The United States Department of the Treasury and the Federal Internal Revenue Service (IRS) designated that 98% of Puerto Rico is a Zone of Opportunity, under the Federal Act for Work and Tax Reduction (Tax Cuts and Jobs Act). These zones were created to promote local, national and international investment, create jobs and generate economic development in disadvantaged communities.
Investors receive preferential tax treatment. They can defer taxes on any previous earnings until no later than December 31, 2026, as long as the earnings are reinvested in a Qualified Opportunity Fund (QOF), an investment vehicle created to make investments in Zones of Qualified Opportunity. According to the IRS, the proposed regulations clarify that almost all capital gains qualify for the deferral. To qualify for tax deferral, that capital must be invested in a Qualified Opportunity Fund intended to carry out an eligible activity, in an area authorized by the Treasury Department.
The QOF must have at least 90% of its assets in an Opportunity Zone. Investors who hold their QOF investment for at least 10 years may qualify to increase their base to the fair market value of the investment, on the date it was sold.
The projection is that, in the short term, the opportunity zones will generate approximately $ 600 million in new investments, jobs and benefits to the coffers of the municipal and central governments. Operations within an Opportunity Zone may include: hotels, inns, and other businesses directly related to tourism; agricultural sector development; service to facilities; malls; high-tech companies, research and manufacturing, development of residential and / or commercial properties for rent and / or sale, among other areas.
Puerto Rico has preferential treatment under this Program, since all low-income communities were automatically designated as Qualified Opportunity Zones. The governors of the United States states can only designate up to 25% of population censuses as Opportunity Zones. Puerto Rico achieved that 98% was designated a Qualified Opportunity Zone.
Puerto Rico, being classified almost entirely as an Opportunity Zone, opens up an immense world of opportunities to boost the growth of the country's economy, developing priority projects, industries, businesses and activities that generate income, contribute to socioeconomic recovery , to diversification and positive transformation of communities.
To develop the Opportunity Zones, the Government of Puerto Rico enacted on July 1, 2019, Act 21 ("Puerto Rico Economic Development Opportunity Zones Development Act"), which establishes the regulatory framework for development in Opportunity Zones on the island, under the new 2017 United States tax Act. The Act provides tax exemptions to Opportunity Zones Funds (“ZO Fund”) or entities where a ZO Fund invests (“ZO Subs”), committed with eligible investments in designated Opportunity Zones in Puerto Rico.
To enjoy the benefits, a ZO or Sub ZO Fund must become an exempt business, requesting a tax concession to obtain a Tax Exemption Decree.
- The Act applies to a ZO Fund or Sub ZO that qualifies under section 1400Z-2 of the 1986 Internal Revenue Code of the United States, as amended, and that carries out a business that is a “priority project” in an “Eligible Zone ”In Puerto Rico (“ PR-IRC ”).
- 50% of the ZO Fund must be capitalized with related funds where a deferment of capital gain is made, under the US-IRC or the Puerto Rico Internal Revenue Code of 2011, as amended.
- "Priority Project" is an industry, business or activity that generates income, which will contribute to the socio-economic recovery, diversification and transformation of a community.
- An “Eligible Zone” is an Opportunity Zone (ZO) under Section 1400Z-1 (b) (3) of the US-IRC, as defined by the United States Department of the Treasury, located in Puerto Rico and designated as such by the Priority Projects Committee in Opportunity Zones (“ZO Committee”)
- The Act establishes the ZO Committee, which must create a list of all eligible commercial activities or businesses by geographic area, which must be considered ZO Eligible Activities.
- The list will be valid for 1 year.
- Funds or ZO Subs that are interested in carrying out activities that are not included in the list, must request the ZO Committee to designate said activity or business as “eligible”.
- Business activities that qualify for tax incentives under Acts 20-2012, 27-2011, 73-2008, 74-2010, and / or 83-2010, do not qualify as an "eligible" activity and cannot obtain a decree of tax exemption under the Opportunity Zones Act.
Opportunity Zone Decree
- Tax incentives under the approved Act must be granted through a ZO Decree between the Fund or Sub ZO and the Government of Puerto Rico.
- The ZO Decree has a term of 15 years.
Tax Exemptions for holders of ZO Decrees:
- 5% contribution on net income
- 5% withholding tax on net earnings
- 100% exemption on dividends or distributions
- 25% tax exemption on municipal license, on net income earned in eligible business activities
- 25% personal and real estate tax exemption
- 25% exemption on municipal construction taxes associated with eligible business activities
- Through municipal ordinances, the municipalities could increase the tax exemption mentioned above, from 25% to 75%
Tax Credits Provided by Law
- It includes a tax credit determined according to the amount invested in the ZO Fund, which, in exchange, uses said amount to invest in an eligible business activity (“ZO Tax Credit”).
- Generally, the ZO tax credit should not exceed 5% of the contributions made with cash capital by investors to the ZO Fund. In any case, the ZO Committee could increase this limit to 25%.
- The ZO tax credit becomes available when the construction of the priority project is completed or the Fund or Sub ZO begins operations, in case a construction is not required.
- The ZO tax credit can be held indefinitely, until it is exhausted.
- Alternatively, the ZO tax credit can be sold (earnings will not be subject to income tax payments).
- The Act amended the PR-IRC to provide the same tax benefits allowed by the US-IRC to the capital gains required to be recognized for Puerto Rico taxes, as long as the investment is made in a Qualified Opportunity Fund, which qualifies as such under the US-IRC, and that it invests only in a Qualified Opportunity Zone located in Puerto Rico.
- The Act establishes a special permitting process to carry out a Priority Project.
- Act 21 ordered the creation of a Regulation to implement the provisions of Sections 6070.54-6070.69 of Act No. 60-2019, known as the "Puerto Rico Incentive Code," which repealed Act 21. However, The new approved Incentive Code adopted the provisions of Act 21, which established the regulatory framework for the development of Opportunity Zones.
To find out the provisions included in the Regulations, click here:
Under the Opportunity Zones Program, foreign investors contribute capital gains to Opportunity Zones Funds (exempt businesses that carry out an eligible activity) or invest in an exempt business that carries out an eligible activity related to tourism, manufacturing, infrastructure, renewable energy, agriculture, creative industries and service exports, among others. They also benefit from the Puerto Rico Incentive Code and expedited permitting.
On the other hand, through the incentives of Puerto Rico, the resident of the island will be able to contribute cash to the Opportunity Zone Funds.
The incentivized eligible activities are: Development of Residential Real Property; Commercial Property Development and Activities of Social Interest.
On the other hand, the Puerto Rico Internal Revenue Code offers the following benefits to investors:
- You will be taxed for 90% of the capital gain invested in the QOF, if you keep the investment in a QOF for a period of 5 years.
- You will be taxed for 85% of the capital gain invested in the QOF, if you keep the investment in a QOF for a period of 7 years
- If you keep the investment in a QOF for a period of 10 years, the profit generated by the investment in the QOF will be totally exempt from tax.
The Puerto Rico Internal Revenue Code benefits exempt businesses as follows:
- Fixed tax rate of 18.5% on eligible income
- Total exemption in the payment of dividends
- 25% exemption in the payment of patents, excise taxes and other municipal contributions. The exemption can increase up to 75%, at the discretion of the Municipality
- 25% exemption in the payment of municipal and state contributions on personal and real property. The exemption can increase up to 75%, at the discretion of the municipality.
- 25% exemption from any contribution, taxes, right, license, excise (including construction excise), on the construction of works.
- Investment credit, up to a maximum of 25%, which is transferable.
To be an Eligible Business within the Incentive Code:
- The business activity must be carried out, in its entirety, in an Eligible Zone.
- The activity carried out is not eligible for a tax exemption concession under previous incentive laws.
- The business is carried out by the Fund or an entity in which the Fund invests, under Section 1400Z-2 (d) (2) of the federal Internal Revenue Code.
The activity carried out by the business is a Priority Project in a QOZ.
The first list of Priority Projects was established in August 2019, through the
“Resolution 19-01 of the Committee of Priority Projects in Opportunity Zones” (HYPERLINK FOR THE APPEARANCE OF THE COMMERCIAL ACTIVITIES OZ DOCUMENT), attached to the Office of the Governor.
The following will be a priority:
- Development Activities (acquisition of property and construction on it, or substantial improvements to an existing property) for sale or rental of: affordable housing, as defined in Section 42 (g) of the United States Internal Revenue Code of 1982, as amended, or by the Puerto Rico Department of Housing; properties for residential or commercial use, properties for industrial use, and substantial improvements to existing projects for commercial use.
This list will be valid for at least 1 year from its publication. However, it could be amended to include a new list of commercial activities or geographic areas, considering the need for commercial activity in Puerto Rico or geographic area and the economic impact of the granting of decrees in the region.
The Priority Projects Committee also has among its main functions to establish the percentage attributable to investment credit; and authorize the approval of investment credits. The minimum eligible investment credit will be 5%.
How can you participate in the Opportunity Zones Program?
Soon you will be able to request the decree, a contract between the exempt business and the Government of Puerto Rico that contains the benefits, terms and conditions that will govern the contractual relationship. The Secretary of the DEDC has discretion to include additional terms and conditions in the decrees. The exemption period of the decree is 15 years.
The process to request the decree is as follows:
- Any person who has established or will establish an Eligible Business with a Priority Project designation by the Committee, may request a tax exemption decree before the Incentives Office, in office since January 1, 2020, in the Department of Economic Development and Commerce. The request will entail the payment of rights, according to the Regulations.
- Within 5 days of receipt of the application, the Director of the Incentive Office will send it to the Secretary of Economic Development to submit an Eligibility Report on the activity to be carried out by the Eligible Business.
- Within 5 business days, upon receipt of the Eligibility Report, the Director of the Incentive Office will send the draft decree to the concerned agencies.
- The agencies must send the Director of the Incentive Office a recommendation regarding the draft decree, within 10 days. If no recommendation is received within said period, the Director of the Incentive Office will consider that the recommendation of the agencies is favorable.
- Once the recommendations have been received, or the term for it has expired, the Director of the Incentives Office will submit the draft decree and its recommendation, for the consideration of the Secretary of Economic Development, within the following 5 days.
- The Secretary of Economic Development will issue a final determination on the approval of the requested decree, within a period not exceeding 5 days.
If the economic activity is not published by the Committee as a Project
Priorities, the petitioner may request the Committee to designate the proposed activity as a Priority Project. The Mayors of the Municipalities may appear as petitioners before the Committee. The Committee shall issue a determination within a period of 30 days, extendable for 15 days. If no determination is issued within the applicable term, the request will be deemed denied. If the request is approved, the activity will be included in an amended list of Priority Projects.
Once the decree is obtained, all exempt businesses will file Annual Reports in the Incentive Office that reflect compliance with the terms and conditions of the decree, no later than 30 days after the date prescribed by law for filing the Tax Return on Income, including extensions. Failure to comply with the presentation of the Annual Reports may lead to the imposition of administrative fines and the revocation of the decree.
On the other hand, the Department of Economic Development will circulate an Inventory of Available Properties on its website so that the private sector has the opportunity to promote its properties. To be part of this inventory you must send us an email to firstname.lastname@example.org with the following information:
- Kind of property
- Area (ft2)
- Building Height
- Land Area (m2)
- Previous use
- Cadastre Number
If you want to see the current list of available properties, click here.
With the "Opportunity Zones" Program we have more than 95% opportunities to improve Puerto Rico's economy in a holistic way, promoting the development of various economic sectors around the island; as well as development in different communities. Its purpose is to benefit merchants, workers, municipalities and the inhabitants of the communities where the new projects are located.
Take advantage of this great opportunity to boost the economic development of Puerto Rico. To learn more, email email@example.com