2023 Laws of Puerto Rico › TITLE SEVEN - Banking (§§ 1 — 3116) › PART VII - Other Financial Institutions (§§ 3001-3012 — 3116) › Chapter 146 - Private Equity Funds Act (§§ 3111 — 3116) › § 3114 - Election effects

(a) Income Tax.— The applicable provisions to partners of a partnership, as provided by §§ 30321 et seq. of Title 13, shall apply to investors of a Fund (including taxable investors who have not contributed money or property in exchange for proprietary interests of the Fund and who have an interest in Fund profit). The Fund shall comply with all Code provisions relating to information (except the tax filing requirement of the Fund in accordance with the provisions of this chapter) and tax withholding requirements.
(1) Fund.—
(A) Income.— Interest and dividends income derived from the Fund will be excluded from its gross income and will be exempt from any tax imposed by the Code, to the extent that such income its derived from the interests, dividends, participation in partnerships, and capital gains generated by the Fund. The Fund shall file its applicable income tax return. If the Fund generates losses, it shall complete a form informing each accredited investor of its distributive share in such losses.
(2) Accredited investors.— Accredited investors, residents of Puerto Rico, of a Fund shall be responsible of income taxes on their distributive share of Fund income, except for the EDB and the GDB which are exempt of taxation in accordance with their respective organic acts. In the case that accredited investors are nonresidents of Puerto Rico, the Fund shall withhold at source its applicable tax and shall remit it to the Department of Treasury of Puerto Rico. In both instances, the tax shall be paid according to the following rules:
(A) Income.— Income derived by accredited investors of the Fund from interest and dividends will pay an income tax to be computed using a fixed rate of ten percent (10%), to the extent that such income is derived from interests, dividends, participation in partnership, and capital gains generated by the Fund.
(B) Capital gains.— The capital gains realized by accredited investors of the Fund from Puerto Rico sources shall be completely exempt from income tax.
(C) Sale of ownership interest.— The capital gains made by investors of the Fund in the sale of their proprietary interest in the Fund will be subject to income tax at a fixed rate of five percent (5%) in the year in which the sale occurs or income is perceived. If within ninety (90) days of the sale the accredited investor reinvests the entire gross income in a PEF-PR, the capital gains will not be subject to income tax.
(D) Net capital loss.— Net capital losses, including reserves incurred by the Funds, may be taken as a deduction by accredited investors of a Fund who are Residents of Puerto Rico up to its distributive share in the Fund losses to the extent that such losses are derived from a corporation, limited liability company, partnership, foreign or domestic, which derives at least eighty percent (80%) of its gross income for the prior three (3) years period from sources within Puerto Rico or from income effectively connected or treated as effectively in accordance with the Code provisions. The losses can only be used in the following manner:
(i) Against income from other Funds to the extent that such losses are considered as capital losses at Fund level;
(ii) to reduce any capital gain generated by the accredited investor from other sources in accordance with the provisions of the Code;
(iii) losses in excess might be carried over indefinitely.
(3) General partners.—
(A) Income.— Income derived by the general partners of the Fund from interest and dividends will be subject to income tax at a fixed rate of five percent (5%) instead of being subject to any other tax provided in the Code.
(B) Capital gain.— Capital gains made by general partners or sponsors of the Fund will be subject to a fixed income tax of two point five percent (2.5%) in the taxable year in which that sale occurs instead of being subject to any other tax provided in the Code.
(4) RIA and PE-Firm.—
(A) Income.— Income derived by RIA and PE-Firm from interest and dividends derived from the Fund will be subject to income tax at a fixed rate of five percent (5%) instead of being subject to any other tax provided in the Code.
(B) Capital gain.— Capital gains made by RIA and PE-Firm of the Fund will be subject to a fixed income tax of two point five percent (2.5%) in the taxable year in which that sale occurs instead of being subject to any other tax provided in the Code.
(b) Incentive acts coordination.— The provisions of this chapter shall not be interpreted or understood as a limitation to tax treatment that the accredited investors, general partners, or a RIA and PE-Firm might obtain under the provisions of any current or future Incentive Act including the Act to Promote Export Services and the Act to Incentivize the Transfer of Investor Individuals to Puerto Rico, if and only if the applicable requirements and application process provided in the applicable acts is completed.
(c) Initial investment treatment for residents of Puerto Rico.—
Provided that after a Fund is in compliance with the investment requirements stated in § 3112 of this title, every resident of Puerto Rico who invests in:
(1) A PEF may deduct up to a maximum of thirty percent (30%) of his or her initial investment within a maximum period of ten (10) years. Provided that the maximum deduction will not exceed fifteen percent (15%) of his or her net income prior to said deduction.
(2) a PEF-PR may deduct up to a maximum of sixty percent (60%) of his or her initial investment within a maximum period of fifteen (15) years. Provided that the maximum deduction will not exceed thirty percent (30%) of his or her net income prior to said deduction.
(d) Municipal License Tax Act.—
(1) The income received by the Fund and the distributions that those entities make to their investors, shall not be considered “gross income” nor shall they be included under the definition of “volume of business” for purposes of the Municipal License Tax Act.
(2) Funds will be exempt from filling the corresponding volume of business declaration provided in the Municipal License Tax Act.
(e) Property tax.—
(1) Personal and real properties belonging to a Fund will be exempt from any property tax imposed by any municipality or by the Commonwealth of Puerto Rico.
(2) The Funds shall be exempt from filling the corresponding return provided in the Municipal Property Tax Act.
(f) Investment Company Act.— The Funds shall be exempt from compliance with the provisions of the Investment Company Act of Puerto Rico and the Puerto Rico Investment Companies Act of 2013.
History —Nov. 12, 2014, No. 185, § 5.