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Puerto Rico gov signs Opportunity Zones Development Act

By on May 14, 2019

(Courtesy)

Rosselló enacts bill alongside investors at Opportunity Zone Summit

SAN JUAN – Puerto Rico Gov. Ricardo Rosselló signed Tuesday Senate Bill 1147, which establishes the regulatory framework for the development of Opportunity Zones on the island under the U.S. Tax Cuts and Jobs Act of 2017.

The Opportunity Zones created under the federal law provide tax benefits to low-income communities to achieve their economic development, the Rosselló administration said in its announcing release. Ninety-seven percent of the island was designated an Opportunity Zone, it added.

The governor signed the law after delivering a presentation at the “Puerto Rico: A Paradise of Opportunities” summit at the Puerto Rico Convention Center in San Juan, which was attended by local, national and international investors.

“From now on, Puerto Rico will benefit from the Opportunity Zones Development Act. This statute makes us the best place in the Nation to invest, since it will promote [multimillion-dollar] investments and the creation of thousands of new jobs. But above all, this measure will have a significant impact on the recovery of Puerto Rico after the passage of Hurricane Maria,” the governor said, adding, “Today, we are not only advancing towards a fairer society, but we are also providing access to capital in different areas that will allow Puerto Rico to be even more competitive.”

Investment in Opportunity Zone funds allows for the deferral of taxes on capital gains on the sale of an asset before Jan. 1, 2027, if the amount invested is equal to the profit earned. The new measure proposes an incentive framework for a 15-year period.

Generally, to qualify as an Opportunity Zone, the population must be classified as low-income communities, as defined in Section 45D(e) of the Federal Internal Revenue Code.

To “qualify as a low-income community, the applicable population census cannot have a poverty level of less than 20 percent, nor can it have an average household income that exceeds 80 percent of the median state or metropolitan area income, depending on the location of the population census,” the governor’s office explained.

During his presentation, the governor spoke to those who may have doubts about investing in Puerto Rico as the island faces fiscal challenges, has a federally created board tasked with overseeing the commonwealth’s finances, and back-to-back hurricanes slammed the island in 2017, causing billions of dollars in damage.

“First of all, I would like to say that we have decided to make some structural changes in Puerto Rico from the get go,” Rosselló said. “Since we took office, our team embarked on making critical changes from the way we operated and to the way we operate in [the] business [sector].”

The governor stressed that amendments were made to the Public Private Partnerships Authority (P3) that allow the government to be more competitive, and pointed out that a labor reform was also implemented. In addition, he said, “some of the things the government was doing had to be outsourced” to the private sector to stem “this flip of ideas and visions every four years and not having a sustainable path forward.”

The governor was referring the creation of the island’s destination marketing organization, Discover Puerto Rico, and InvestPR, to promote investment benefits and opportunities.

“If we see Puerto Rico as a destination to invest, we have to invest in our human resources,” Rosselló said, noting that his administration has carried out “robust Education Reform so Puerto Rico can have world-class education moving forward.”

Rosselló also underscored the recently signed Energy Reform, which establishes a timeline for the implementation of renewable energy on the island that includes the elimination of 20 percent of the fossil fuel use by 2022; 40 percent by 2025; and 60 percent by 2040. By 2050, the island should be using only renewable energy sources.

“Because Puerto Rico is now in a position to rebuild itself, we are going to get support from the federal government to do so,” he said. “We are going to get anywhere from $80 billion to $100 billion; we have estimated damages of around $140 billion…that is money that is going arrive here, and that takes what was a chronically ill infrastructure into a positive and new infrastructure.”

The governor spoke about the array of local incentives investors may be eligible for when investing their capital gains in Puerto Rico Opportunity Zones, which he said cover “95 to 97 percent” of the island as disadvantaged or low-income areas for which tax benefits are available to attract investment with the end-goal of development and job-creation to help jumpstart the local economy.

“So there are an ample set of benefits that are going to bring a unique set of opportunities,” he said.

Rosselló added that other initiatives are being implemented to make the island even more attractive for investments.

“We are currently in conversations with the U.S. Department of Housing and Urban Development (HUD) and with Treasury and with all of the stakeholders so that we can take part of the Community Development Block Grant (CDBG) funds that will be allocated to the island, about $400 million of those funds, and turn them into a revolving fund with low interest that would allow us to work with some of the Opportunity Zones projects,” the governor said, adding that the initiative will make Puerto Rico a very competitive “spot.”

The federal law encourages investors to reinvest capital gains, which can come from any investment, such as stocks, bonds, real estate or partnership interests. Investors must “sell their asset and realize a capital gain” and then invest in an Opportunity Zone within 180 days of receiving those gains.

Among the “key aspects” of the local law, according to statement issued by the governor’s office, include an 18.5 percent tax on the net income of an exempt business; dividend tax exemption; 25 percent exemption from patents and property taxes; and 25 percent exemption from construction taxes.

The measure also includes a “maximum investment credit of 25 percent, transferable; a credit preference system for priority projects in Opportunity Zones; and capital gains tax deferral for profits invested in a qualified opportunity fund on the Island under rules similar to those passed in the federal legislation,” reads the statement issued by the governor’s office. “There will also be tax exemption for interest earned on loans to exempt businesses; as well as a fast procedure for the evaluation and issuance of permits for exempt businesses and projects agreed in an alliance contract in accordance with Act 29-2019, as amended.”

The governor added that he expects for Puerto Rico to attract some $600 million in Opportunity Zone investments across the island.  

Regarding the measure’s approval, the government’s chief investment officer, Gerardo Portela, who attended the summit, was quoted as saying Puerto Rico “has an exceptional regulatory framework that facilitates and promotes capital investment in low-income communities,” unlike other jurisdictions, the governor’s release added.

“Puerto Rico is an American territory that has a largely bilingual and highly qualified workforce for jobs in various industries and economic areas, so this law facilitates citizens’ access to these important areas,” Portela further said.

In an aside with Caribbean Business, Portela said Opportunity Zones are a catalyst for economic development.

“We believe this is a main pillar for sustainable economic development for Puerto Rico,” Portela said.

He also said the governor wants to double down on tourism, adding, “We want tourism to represent over 10 percent of the economy.”

Among the panelists participating in the Opportunity Zones Summit were Rodrick Miller, chief executive officer of Invest Puerto Rico; and Economic Development Secretary Manuel Laboy, who is also executive director of the Puerto Rico Industrial Development Co. (Pridco).

Also attending were U.S. Treasury Department advisers Daniel Kowalski and Brad Wandt; the regional administrator of the U.S. Department of Housing and Urban Development, Denise Cleveland; the executive director of the Puerto Rico Central Office for Recovery, Reconstruction and Resiliency (COR3), Omar Marrero; as well as bankers and experts in tax law and investments.

Treasury adviser Kowalski, who was hoping to provide additional information on the Opportunity Zone incentives and encourage potential investors, explained to Caribbean Business that “any business is a prime candidate for being an Opportunity Zone in Puerto Rico in part because the vast amount of Opportunity Zones that you have; aside from some coastal properties, you can locate just about anywhere and receive the tax benefit and I think that opens a lot of doors for investment in the island.”

He said the island should ultimately benefit from the expected rise in investment.

“What you hope is that capital investment into Opportunity Zones will lead to job growth and job growth will lead to wealth creation and the job growth and wealth creation will benefit government coffers,” Kowalski said. “What you want is to encourage investment that would have not happened otherwise and that having happened otherwise is going to lead to an increase in revenue.”

Kowalski emphasized that when these new businesses make money, they will pay taxes on those earnings, and a permanent exclusion from taxable income of capital gains from the sale or exchange of an investment will be granted in an Opportunity Fund if the investment is held for at least 10 years.

“From a federal level, we do not see any impediment from investing here,” the adviser said. “And now, with the additional local incentives…that should push [local investment further],” Kowalski added.

“We appreciate the participation and support of both the United States Treasury and the Department of Housing. Their support is essential in the economic development of the Island, as well as on the success of this bill,” Rosselló said while thanking Puerto Rico’s Legislative Assembly “for the prompt approval of this administration bill,” according to his office’s release.

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