Puerto Rico: An Overview

After years of fiscal crisis and natural disasters, Puerto Rico is charting a course defined by economic resilience, ambitious legislative reform, and a once-in-a-generation opportunity to reposition itself as a premier destination for advanced manufacturing within the United States. Formidable challenges remain, however, including from an unresolved energy sector to the continued presence of the federal fiscal oversight board.

A Steady but Fragile Recovery

Puerto Rico’s economy closed fiscal year 2025 with real GDP growth of 0.4% and a GDP at current prices of approximately USD125.8 billion. The labour market reached historic milestones: unemployment fell to 5.6%, its lowest sustained level on record, while private-sector employment climbed to 767,400 jobs, a new high. The island reported over 50,800 business establishments, and its trade surplus reached USD6.2 billion, driven by pharmaceutical exports totalling USD48.4 billion. The Puerto Rico Planning Board projects baseline real GDP growth of 0.4% for fiscal year 2026 and 0.3% for fiscal year 2027, though an optimistic scenario pegs growth as high as 2.3% and 1.0%, respectively, fuelled by reshoring, tourism, and construction investment. These figures reflect cautious optimism tempered by global uncertainty, sustained inflation, elevated energy costs, and continued demographic headwinds, as the island’s population ages.

Reshoring: Puerto Rico’s Strategic Moment

Perhaps the most consequential trend shaping the corporate landscape is the acceleration of pharmaceutical and advanced manufacturing reshoring. Given that products made in Puerto Rico are “Made in the USA” and enter the mainland tariff-free, the island is uniquely positioned to benefit from federal policies encouraging domestic production of critical goods. Governor Jenniffer González Colón issued Executive Order 2025-012 establishing a reshoring task force, giving momentum to this trend.

Amgen has committed nearly USD1 billion to expand its biologics facility in Juncos. Eli Lilly announced a USD1.2 billion investment to modernise its Carolina manufacturing site for oral GLP-1 medicines. Taiwan-based PharmaEssentia signed an investment agreement for a new facility in Toa Baja, with operations planned for 2027. At least seven additional manufacturers have opened or expanded operations since early 2025. Puerto Rico’s pitch – more than 70 FDA-approved manufacturing facilities, over 65 years of regulated production experience, a bilingual STEM-trained workforce, and a 4% corporate income tax rate under the Incentives Code (Act 60) – is attractive to companies rethinking supply chain resilience.

Tax and Incentive Reforms

The legislative landscape saw notable changes in 2025 and early 2026. Some of the key legislative changes include Act 65-2025, Act 38-2026 and Act 180-2025. Act 65-2025 amended the Puerto Rico Internal Revenue Code, the General Corporations Act, the Municipal Code and the Incentives Code to simplify tax compliance. It broadened LLC eligibility for disregarded-entity treatment regardless of the owner’s residency, raised the cash-basis accounting threshold from USD3 million to USD10 million in annual gross income, refined the “engaged in trade or business in Puerto Rico” standard to require “considerable, continuous, and regular” activity, and eliminated the annual corporate report filing requirement while preserving the related fee, among other important changes.

Act 38-2026 brought significant changes to the Individual Resident Investor programme under Act 60. The law extends the programme’s sunset from 2035 to 2055 but replaces the 0% tax rate on passive income with a 4% preferential rate for applications filed on or after 1 January 2027. Investors who submit their applications by 31 December 2026 may retain the original 0% rate.

Act 180-2025 amended the Incentives Code to limit the exemption available with respect to capital gains realised on the sale of a qualifying principal residence. To qualify:

• the seller must not be a decree holder under the Individual Resident Investor programme or its predecessor Act 22-2012;
• the property must have been the seller’s principal residence, continuously occupied for at least two of the five years preceding the sale; and
• the property may not have been rented during that period.

Special rules apply for inherited property.

Additionally, a March 2026 administrative order introduced stricter anti-abuse provisions for private equity funds under Act 60, including, without limitation, economic substance requirements, restrictions on related-party investments, and rules targeting circular capital flows. These reforms signal a maturing incentive framework that balances investment attraction with fiscal accountability.

Deal Activity

M&A transactions in Puerto Rico continue to benefit from a growing pool of deployable capital, including private funds and investor capital attracted by the Incentives Code. In this environment, private equity sponsors are increasingly active on both the buy side and the sell side across sectors such as tourism, food distribution, lending, hospitality, renewable energy, healthcare, technology and entertainment. As the market matures, sponsors are also making greater use of deal structures such as seller financing, earn-outs and equity rollovers to bridge valuation gaps and support transactions in a market where most deals involve private companies.

The Fiscal Oversight Board

Puerto Rico’s relationship with the Financial Oversight and Management Board (FOMB), established under the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) in 2016, continues to define the island’s fiscal and regulatory environment. To date, the FOMB and the government have restructured approximately 80% of Puerto Rico’s outstanding debt, reducing total liabilities from more than USD70 billion to approximately USD37 billion and saving more than USD50 billion in debt service payments.

Under PROMESA Section 209, the FOMB can terminate only after Puerto Rico achieves four consecutive years of balanced budgets under modified accrual accounting and demonstrates adequate access to credit markets at reasonable rates. While the current fiscal year’s budget could qualify as the first of those four, some estimates suggest the Board may remain in place until at least 2030. The FOMB continues to require that all legislation with fiscal impact be submitted for review before enactment and has flagged permitting reform, tax administration and agency right-sizing as areas where progress has lagged. For businesses operating in Puerto Rico, the Board’s continued oversight means fiscal discipline will shape the policy environment for the foreseeable future.

Energy Challenges

Puerto Rico’s energy sector remains one of its most significant structural challenges and a material concern for corporate clients. The Puerto Rico Electric Power Authority (PREPA)’s Title III proceedings continue, with approximately USD9 billion in bonded debt still unresolved, while broader issues relating to utility governance, debt restructuring and long-term system reform continue to shape the sector’s outlook. Despite ongoing infrastructure investment, grid reliability remains uneven, and energy costs continue to weigh on business planning and investment decisions. Federal reconstruction funding is gradually moving from planning into execution, and grid improvements are expected over the coming years. For companies operating in Puerto Rico, the sector’s persistent operational and regulatory uncertainty remains a central consideration.

Looking Ahead

Puerto Rico’s economic environment is marked by a rare convergence of opportunity and complexity. The reshoring wave, favourable tax incentives and a historically strong labour market offer compelling reasons for investment. At the same time, energy instability, the unresolved PREPA bankruptcy, demographic pressures and the regulatory overlay of the FOMB require careful navigation. The next twelve months will be critical: the trajectory of tax reform, the outcome of the LUMA litigation, and progress towards the FOMB’s exit criteria will each shape the island’s business climate for years to come. For practitioners and clients alike, Puerto Rico demands attention to a rapidly evolving legal and regulatory landscape.