On April 14, 2021, the Department of Treasury (“Treasury”) released proposed regulations (the “Proposed Regulations”) that, if adopted, would allow flexibility for qualified opportunity zone businesses (“QOZBs”) to revise or replace their original written plans for working capital safe harbor compliance located in an opportunity zone that has been affected by a federally-declared disaster including the ongoing novel coronavirus pandemic (“COVID-19”). Further, the Proposed Regulations establish requirements for foreign persons and foreign-owned partnerships to reduce or eliminate withholding under Internal Revenue Code sections 1445, 1446(a), and 1446(f) (“FIRPTA Withholding”). Comments are due on the Proposed Regulations by June 11, 2021.
Working Capital Safe Harbor Plans
The Proposed Regulations would permit QOZBs to revise or replace their original written plans, so long as the remaining working capital assets are expended within the originally-required 31-month period, increased by up to 24 additional months provided in response to the federally-declared disaster. The Proposed Regulations state that the working capital plan modification provision will apply to taxable years beginning after the date that the Proposed Regulations are published as final Treasury regulations in the Federal Register, but a taxpayer may rely on the provision for taxable years beginning after December 31, 2019. This guidance should protect all Qualified Opportunity Funds and QOZBs that were forced to pivot to during the COVID-19 pandemic.
Foreign Investments in Qualified Opportunity Funds
At the outset, Treasury notes that the existing regulations do not coordinate the deferral election with the FIRPTA Withholding rules and, in connection with deferred gain, the FIRPTA Withholding does not serve its intended purpose to ensure that the substantive tax is collected. The Proposed Regulations provide that certain foreign persons and certain foreign-owned partnerships investing gain from a transfer subject to FIRPTA Withholding may not make a deferral election unless they obtain an “eligibility certificate” with respect to that gain by the date on which the deferral election is filed with the IRS. If an eligibility certificate is obtained, the FIRPTA Withholding is reduced or eliminated; otherwise, the transfer is subject to normal FIRPTA Withholding. An eligibility certificate will be issued for a permitted deferral amount and, if security is provided in an amount equal to the “maximum security amount,” then the permitted deferral amount is the total amount of the gain.
To obtain an eligibility certificate, foreign persons and foreign-owned partnerships must submit an application to the IRS. The application must generally include the following: (i) certain information about the foreign person and the covered transfer; (ii) an agreement for the deferral of tax and provision of security (a “Deferral Agreement”); (iii) an agreement with a US agent; and (iv) acceptable security (such as an irrevocable standby letter of credit issued by a US bank) that secures the amount of the gain for which the eligibility certificate is being obtained. The Deferral Agreement will require the foreign persons and foreign-owned partnerships to: (a) timely file a Federal income tax return and pay any tax liability due on the gain when required; (b) report any gain in accordance with the Treasury regulations under Code section 1400Z-2; (c) provide security to the IRS with respect to any tax liability due on gain; and (d) appoint a US person to act as the foreign person’s or foreign-owned partnership’s limited agent for certain purposes specified in the Deferral Agreement. The Proposed Regulations state that taxpayers should not submit applications for eligibility certificates before the date that the Proposed Regulations are published as final Treasury regulations in the Federal Register, and any applications submitted before such date will not be processed by the IRS.