The Muni Brief: Territories and Tax Exemption
May 26, 2026
Read Time 2 MIN
Why Puerto Rico Can Issue Tax-Exempt Bonds?
As a legally authorized “Territory” of the U.S., Puerto Rico has long been recognized as an important issuer of tax-exempt bonds. The answer lies in the U.S. Constitution, Article IV, Section 3, Clause 2, which allows Congress to create territorial governments, with taxing authority and borrowing authority.
Puerto Rico has been a U.S. territory since the end of the Spanish-American War in 1898. Its constitution wasn’t formally approved by Congress until 1952, but the borrowing authority that came with territorial status has made it one of the most unique, if not important issuers in the municipal bond market over the past 50 years.
The Triple Tax Exemption
The Internal Revenue Code treats territorial obligations similarly to state obligations. But, for Puerto Rico and other territories, that has meant a unique tax treatment for bondholders.
Interest paid on many Puerto Rico bonds is:
- Exempt from federal income tax
- Exempt from state income tax across all 50 states
- Exempt from local taxes
That’s what the market calls the “triple tax exemption,” and it’s the main reason Puerto Rico debt became so deeply embedded in mainland muni portfolios and mutual funds over the years.
Four other U.S. territories share the same triple exemption:
- Guam
- U.S. Virgin Islands
- Northern Mariana Islands
- American Samoa
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How Big Is the Territory Muni Market?
Current debt outstanding from Puerto Rico is approximately $37 billion. Add roughly $5 billion from the other four territories and you’re looking at a combined footprint that, while a small slice of the overall muni market, is significant enough to influence index construction and show up in broadly diversified muni funds. Territory bonds in the VanEck muni ETF suite are held primarily in SHYD and HYD, the two high yield muni funds. Commonwealth General Obligation debt carries a BB rating, which keeps it in high yield territory while a small number of territory bonds do qualify as investment grade. But the bulk of territorial exposure sits in the high yield sleeve.
What Investors Should Keep in Mind
Puerto Rico today, as an issuer of municipal bonds, is a different story than it was at peak crisis. It's more accurately viewed as a post-restructuring territorial credit with materially reduced bonded debt. New Congressional initiatives are being unveiled to stimulate investment and incentivize certain industries to return to the island, including the Supply Chain Security and Growth Act and the MMEDS Act (H.R. 3042), which targets pharmaceutical and medical device manufacturing, sectors with deep historical roots in Puerto Rico. That renewed investment focus, combined with the triple exemption that has always defined territory bonds, gives muni investors reason to believe the best of Puerto Rico's story may still be ahead.
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IMPORTANT DISCLOSURES
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors incomes may be subject to the Federal Alternative Minimum Tax (AMT) and taxable gains are also possible.
An investment in the VanEck High Yield Muni ETF (HYD) may be subject to risks which include, among others, municipal securities, high yield securities, credit, interest rate, call, private activity bonds, industrial development bond, health care bond, special tax bond, California, New York, market, operational, sampling, index tracking, tax, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, and index-related concentration risks, all of which may adversely affect the Fund. High-yield municipal bonds are subject to greater risk of loss of income and principal than higher-rated securities, and are likely to be more sensitive to adverse economic changes or individual municipal developments than those of higher-rated securities. Municipal bonds may be less liquid than taxable bonds. A portion of the dividends you receive may be subject to the federal alternative minimum tax (AMT). There is no guarantee that the Fund's income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax.
An investment in the VanEck Short High Yield Muni ETF (SHYD) may be subject to risks which include, among others, municipal securities, credit, interest rate, high yield securities, industrial development bond, Illinois, New York, call, private activity bonds, market, operational, sampling, index tracking, tax, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, and index-related concentration risks, all of which may adversely affect the Fund. High-yield municipal bonds are subject to greater risk of loss of income and principal than higher-rated securities, and are likely to be more sensitive to adverse economic changes or individual municipal developments than those of higher-rated securities. Municipal bonds may be less liquid than taxable bonds. A portion of the dividends you receive may be subject to the federal alternative minimum tax (AMT).There is no guarantee that the Fund's income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax. The Fund's assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
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IMPORTANT DISCLOSURES
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors incomes may be subject to the Federal Alternative Minimum Tax (AMT) and taxable gains are also possible.
An investment in the VanEck High Yield Muni ETF (HYD) may be subject to risks which include, among others, municipal securities, high yield securities, credit, interest rate, call, private activity bonds, industrial development bond, health care bond, special tax bond, California, New York, market, operational, sampling, index tracking, tax, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, and index-related concentration risks, all of which may adversely affect the Fund. High-yield municipal bonds are subject to greater risk of loss of income and principal than higher-rated securities, and are likely to be more sensitive to adverse economic changes or individual municipal developments than those of higher-rated securities. Municipal bonds may be less liquid than taxable bonds. A portion of the dividends you receive may be subject to the federal alternative minimum tax (AMT). There is no guarantee that the Fund's income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax.
An investment in the VanEck Short High Yield Muni ETF (SHYD) may be subject to risks which include, among others, municipal securities, credit, interest rate, high yield securities, industrial development bond, Illinois, New York, call, private activity bonds, market, operational, sampling, index tracking, tax, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, and index-related concentration risks, all of which may adversely affect the Fund. High-yield municipal bonds are subject to greater risk of loss of income and principal than higher-rated securities, and are likely to be more sensitive to adverse economic changes or individual municipal developments than those of higher-rated securities. Municipal bonds may be less liquid than taxable bonds. A portion of the dividends you receive may be subject to the federal alternative minimum tax (AMT).There is no guarantee that the Fund's income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax. The Fund's assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.