Opportunity Zone Magazine Volume 1, Issue 3 - Page 73

PUERTO RICO’S RARE POSITION IN THE OZ SPACE
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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.
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