Puerto Rico Tax Incentives: The TCJA and other considerations

Transcription

1 Puerto Rico Tax Icetives: The TCJA ad other cosideratios February 14-15, 2019 Edgar Ríos-Médez, Esq.

2 Table of Cotets Iteratioal Tax Provisios 3 q Corporate Tax Rates ad Other Provisios 4 q Global Itagible Low Tax Icome (GILTI) 6 q Example 9 Idividual Taxpayers 12 q Icome Tax Rates 13 q Carried Iterest 14 q Example Before Tax Reform 15 q Carried Iterest, cot. 17 q Example After Tax Reform 20 q Post-TCJA: Additioal Thoughts? 24 Our Team 25 2

3 Sectio I INTERNATIONAL TAX PROVISIONS 3

4 Iteratioal Tax Provisios Corporate Tax Rates ad Other Provisios Corporate tax rate is 21%. A Cotrolled Foreig Corporatio (CFC) is a foreig corporatio if more tha 50% of the total combied votig power or value of the stock of such corporatio is owed or cosidered as owed by Uited States shareholders. A Uited States shareholder is a US perso who ows or is cosidered as owig 10% or more (by vote or value) of a ay foreig corporatio. 4

5 Iteratioal Tax Provisios Corporate Tax Rates ad Other Provisios, cot. IRC 957(C): a shareholder who is a boa fide residet of Puerto Rico is ot a US perso i relatio to a etity taxed as a corporatio orgaized i Puerto Rico if a divided received by such shareholder is treated as icome derived from sources withi Puerto Rico uder IRC 933 Therefore, a Puerto Rico corporatio is ot a CFC whe it is 50% or more owed by Puerto Rico residet (shareholders). If excluded from the CFC regime, o deemed repatriatio of icome to US residet shareholders applies. 5

6 Iteratioal Tax Provisios Global Itagible Low Tax Icome (GILTI) This provisio applies to Cotrolled Foreig Corporatios. GILTI is computed as the excess of: q the shareholder's prorata share of the CFC's et icome (after foreig taxes), over q the shareholder's prorata share of the CFC's deemed tagible icome retur (which is basically a retur equal to 10% over the corporatio's tax basis i tagible property). I the case of a service busiess, tagible property ca be very limited or oe. No GILTI applicatio if the corporatio is ot a CFC. 6

7 Iteratioal Tax Provisios Global Itagible Low Tax Icome (GILTI) With certai deductios, the effective tax rate for corporate shareholders is 10.5% up to December 31, 2025 ad % for taxable years commeced after December 31, Startig o Jauary 1, 2018, Uited States shareholder idividuals of a CFC will be subject to ordiary icome tax rates o the GILTI. Foreig tax credits available upo foreig icome tax paid with respect to GILTI, but limited to a 80%, without carry back or carry forward. A US Shareholder may have 962 electio- electio to be taxed at corporate rates o certai gross icome (related to CFCs). 7

8 Iteratioal Tax Provisios Example: Post-TCJA + GILTI Effect + 957(c) Idividual Parter 1 (PR) 50% Idividual Parter 2 (US) 50% A active Act 20 Compay has 2 parters, a PR parter (50%) ad a US parter (50%) The Compay pays its 4% icome tax rate o the active service icome Upo distributios from the Act 20 Compay: Act 20 Divided = 0% icome tax Act 20 Compay (PR) Qualified Divided q PR parter receives its distributios from the Act 20 Compay at a 0% icome tax rate Leged Idividual q US parter has a qualified divided o the distributio Etity taxed as a corporatio for US ad Puerto Rico icome tax purposes 8

9 Sectio II: INDIVIDUAL TAXPAYERS 9

10 Idividual Taxpayers Icome Tax Rates Persoal Icome Tax rates reductio after TCJA: q The highest icome tax rate applicable to idividuals was reduced from 39.6% to 37%. q Previously, the icome tax rates had 6 tax rates: 10%, 15%, 25%, 28%, 33%, 35%, ad 39.6%; q Curret Icome Tax Rates : 10%, 12%, 22%, 24%, 32%, 35%, ad 37%. 10

11 Idividual Taxpayers Carried Iterest for Services A profits iterest i a partership is ay iterest other tha a capital iterest. A profits iterest gives the holder the right to receive future profits ad appreciatio i value of assets of a partership, but does't give the holder a share of the proceeds upo the immediate liquidatio of the partership. The receipt of a capital iterest for services provided by a partership results i taxable compesatio for the recipiet. However, uder a safe harbor rule, the receipt of a profits iterest i exchage for services provided is ot a taxable evet to the recipiet if the profits iterest etitles the holder to share oly i gais ad profits geerated after the date of issuace. 11

12 Idividual Taxpayers Example: Hedge Fuds- Pre-TCJA Fud Maagers are compesated for the services redered to the fud by meas of a profit iterest. Fud Maager (US) 20% 80% Parters The receipt of the profit iterest by the Fud Maager is ot a taxable evet to the Fud Maager. The Fud ad the Maager treat the Maager as havig a partership iterest. Service Redered by Fud Maager Ivestmet Fud (DE) Share of icome/loss Accordigly, Fud Maager accouts for his or her distributive share of the Fud's icome or loss for icome tax purposes. Leged Idividuals or ay other type of taxpayer Log-term capital gai treatmet to Fud Mager through its profits iterest whe the Fuds sells capital assets held for more tha oe year. Etity taxed as a partership for PR ad US tax purposes 12

13 Idividual Taxpayers Example: Hedge Fuds- Pre-TCJA, cot. A Fud raised capital of $100MM ad sold its ivestmets held over a year for $150MM, resultig i a $50MM gai. Fud Maager (US) 20% 80% Parters The Maager had 20% carried iterest, therefore his or her distributive share of the gai is $10MM. Service Redered by Fud Maager $10MM capital gai Ivestmet Fud (DE) Share of icome/loss from the Fud The gai is taxed at a 20% log term capital gai rate, plus 3.8% et ivestmet icome tax. The Maager geerated a et after tax retur of $7.62MM. Leged Idividuals or ay other type of taxpayer Etity taxed as a partership for PR ad US tax purposes 13

14 Idividual Taxpayers Carried Iterest for Services, cot. I geeral, the Act imposes a 3-year holdig period requiremet o the sale of partership assets which affects taxpayers holdig applicable partership iterests received as maagers ad/or sposors with respect to icome allocatios iteded to be treated as log-term capital gais i relatio to the sale of specified assets. I the case the time threshold has ot bee met, the icome would be cosidered short term capital gai ad taxed at ordiary icome tax rates. Fud may use borrowig mechaism to get capital iterest istead of carried iterest. Flow-through gai/bifurcatio issue. 14

15 Idividual Taxpayers Carried Iterest for Services, cot. Applicable partership iterests: iterest i a partership held by or trasferred to the taxpayer related to the performace of [his or her] substatial services i ay applicable trade or busiess. A applicable trade or busiess is a regular activity cosistig of: q q Raisig or returig capital; ad Either ivestig i or disposig of specified assets or developig specified assets 15

16 Idividual Taxpayers Example: Hedge Fuds-Post-TCJA, cot. Fud Maager (US) Parters If the Fud sells capital assets before holdig the same for 3 years, ay realized gai allocated to the maagers holdig the profit iterest will be taxed at ordiary icome tax rates. (The US Sceario) Leged Service Redered by Fud Maager 20% 80% Ivestmet Fud (DE) Share of icome/loss from the Fud If the Fud Maager were to restructure its compesatio as a basic fee plus a cotiget fee based o certai metrics ad (i) the services were redered from Puerto Rico, (ii) usig a Puerto Rico etity ot egaged i busiess i the Uited States, ad (iii) maagers were residig i Puerto Rico, through Act 20, the et icome from services would oly suffer a 4% PR icome tax (o federal icome tax). There would be o impact o the tax treatmet of the service icome regardless of the holdig period of the uderlyig assets of the partership beig sold. (The PR Sceario) Idividuals or ay other type of taxpayer Etity taxed as a partership for PR ad US tax purposes 16

17 Idividual Taxpayers Post-TCJA: Additioal Thoughts? Fud Maager (PR) 100% Act 22 idividual? Withi the PR Sceario- additioal thoughts: Structure servicig Opportuity Zoe (OZ)fuds with o PR exus or uder the Act 20 decree, as a promoter (Promoter decree). Service Redered by Fud Maager Maager Act 20 LLC (PR) 20% 80% Compesatio Ivestmet Fud (DE) Parters Distributive share of icome/loss PR OZ fuds & IRC 933 together with a Act 22? US Taited assets subject to bifurcatio, after 10 years (of beig a boa fide residet of PR) US tait disappears ad the it ca be disposed with o US tax provided perso is a boa fide residet of PR at the time of dispositio. This is the reverse OZ, i.e., for accrued gais rather tha realized gais seekig deferral. Leged Idividuals or ay other type of taxpayer Etity taxed as a partership for PR ad US tax purposes 17

18 Sectio III: OUR TEAM 18

19 Our Team Edgar Ríos-Médez, Esq. Member (787) Mr. Ríos-Médez leads PMA s tax practice. He primarily focuses o iteratioal tax matters, iboud ad outboud corporate reorgaizatios, registered ivestmet compaies, structured ivestmet vehicles ad other complex federal, iteratioal ad Puerto Rico tax law matters. Mr. Ríos- Médez has bee active i some of the major Puerto Rico tourism related projects with respect to the egotiatio of tax icetive grats ad the sale of tourism ivestmet tax credits. I the Puerto Rico idustrial tax icetive area, Mr. Ríos- Médez has assisted cliets i the idustrial ad service sectors ad i recet times has actively participated i the egotiatio of tax icetives for cliets i the fiacial services idustry. He has requested private letter ruligs ad egotiated closig agreemets with the Puerto Rico Treasury Departmet for the Firm s cliets. Mr. Ríos-Médez has acted as tax cousel i the structurig of fiacig trasactios with borrowers located i Puerto Rico, the Baltic regio, Easter Europe ad Asia. 19

20 If you have ay questios or commets, or wish additioal iformatio regardig this presetatio, please cotact: Edgar Ríos-Médez This presetatio has bee prepared for iformatioal purposes oly. It is ot iteded as, ad does ot costitute, legal advice. It is recommeded that ay perso who reads this presetatio seek advice from their lawyer ad/or fiacial advisor before carryig out ay trasactio described here. This presetatio is protected uder the copyright laws of the Uited States ad is the property of Pietratoi Medez & Alvarez LLC. It may ot be reproduced or otherwise distributed without the express coset of Pietratoi Medez & Alvarez LLC. 20