Opportunity Zone Magazine Volume 1, Issue 3 - Page 73

PUERTO RICO’S RARE POSITION IN THE OZ SPACE 73 an exception based on where the QOF and the invested in entities are organized: 3 • A QOF organized in a possession and not in one of the 50 States or DC will be considered domestic only it is organized for the investment in qualified opportunity zone property that relate to a trade or business operated in the possession in which it is organized. 4 • If an entity is organized in a possession but not in one of the 50 states or DC, it will satisfy the domestic requirement if it only conducts a qualified opportunity zone business in the possession it was organized. 5 For these purposes, a possession is defined as any jurisdiction other than the 50 states and DC where a designated qualified OZ exists. Consequently, QOFs and entities organized in Puerto Rico are eligible to participate in the OZ program. A STRONG TAX INCENTIVES PROGRAM For many decades, Puerto Rico’s robust and well-established set of tax incentives programs, has attracted the establishment of businesses in several industries like manufacturing, tourism, research and development, and services, to mention a few. On July 1, 2019, all these incentives laws were collected in a single document known as the “Puerto Rico Incentives Code.” 7 The different incentives were grouped by the economy segments or industries they target: individuals; export of goods and services; financial and insurance services; visitors’ economy; manufacturing (including R&D); infrastructure (green energy and housing); agriculture; creative industries; entrepreneurship; and priority projects in OZs. HOW ARE OZs IN PUERTO RICO DESIGNATED? While states and other possessions were able to propose for designation as OZs up to 25% of their low-income census tracts, Puerto Rico, by disposition of law, was granted designation for 100% of its low-income census tracts. 1 Pursuant to this, Puerto Rico has over 800 designated OZs. Therefore, almost 100% of the island qualifies for OZ investments. And even though the law requires that a Qualified Opportunity Fund (QOF) and the corporations and partnerships in which the QOF invests must be domestic entities, the term “domestic” when applied to a corporation or partnership means created or organized in the United States or under the law of the United States or of any state unless, in the case of a partnership, the Secretary provides otherwise by regulations, 2 and as explained above, entities organized in Puerto Rico are foreign for U.S. tax purposes. The first set of proposed regulations issued in October 2018 established In general, an eligible business (certain businesses like PYMES, Priority Projects and agricultural may enjoy different rates) will benefit of a flat 4% income tax rate on qualified income, 50% exemption on municipal license taxes, 75% exemption on real and personal property taxes, and distributions made by the eligible business are 100% exempt of Puerto Rico income taxes (see further below for the specific benefits applicable to priority projects.) The benefits are formalized by entering into a contract type of agreement with the government of Puerto Rico and substantiated by a 15-year grant that may be extended for 15 additional years. In addition, and depending on the industry, the business and or its investors may obtain an investment tax credit that they may use against their tax liability or may sell or transfer. Examples of the investment tax credits are those granted to priority projects, tourism projects and film projects. The credits, in general are not reimbursable but may be sold, ceded or transferred. When sold, the proceeds are not taxable to the seller and the discount on the sales price is not taxable to the buyer. OPPORTUNITYZONE.COM