified Puerto Rico retirement plans that are subject to the preferential ten percent (10%) tax rate under Section 1081.01(b) of the PR Code. This change is effective for distributions made in tax years beginning in 2025 and thereafter.
Background on ABT for Individuals
The ABT ensures that certain types of income subject to special tax rates or exemptions remain taxed by capping the use of said preferred tax treatments. ABT must be calculated in parallel to the regular income tax, meaning that taxpayers must assess their tax liability under both sets of rules. The ABT for individuals can be as high as twenty-four percent (24%) on net income subject to ABT exceeding $250,000.
ABT Impact on Qualified Retirement Plan Trust Distributions prior to Act 65 Modifications
Under PR Code Section 1081.01, a trust forming part of an employer’s retirement plan must meet specific statutory requirements to be treated as a qualified trust. This qualification grants important tax advantages to both the trust and the plan. Such advantages extend to participants and beneficiaries as any distributions by a qualified plan are taxed at the individual level as follows:
- Ordinary distributions are taxed in the year they are received or made available, except for amounts previously taxed in Puerto Rico (and subject to certain income tax exemptions on annual annuities/periodic payments).
- Lump sum (total) distributions resulting from the separation of service or plan termination are taxed at a twenty percent (20%) rate on taxable distributions, but subject to ABT.
- If the trust is organized under Puerto Rico law or has a Puerto Rico-resident trustee acting as paying agent, and at least ten percent (10%) of the assets attributable to Puerto Rico resident participants are invested in Puerto Rico-registered investment companies, lump sum (total) distributions qualify for a reduced ten percent (10%) income tax rate, but subject to ABT.
Effect of Act 65 on Retirement Plan Distributions Subject to ABT
Act 65 modifies the ABT to allow plan participants or beneficiaries to deduct from their ABT calculation any lump sum retirement plan distribution taxed at the preferential ten percent (10%) rate. In effect, this expands participants’ ability to leverage qualified plan benefits for individuals receiving large (i.e. over $250k) lump sum distributions from Puerto Rico qualified retirement plans subject to the ten percent (10%) tax rule.
In summary, Act 65 enhances the advantages of Puerto Rico qualified retirement plans by introducing a new ABT exclusion for favorable‑rate distributions that are subject to ten percent (10%) rate, without being separately subject to a potential twenty-four percent (24%) ABT. While the full scope of future legislative activity remains evolving with new additional measures been evaluated by the Puerto Rico legislature, this development presents immediate planning opportunities. We encourage affected parties to proactively evaluate plan distributions in light of the implications of this change for their overall tax planning.
This document has been prepared for information purposes only and is not intended as and should not be relied upon as legal advice. If you have any questions or comments about the matters discussed in this notice, wish to obtain more information related thereto, or about its possible effect(s) on policy or operational matters, please contact us.