PUERTO RICO Law and Practice Contributed by: Miguel E Otero-Sobrino and Alexis R González-Pagani, Ferraiuoli LLC
services to its owners. If the dividend is received by an individual or entity that is not a resident of Puerto Rico, then the recipient may be subject to taxation on said dividend. The terms of the exemption provided to the entity under the Incentives Code is covered under a con - tract between the government of Puerto Rico and the entity that requested the benefits. The initial term of the benefits under the Incentives Code is 15 years, which can be extended for an additional 15 years at the discretion of the government of Puerto Rico. Relocation to Puerto Rico Furthermore, under a separate section of the Incen - tives Code, an exemption from Puerto Rico-sourced passive income (including interest and dividends that flow through the fund) can be obtained by individuals who relocate to Puerto Rico and become residents thereof. This includes capital gains, interest and divi - dends. The provisions of the Incentives Code that grant these benefits are tied into the 933 Exemption, the sourcing rules of the US Internal Revenue Code (IRC) and benefits offered under the Incentives Code. For those individuals that use this section of the Incen - tives Code, their capital gains, interest and dividends are subject to 100% exemption from Puerto Rico tax - es. Therefore, individuals that combine the use of the PR-PEF and the individual tax incentives described herein would enjoy the benefits of the deduction but also exemption from any capital gains, interest, and dividends generated by the fund. Investors can greatly benefit from the interplay of these rules. 3. Regulatory Framework 3.1 Primary Regulators and Regulatory Issues PEFs, venture capital funds, investment managers and their investment advisers organised under the laws of Puerto Rico and/or doing business in the country are subject to its laws and regulations, the supervision of the local regulator, the Office of the Commissioner of Financial Institutions of Puerto Rico (OCIF), the laws and regulations of the USA, all appli - cable rules and regulations promulgated by the Secu - rities and Exchange Commission (SEC) and, in some
instances, the Model Rules of North American Securi - ties Administrators Association (NASAA), as imposed by the OCIF. Private equity-backed buyers usually need to comply with the provisions set out in Act No 77 of 1964, as amended, known as the Puerto Rico Anti-Monopolistic Act (“Act 77-1964”). Act 77-1964 regulates unlawful mergers and business practices, generally to promote fair competition for the benefit of consumers in an open market economy. Act 77-1964 specifically states that it is unlawful to sell, contract to sell, offer to sell or participate in any step of a sale with the purpose of destroying competition or eliminating a competitor located in Puerto Rico. The Puerto Rico Department of Justice Office of Monopolistic Affairs (OMA) is authorised to investigate and initiate legal action to protect free competition practices in accordance with the Puerto Rico Anti - trust Act, which was enacted to regulate any unlawful restraints of trade or commerce and exempts the legal regulation of public utilities, insurance companies and any other enterprises or entities subject to special regulation by the government of Puerto Rico or of the USA. Under the Puerto Rico Antitrust Act, similar to the federal antitrust laws, a contract, combination in the form of trust or otherwise, or conspiracy that “unreasonably restrains trade or commerce in Puerto Rico” is illegal. With regard to M&A, the Puerto Rico Antitrust Act states that it will be unlawful if the effect of the acquisition may be to “substantially lessen competition, or to tend to create a monopoly”. These antitrust regulations will generally apply to business combinations and private equity-backed buyers. In addition, if the private equity firm or venture capi - tal fund enjoys a preferential tax treatment under the Incentives Code, it will be subject to the oversight of the Office of Incentives for Businesses in Puerto Rico (OI) and the Puerto Rico Treasury Department. Furthermore, depending on whether or not it relies on an exception from registration under SEC Rule 203-1 (l) or 203-1 (m), there are different types of limitations on the type of portfolio company acquisitions that the entity can undertake and/or the amount of leverage it can assume.
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