Puerto Rico Tax Incentives
Few places on earth offer a return on investment the way Puerto Rico does. With an ever-growing array of services and emerging industries, part of your success will be directly attributable to the incentives available. In order to bolster a diversified economy, the local government has created an aggressive economic and tax incentives program with the purpose of helping operations on the island become more profitable to those companies who establish themselves here.
These incentives were created to ensure Puerto Rico’s competitiveness in attracting investments and they are an opportunity for companies all over the world, particularly those dedicated to state-of-the-art technologies and added value.
Puerto Rico, officially the Commonwealth of Puerto Rico, is a self- governing, territory of the United States, located in the northeastern Caribbean, east of the Dominican Republic and west of both the US Virgin Islands and the British Virgin Islands
The government of Puerto Rico is composed of three branches: the executive, legislative, and judicial branch. The executive branch is headed by the governor. The legislative branch consists of a Legislative Assembly, made up of a Senate as its upper chamber and a House of Representatives as its lower chamber. The Senate is headed by the President of the Senate, while the House of Representatives is headed by the Speaker of the House. The governor and legislators are elected by popular vote every four years.
Puerto Rico has authority over its internal affairs unless US law is involved. The major differences between Puerto Rico and the 50 states are exemptions from some aspects of the Internal Revenue Code, its lack of voting representation, and the ineligibility of Puerto Ricans to vote in presidential elections.
The island is divided into 78 municipalities (counties/cities) with various degrees of autonomy from the central government. San Juan is the capital and most populated municipality, combined with nine other municipalities which form the San Juan Metropolitan Area. Within the 78 municipalities, 4 are considered major cities.
The island has been part of the U.S. since 1898 and those born in Puerto Rico have been citizens of the U.S. since 1917. Yet, because Puerto Rico is not a state, federal taxes do not apply generally to income generated by individuals or corporations within the Commonwealth. Puerto Rico corporations are treated for federal tax purposes as foreign corporations and are not generally subject to U.S. corporate taxes. Individual bona-fide residents of Puerto Rico are not subject to federal taxes on income derived from Puerto Rico sources. In addition, Puerto Rico has provided incentives for manufacturing operations for over four decades. Products manufactured in Puerto Rico will carry the Made in USA label.
In 2008, a new Economic Incentives Act for the Development of Puerto Rico (herein after, Act 73or Economic Incentives Act) went into effect. Also, during the year 2012, two additional laws were enacted: Act 20 and Act 22, promoting the export of services from Puerto Rico and the transfer of wealthy individuals to Puerto Rico. These new laws established a legal framework of incentives designed to stimulate the establishment and development of a wide array of ventures, among them manufacturing, social media, other internet-based operations, commercial businesses, and the export of services. In 2019, most incentives were consolidated under Act 60.
Contact us for an introduction to a top Puerto Rico Tax Consultant, who will guide you through the incentives applicable to your company.
To help you navigate this section, take a look at the tabs with overviews of Puerto Rico’s Tax Incentives.
DISCLAIMER: Remax Zone is not a financial advisor, legal counsel or CPA. The above is a consolidation of information publicly obtained for informative purposes. We recommend the investor to contact the proper professional for specific and detailed advice.
EB5 – Immigrant Investor Program
The U.S. Congress created the fifth-employment based (EB-5) immigrant visa category in 1990 for the qualified foreigner willing to invest in a business that will benefit the U.S. economy and create or save at least 10 full-time jobs.
The investment requirement is typically US $1,000,000 per foreign investor. A minimum investment of US $500,000 is accepted if the investment is made in a designated Target Employment Area, such as a rural or high unemployment area, and through a designated EB-5 Regional Center. Puerto Rico is a Target Employment Area and therefore all projects offered by Caribbean USA Economic Development Regional Center require only the minimum of $500,000 in investment by the foreign investor.
DISCLAIMER: Remax Zone is not a financial advisor, legal counsel or CPA. The above is a consolidation of information publicly obtained for informative purposes. We recommend the investor to contact the proper professional for specific and detailed advice.
Please click any of the following links for further information:
- Brief History
- General Purposes
- Individuals
- Incentives for Services and Goods Export
- Finance, Investments, and Insurances
- Visitor’s Economy
- Manufacturing
- Infrastructure and Renewable Energy
- Agribusinesses
- Creative Industries
- Entrepreneurship
- Other Industries: Strengthening Commercial, Logistic, and Tourism Transportation
Opportunity Zones in Puerto Rico
Opportunity Zones (OZ) are an economic development tool that allows people to invest in distressed areas in the United States.
98% of Puerto Rico has been designated as an OZ.
Their purpose is to spur economic growth and job creation in low-income communities while providing tax benefits to investors.
Taxpayers can invest in these zones through Qualified Opportunity Funds.
Qualified Opportunity Fund
As appearing on https://www.irs.gov/credits-deductions/businesses/opportunity-zones you can support economic development in Qualified Opportunity Zones and temporarily defer tax on eligible gains when you invest in a Qualified Opportunity Fund.
Taxpayers who invest in Qualified Opportunity Zone property through a Qualified Opportunity Fund can temporarily defer tax on the amount of eligible gains they invest.
How an Opportunity Fund Works
You can defer tax on eligible gains you invest in a Qualified Opportunity Fund until you have an inclusion event or by December 31, 2026, whichever is earlier.
Eligible gains include both capital gains and qualified 1231 gains, but only if the gains are:
- Recognized for federal income tax purposes before January 1, 2027
- Not from a transaction with a related person
In general, qualified 1231 gains are gains reported on Form 4797, Sales of Business Property.
You can transfer property other than cash as an investment in a Qualified Opportunity Fund. However, a transfer of non-cash property may result in only part of the investment being eligible for Opportunity Zone tax benefits (that is, a qualifying investment). Specifically, the amount of gain you defer is limited to the basis of the contributed property, even if you transfer a property with a greater value.
Filing Requirements
You must meet annual investor reporting requirements if you hold a qualifying investment in a Qualified Opportunity Fund at any point during the tax year. You must file Form 8997, Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments with your timely filed federal tax return (including extensions).
Timing of Investments
To defer tax on an eligible gain, you must invest in a Qualified Opportunity Fund in exchange for equity interest (not debt interest) within 180 days of realizing the gain. In general, if you don’t defer the gain, the gain would be recognized for federal income tax purposes the first day of the 180-day period.
Tax Benefit
The amount of time you hold the Qualified Opportunity Fund investment determines the tax benefit you receive. When you make an election to defer the gain, the basis in the Qualified Opportunity Fund investment becomes zero. The Qualified Opportunity Fund basis increases the longer you hold your interest in the Qualified Opportunity Fund.
Tax Benefit on Temporary Deferral
- If you hold your investment in the Qualified Opportunity Fund for at least 5 years, your basis (the amount of your investment) will increase by 10% of the deferred gain.
- If you hold your investment in the Qualified Opportunity Fund for at least 7 years, your basis (the amount of your investment) will increase by an additional 5% of the deferred gain.
Adjustment to Basis After 10 Years
- If you hold your investment in the Qualified Opportunity Fund for at least 10 years, you may be able to permanently exclude gain resulting from a qualifying investment when it is sold or exchanged.
- The exclusion occurs if you elect to increase the basis of your Qualified Opportunity Fund investment to its fair market value on the date of the sale or exchange.
How to Elect the Eligible Gain Deferral
You must invest the eligible gain in a Qualified Opportunity Fund in exchange for an equity interest in the Qualified Opportunity Fund (that is, the qualifying investment). Once you have done this, you can elect the deferral on Form 8949, Sales and Other Dispositions of Capital Assets, for the taxable year in which the gain would be recognized if you didn’t defer it. Also, complete and submit Form 8997, Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments.
To elect to defer tax on a gain if you already filed your federal income tax return, file an amended return or an Administrative Adjustment Request (AAR), as appropriate, with a completed election on Form 8949. Review the guidance provided on Form 8949 Instructions for reporting eligible gains.
Deferred Gain Inclusion
An inclusion event, in general, is an event that reduces or terminates your qualifying investment in a Qualified Opportunity Fund. Refer to Investing in Qualified Opportunity Funds – Final Regulations (TD 9889)PDF for a list of events, which includes but is not limited to sales, gifts or liquidation of the Qualified Opportunity Fund.
To determine how much deferred gain to report at the time of inclusion:
- Take the Deferred Gain or the fair market value of the Qualified Opportunity Fund Investment, whichever is less
- Subtract the basis in the Qualified Opportunity Fund Investment
- Use the total as the Reportable Deferred Gain
Investment Basis Considerations
If you sold or exchanged your investment in a Qualified Opportunity Fund during the tax year, you must report the amount of gain or loss. To do this, file Form 8949, Sales and Other Dispositions of Capital Assets.
You need to know your basis to figure any gain or loss on the sale or other disposition of the property. When you elect to defer an eligible gain and invest in a Qualified Opportunity Fund, the basis in the Qualified Opportunity Fund investment is zero plus the 5 to 7-year basis adjustments, if applicable, and all other allowable increases and decreases.
You must keep accurate records that show the basis and, if applicable, adjusted basis of your property.
Find more information on tax rules that apply when disposing of a property in Sales and Others Dispositions of Assets, Publication 544.
Certify and Maintain a Qualified Opportunity Fund
Find eligibility and filing requirements to certify and maintain a Qualified Opportunity Fund.
A Qualified Opportunity Fund is an investment vehicle that is organized as a corporation or partnership for the purpose of investing in Qualified Opportunity Zone property (other than another Qualified Opportunity Fund).
To certify and maintain a Qualified Opportunity Fund, an entity must:
- File a federal income tax return as a partnership, corporation, or LLC that is treated as a partnership or corporation;
- Be organized for the purpose of investing in Qualified Opportunity Zone property under the laws in one of the 50 states, the District of Columbia, a U.S. possession, or a federally recognized Indian tribal government; and
- Hold 90% of its assets in Qualified Opportunity Zone property.
Filing Requirements
To certify and maintain as a Qualified Opportunity Fund, the entity must annually file Form 8996, Qualified Opportunity Fund with the eligible partnership or corporation federal tax return. You must file Form 8996 by the due date of the tax return (including extensions).
Form 8996 is used to:
- Certify the corporation or partnership is organized to invest in Qualified Opportunity Zone property;
- Report that it meets the 90% investment standard of section 1400Z-2; and
- Figure the penalty if it fails to meet the 90% investment standard.
Meeting the 90% Investment Standard
A Qualified Opportunity Fund must satisfy the standard of investing 90% of its assets in Qualified Opportunity Zone property. This is determined by the average of the percentage of Qualified Opportunity Zone property held in the Qualified Opportunity Fund as measured on:
- The last day of the first 6-month period of the tax year of the Qualified Opportunity Fund, and
- The last day of the tax year of the Qualified Opportunity Fund.
Reporting Disposal of Equity Interest
You must report all disposal (or disposition) of equity interest, by a partner or shareholder, in a Qualified Opportunity Fund. This includes any disposal of the investment (whether or not it is for consideration), including by gift or inheritance.
To report disposal of equity interest:
- Check ‘Yes’ on Line 5, Part 1 of Form 8996, Qualified Opportunity Fund and attach a statement with each investor’s name, date of the disposal, and the interest they disposed, and
- Report each disposition on a separate Form 1099-B, Proceeds from Broker and Barter Exchange Transactions.
What is a Qualified Opportunity Zone Property?
A Qualified Opportunity Zone property means Qualified Opportunity Zone stock, a Qualified Opportunity Zone partnership interest, and Qualified Opportunity Zone business property. Find detailed definitions for each in instructions for Form 8996.
Any Qualified Opportunity Zone stock or Qualified Opportunity Zone partnership interests used to satisfy the 90% investment standard must be an entity that satisfies section 1400Z-2(d)(3)—that is, that the entity is a Qualified Opportunity Zone business. The Qualified Opportunity Zone business must provide sufficient information to the Qualified Opportunity Fund to show that they meet the requirements, otherwise the Qualified Opportunity Fund may be subject to penalties.
Meeting Qualified Opportunity Zone Business Property Requirements
Tangible property is Qualified Opportunity Zone business property if used in a trade or business and meets the following requirements:
- Timing of acquisition: Property was acquired by purchase after December 31, 2017.
- Asset type – original or improved: Property must be originally used in the Qualified Opportunity Zone or substantially improved. Property is original use on the date first placed in service in the Qualified Opportunity Zone for purposes of depreciation or amortization. Used tangible property satisfies the original use requirement if the property has not been previously placed in service in the qualified opportunity zone.
- Location in a Qualified Opportunity Zone requirements: Property is in a Qualified Opportunity Zone for substantially all the time held.
Income Tests
A Qualified Opportunity Zone business must earn at least 50% of its gross income from business activities within a Qualified Opportunity Zone. It must do so for each taxable year. The regulations provide four safe harbors that a business may use to meet this test. These safe harbors are the:
- Hours-of-services-received test.
- Amounts-paid-for-services test.
- Necessary-tangible-property-and-business-functions test.
- Facts and circumstance test.
Frequently Asked Questions
- Opportunity Zones Frequently Asked Questions: Investors
- Opportunity Zones Frequently Asked Questions: Qualified Opportunity Funds
Forms and Instructions
- Form 8996, Qualified Opportunity Fund
- Form 1099-B, Proceeds from Broker and Barter Exchange Transactions
- Form 4797, Sales of Business Property
- Form 8949, Sales and Other Dispositions of Capital Assets
- Form 8997, Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments
- Sales and Other Dispositions of Assets, Publication 544
Regulations and Guidance
All information as appearing on https://www.irs.gov/credits-deductions/businesses/opportunity-zones
Related Links:
Invest in a Qualified Opportunity Fund
Qualified Opportunity Zone Property?
DISCLAIMER: Remax Zone is not a financial advisor, legal counsel or CPA. The above is a consolidation of information publicly obtained for informative purposes. We do not assume any responsibility for the contents of, or the consequences of using their content. We recommend the investor to contact the proper professionals in law and accounting for specific and detailed advice. @2023
HOW 1031 EXCHANGES WORK IN PUERTO RICO
POSTED: AUGUST 21, 2018
POSTED BY: TRAVIS LYNK
LAST REVIEWED: MAY 21, 2021
This is a guest post by Dave Foster of the1031investor.com
How 1031 Exchanges Work in Puerto Rico
The United States encompasses quite a few bits of land around the world. From the U.S. Virgin Islands in the Caribbean to Guam in Micronesia, American soil stretches far. But how far around the world can a 1031 real estate exchange go?
Where do 1031 exchanges work?
The Northern Marianas, Guam, and the U.S. Virgin Islands are all listed as viable locations to carry out a U.S. to U.S. 1031 exchange thanks to a series of government treaty interpretations and regulations last updated in 2005. However, Puerto Rico is not included on this list of coordinated territories. Meaning that while Puerto Rico is most certainly a United States Territory, you cannot carry out a 1031 exchange selling within the 50 United States and purchasing there.
While this might be disappointing for an investor eying Puerto Rico as a potential place for investment, there may be alternative ways to get the most out of investing in the islands.
Other options for Puerto Rico
Of course, an investor could simply decide to forgo the tax deferral of the 1031 exchange for a potentially more lucrative offshore opportunity. Common wisdom is to not let the “tax tail wag the dog.” In other words, don’t forgo greater potential returns simply to save less money come tax season.
However, there are also a couple of ways to have your tax deferral cake and eat it too. For someone desiring to keep the tax deferral inside their 1031 activity, it is still possible to complete a 1031 domestically and then refinance to pull cash out to invest in Puerto Rico. Proceeds from a cash-out refinance are not taxable. All tax would still be deferred inside the 1031 and the cash generated is now free to be deployed wherever the investor desires.
Another option that is now available is to use the cash to invest in something called a “Qualified Opportunity Zone.” Qualified Opportunity Zones were created recently as part of the Tax Cuts and Jobs Act bill of December 22, 2017. Established to stimulate community development, the zones are set up to attract long-term investors with alluring tax benefits. Investments in areas of states that have been deemed economically distressed will be granted a new tax break that lets investors reduce, defer, and potentially eliminate capital gains taxes with investments into Opportunity Funds. While some of the tax benefits are available to investors immediately, Opportunity Zones are designed to encourage investors to stay long term. Investors that remain a full ten years in an Opportunity Zone will receive the most tax incentives.
To qualify, an area must have at least a 20% poverty rate to be an Opportunity Zone, and the average income within the zone must be lower than 80% of the state’s median income. While states have a limited number of areas that may be classified as an Opportunity Zone, the whole of the islands of Puerto Rico is designated as a Qualified Opportunity Zone. This means that any investment in Puerto Rico can now be a tax-free activity for those who keep their capital there using the structure of the Qualified Opportunity Zone.
Investors can defer taxes on prior gains until at least December 31, 2026, as long as the gain is then reinvested in a Qualified Opportunity Fund.
Regulations and interpretations are being issued almost weekly, including guidance on elimination and not just deferral of the capital gain from investing in a Qualified Opportunity Zone. Stay tuned – Utilizing Opportunity Zones may be the next great way to maximize one’s real estate investing while having a positive impact on communities in need.
DISCLAIMER: Remax Zone is not a financial advisor, legal counsel or CPA. The above is a consolidation of information publicly obtained for informative purposes. We do not assume any responsibility for the contents of, or the consequences of using their content. We recommend the investor to contact the proper professionals in law and accounting for specific and detailed advice. @2023
