Qualified Opportunity Funds: New Proposed Regulations for Foreign Investors

May 18, 2021

Let’s Schedule a Compliance Check- up For Your QOF and/ or QOZB In Regard to Semi-annual Testing Coming Up on June 30, 2021.

Just a quick reminder that IRS extensions of deadlines for QOFs and their investors are expiring soon so we recommend getting an early start reviewing your compliance with the different tests that apply to QOFs and QOZBs.  Please contact us to schedule time to review compliance with the June 30 semi-annual required testing.

New Proposed Regulations Issued for Qualified Opportunity Funds and Investors

The Treasury Department recently issued proposed regulations that provide flexibility for working capital safe harbor plans and requirements for certain foreign persons and certain foreign-owned partnerships investing in QOFs.

Requirements for foreign persons and certain foreign-owned partnerships investing in QOFs

Under recently issued proposed regulations, certain foreign persons and foreign-owned partnerships reinvesting gains in a QOF from transfers that are ordinarily subject to U.S. withholding tax may not make a gain deferral election unless an “eligibility certificate” is obtained with respect to that gain.  At the same time, the proposed regulations eliminate or reduce withholding obligations for such foreign-persons and foreign-owned partnerships that obtain an eligibility certificate and provide security to the IRS before the transaction giving rise to the gain. These regulations if adopted will apply after they become final.

24-month extension of working capital safe harbor deadline

Under previous IRS relief guidance, QOZ businesses holding working capital that was intended to qualify under the 31-month working capital safe harbor prior to June 30, 2021 have been granted up to an additional 24- month extension to spend such working capital on qualified expenditures due to the federal declared disaster of COVID-19 pandemic, as long as the QOZ business otherwise meets the requirements to qualify for the working capital safe harbor. One of those requirements was a written working capital designation and written plan. However, concerns were raised that pre pandemic plans would have changed dramatically making such plans infeasible. In response, the Treasury issued proposed regulations providing some additional flexibility for QOZ businesses to revise or replace their original written working capital designation and written plan to the extent necessary to take advantage of the additional 24- month extension period, provided that the remaining working capital assets are expended within such extension period. These proposed regs may be relied on for tax years after Dec. 31, 2019.

A Reminder of Other OZ Relief Provisions Expiring Soon

90-percent investment standard temporarily relaxed for QOFs that fail to meet such standard

Previous IRS relief guidance provided that a QOF’s failure to satisfy the 90-percent investment standard on any semi-annual testing date that falls on or after April 1, 2020 and on or before June 30, 2021 is due to reasonable cause on account of the COVID-19 pandemic.  A QOF’s failure to satisfy this 90-percent investment standard on any testing date that falls during the period beginning April 1, 2020 and ending June 30, 2021 does not affect the entity’s status as a QOF or prevent an investment in the entity from being a qualified investment, and any applicable penalties will be waived. This should help QOF’s whether through the impact of the pandemic through most of 2021.

30-month substantial improvement period temporarily suspended

For purposes of the substantial improvement requirement with respect to property held by a QOF or QOZ business, the period beginning April 1, 2020 and ending on March 31, 2021 is disregarded in determining any 30-month substantial improvement period. Thus, an additional 12- month period in which to meet the substantial improvement rules.

12-month extension of reinvestment period for QOFs

QOFs generally have 12 months to reinvest returns of capital and proceeds from the sale of qualified opportunity zone (“QOZ”) property in other QOZ property.  Under the IRS’ previous relief guidance, if any part of the 12-month period during which the QOF may reinvest proceeds from the sale of QOZ property in other QOZ property includes June 30, 2020, the reinvestment period is extended up to an additional 12 months.  The extended reinvestment period will end no later than June 30, 2021.

For additional information about how this guidance may impact your investment in a QOF or the requirements that a QOF must meet, please contact a Cherry Bekaert team member.