Puerto Rico gov sends legislation to enable Opportunity Zones
SAN JUAN – Puerto Rico Gov. Ricardo Rosselló sent a bill to be introduced in the island’s Legislative Assembly for the establishment of preferential tax treatment for new investments as part of the federal Opportunity Zones program for economically distressed communities.
A Qualified Opportunity Fund is an investment vehicle that is set up as either a partnership or corporation for investing in eligible property that is located in a Qualified Opportunity Zone, where at least 90 percent of its assets must be must held.
Investors “can defer tax on any prior gains invested in a Qualified Opportunity Fund (QOF) until the earlier of the date on which the investment in a QOF is sold or exchanged, or December 31, 2026,” according to the Internal Revenue Service (IRS). “If the QOF investment is held for longer than 5 years, there is a 10% exclusion of the deferred gain. If held for more than 7 years, the 10% becomes 15%.”
In addition, if the investor holds the investment in the Opportunity Fund for at least 10 years, the investor is eligible for “an increase in basis of the QOF investment equal to its fair market value on the date that the QOF investment is sold or exchanged,” the IRS explains on its website.
“The federal Tax Reform introduced new rules on the taxation of capital gains in a Qualified Opportunity Fund. With this law, we promote a more favorable environment to attract private investment that establishes qualified opportunity zones,” the governor, who is currently in Toronto, said in a release issued by his office, La Fortaleza.
Puerto Rico has preferential treatment under the program because all low-income communities were designated as Qualified Opportunity Zones. State governors can designate up to 25 percent of census tracts that either have poverty rates of at least 20 percent or median family incomes of no more than 80 percent of statewide or metropolitan area family income.
The governor said that efforts carried out with Resident Commissioner Jennifer González resulted in 95 percent of Puerto Rico being designated as a qualified Opportunity Zone.
“This is one of the best economic development tools we count on and we will maximize it, offering incentives that promote private investment. For this, we have to introduce this piece of legislation in order to establish the program in Puerto Rico,” Rosselló Nevares said.
The bill proposes an incentives framework for a period of 15 years, similar to other incentives already offered in Puerto Rico.
Among those proposed are a 20 percent tax on the net income of an exempt business; exempt-interest dividends; partial exemption in license fees and property taxes; 100 percent exemption from construction taxes; and the creation of a transferable investment credit of up to 15 percent for Priority Projects.
The bill also provides deferred capital gains taxation for residents of Puerto Rico who invest in a qualified Opportunity Fund on the island, as well as a tax exemption for interest accrued on loans to exempt businesses.
The bill would also provide an expedited permitting process for exempt businesses and public-private-partnership projects in accordance with Act 29 of 2009 (APPP).
“We have already seen great interest from the private sector throughout the United States to make use of this tool and we cannot let Puerto Rico stay out, as it is the most benefited area with the designation. We estimate that, through the opportunity zones, we have the potential to inject more than $600 million in new investments into the local economy,” the governor added.