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QOZ guidance on foreign investors, disaster relief

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Tax Hot Topics newsletter The IRS released proposed regulations (REG-121095-19) on qualified opportunity zones on April 12 that clarify disaster relief under the working capital safe harbor and offer rules for foreign investors.

Opportunity zones were created by the Tax Cuts and Jobs Act to encourage investment in specific geographic areas. Taxpayers investing in qualified opportunity finds (QOFs) can defer and even exclude capital gain if they meet certain requirements (see our prior coverage for more details). The new regulations provide both new requirements and withholding relief for foreign investors in QOFs.

The proposed regulations will not allow a “security-required person” investing in a QOF to make a gain deferral election unless an eligibility certificate is obtained, but the certificates will allow taxpayers to reduce or eliminate withholding under Sections 1445, 1446(a), or 1446(f). A “security-required person” is defined as a either a foreign person (other than a partnership) or a “specified partnership.” A specified partnership is defined using an ownership test, a “closely-held” test, and a gain or asset test.

If a security-required person obtains an eligibility certificate before the transaction giving rise to the gain, the taxpayer’s withholding requirement is reduced or eliminated. However, if a security-required person does not obtain an eligibility certificate, then the transfer would be subject to withholding. A taxpayer that does not obtain an eligibility certificate before the transfer must still obtain an eligibility certificate to make a deferral election, and may then claim a credit or refund for the amount withheld.

Security-related persons must apply to the IRS for an eligibility certificate under a process to be released in the future, but the application will include all of the following:

  • Certain information about the security-required person, and the covered transfer
  • An agreement for the deferral of tax and provision of security (Deferral Agreement)
  • An agreement with a U.S. agent
  • Acceptable security that secures the amount of the security-required gain for which the eligibility certificate is being obtained

The Deferral Agreement will require the security-required person to perform all of the following:

  • Timely file a federal income tax return and pay any tax liability due on the security-required gain for which the security-required person seeks to defer gain under Section 1400Z–2(a) when required
  • Report any security-required gain in accordance with the regulations under Section 1400Z-2
  • Provide security to the IRS with respect to any tax liability due on security-required gain for which the security-required person seeks to defer gain under Section 1400Z– 2(a)
  • Appoint a U.S. person to act as the security-required person’s limited agent for certain purposes specified in the deferral agreement

The IRS also offered additional flexibility for disaster relief under the working capital safe harbor in the final regulations. The final regulations generally offer a safe harbor allowing qualified opportunity zone businesses (QOZBs) 31 months to spend working capital if they have written plan and meet other conditions. The IRS previously offered a 24-month extension to the 31-month safe harbor period in the event of a “federally declared disaster.” The proposed regulations clarify that QOZBs may revise or replace their original written plans consistent with the 24-month extension.

The proposed regulations on eligibility certificates are proposed to apply to any covered transfer after the date that the proposed regulations are finalized and published in the Federal Register. The working capital safe harbor rules are proposed to apply to tax years beginning after the date that the proposed regulations are finalized and published in the Federal Register, but taxpayers may rely on them for tax years beginning after Dec. 31, 2019.

Contact:
Dustin Stamper
Managing Director
Washington National Tax Office
T +1 202 861 4144

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