Clarity for Private Equity Funds and New Tax Credit Refund Exchange Program

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Sweeping legislation like the Tax Incentives Code (Act 60-2019) often raises questions on possible oversights. Recently enacted Act 40-2020 tries to address some of the issues raised after the enactment of the Tax Incentives Code: the complete repeal of the Private Equity Funds Act of 2014 (Act 185-2014). This repeal left private equity funds scrambling for answers. Almost a year after the Tax Incentives Code’s approval, we have those answers.

Section 94 of Act 40-2020 established a new Private Equity Funds Act to ensure that funds created pursuant to Act 185-2014, and their investors, continue enjoying the benefits afforded to them under said Act. To achieve this, Act 40-2020 provides that Private Equity Funds & Puerto Rico Private Equity Funds in operation under a valid Act 185-2014 election as of June 30, 2019 will be grandfathered under the terms of Act 185-2014 as if the repealed never occurred.

Funds established after that date will be subject to the terms established in the Tax Incentives Code.

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Meanwhile, Act 40-2020 also amended Section 3000.01 of the Tax Incentives Code to establish a tax credit refund exchange program.

This new exchange program is applicable to tax credits awarded under the Tax Incentives Code or any previous incentives law, except those credits for purchase of products manufactured in Puerto Rico or any other credit that is not transferable.

Exempt Businesses will have the choice of giving up all or part of the tax credits awarded after June 30, 2021 in exchange for a refund of 90% of the face value of the tax credit. Meanwhile, tax credits awarded before July 1, 2021 under any previous incentives law can be exchanged for a refund of up to 85% of the face value of the tax credit.

The Secretary of the PR Treasury Department (Secretary) will have the authority to reduce the refund percentage, but at no point shall it be lower than 85% for tax credits awarded after June 30, 2021 or lower than 80% for tax credits awarder before July 1, 2021. The Secretary can use his/her authority to vary the refund percentages via Administrative Determination, Circular Letter or General Newsletter and the refund percentage determined will be valid for one year.

BDO Insight
The program effectively creates a market value reference to monetize tax credits. Note, however, that PR Treasury will refund in quarterly installments not to exceed 3 years under the established annual cap.

The annual cap of the exchange program is set at $40 million per government’s fiscal year ending June 30.

The Secretary has 60 days after the election to exchange tax credits is submitted to accept or deny, totally or in part, the proposed exchange. If the exchange is accepted, the refund will be paid in equal quarterly installments for a period no longer than 3 years. If the exchange request is denied, the Exempt Business retains the ability to use, assign, sell or otherwise transfer the tax credits as established within the Tax Incentives Code.

This exchange is available for non-refundable tax credits only if they are transferable.

Any gain realized by the Exempt Business from this type of exchange will be exempt from income and municipal license tax (“patente”).