PUERTO RICO Law and Practice Contributed by: Miguel E Otero-Sobrino and Alexis R González-Pagani, Ferraiuoli LLC
1. Transaction Activity 1.1 Private Equity Transactions and M&A Deals in General The market for private equity has continued its rapid growth in Puerto Rico, with investors, buyers and lenders eager to put their capital to work in various sectors and industries. The volume of private equity- related transactions have kept steadily growing and accelerating for many reasons, including substantial demand among mid-sized and developed businesses looking to expand into new markets; the limited supply of local banks; resilient business and asset valuations; and industry acceptance of the use of private equity funds (PEFs) in various transaction types, phasing out the more traditional financing structures. Private equity firms and venture capital funds continue carrying out fast-tracked acquisitions and exits, either accelerating long-term strategies to gain market share and growth or in response to the fast-paced market. In a fairly short period of time, the evolution of the private equity model in Puerto Rico has created a new engine for M&A transactional work, which includes the restructuring of existing and developed business - es. This continuous development of the local private equity framework has underscored the deal-making capacity that private equity firms bring to the table. Recently, banks in Puerto Rico have begun integrating themselves into transactions involving PEFs, provid - ing capital to the funds or the fund sponsors. 1.2 Market Activity and Impact of Macro- Economic Factors The commercial and residential real estate, lending and credit, entertainment, auto, marine, alternative assets (ie, digital and physical collectibles), food and food technology and logistics, tourism and hospitality, technology, renewable energy, hospitality and lodg - ing sectors continued to show significant activity and steady acceleration during 2023 and 2024. PEFs have also received a lot of attention from indus - try leaders, including the banking sector, with both seasoned and new investors showing interest in these types of investment vehicles and being open to test - ing the market. This fundraising momentum is likely to continue into the next year, as well-established play -
ers are planning additional capital raises and new pri - vate equity firms are opening. The sustained increase in activity has required local regulatory agencies to hire numerous personnel to better manage the increase in volume of the new Puerto Rico private equity funds (PR-PEFs) and PEFs currently being organised, aid the implementation and monitoring of existing regulations, and ensure the proper operation of these new investment vehicles. 2. Private Equity Developments 2.1 Impact of Legal Developments on Funds US citizens are generally subject to federal taxation on their worldwide income. The applicable rates vary depending on the nature of the income being gener - ated. US citizens can be subject to rates of up to: • 20% in the case of long-term capital gains; and • 37% in the case of ordinary income. However, US citizens that are also bona fide residents of Puerto Rico are allowed to exclude from federal taxation all their income, be it ordinary income, inter - est, dividends or capital gains that are derived from sources within Puerto Rico (the “933 Exclusion”). The 933 Exclusion did not historically represent a significant tax-saving opportunity for individuals that became Puerto Rico residents, since Puerto Rico resi - dents are subject to worldwide taxation in Puerto Rico at rates of: • 10% to 24% in the case of long-term capital gains; and • 33% in the case of ordinary income. However, the Puerto Rico government has enacted various laws that provide preferential tax rates in the hopes of attracting individual and businesses to Puerto Rico. Under Act No 60 of 2019, known as the Puerto Rico Incentives Code (as amended) (the “Incentives Code”), the law that covers the vast major - ity of the incentives in Puerto Rico provides that a PEF that meets various requirements can obtain a tax grant and Transactions The 933 Exclusion
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