International Financial Entities (IFEs) are
licensed and regulated by the Office of the Commissioner of Financial
Institutions pursuant to Act No. 273 of September 25, 2012, as amended (the IFE
Act) and Regulation No. 5653. The IFE Act prospectively replaces the
International Banking Entities (IBEs) under the former International Banking
Regulatory Act, Act No. 52 of 1989, and offers tax incentives to IFEs that set
up operations in Puerto Rico, subject to the licensing requirement and
regulatory powers of the Commissioner.
In this post, we summarize the applicable laws
and regulations governing the establishment of IFEs in Puerto Rico that may be
of interest to those seeking a general understanding of the organization and
licensing process of an IFE, as well as the tax benefits offered under the IFE
Act.
Pursuant to the IFE Act, any person other than
an individual, incorporated or organized under the laws of Puerto Rico, the
United States or any other country, or any entity constituted as a unit of said
person, may apply for a license to do business as an IFE.
The principal goal of IFEs is to attract United
States and foreign investors to Puerto Rico. The IFE Act authorizes the
proposed entity to engage in specific banking and financial activity in Puerto
Rico (Authorized IFE Activities) with non-residents of Puerto Rico. There are
some activities allowed with Puerto Rico residents, but they are the exception.
The Authorized IFE Activities are listed in the Appendix to this
document.
An IFE organized pursuant to the provisions of
the IFE Act must have (i) at least four full-time employees at its business
offices in Puerto Rico, unless a lesser amount is authorized by the
Commissioner; (ii) office space in Puerto Rico; (iii) authorized capital stock
of no less than US$5 million, with at least US$250,000 of paid-in-capital at
the time the license is issued; and (iv) in addition to the paid-in capital
minimum described in (iii) above, US$300,000 of unencumbered assets or
acceptable financial securities, or a lesser amount as authorized by the
Commissioner, at its sole discretion. The IFE Act requires each IFE to maintain
such unencumbered assets at all times.
In order to operate as an IFE under the laws of
the Commonwealth of Puerto Rico, the entity must first be organized as a
corporation, partnership, limited liability company or other legal entity. In
order to organize an IFE, the applicant must first draft the articles of
incorporation, partnership agreement, operating agreement or any other
applicable organizational documents establishing the IFE. Said organizational
documents must contain (i) the name of the IFE, which must include the words
“International,” “Foreign,” or “Overseas,” or other similar words connoting the
international character of the IFE; (ii) the address of the principal place of
business in Puerto Rico of the IFE; (iii) the authorized or proposed capital of
the IFE (as described above); (iv) the term of existence of the IFE; and (v)
the purposes for which it is organized, including a specific limitation of its
operations to carry out only those services authorized by the IFE Act.
The application process to establish an IFE
consists of two stages. The first stage of the process encompasses the
organization of the IFE and begins once the organizational documents have been
drafted and the applicant files an application for a permit to organize with
the Commissioner.
This application must be in writing, sworn before a notary
public, and must include (i) drafts of the proposed organizational document
establishing the IFE; (ii) a business plan; (iii) a nonrefundable application
fee of US$5,000; (vi) historical and financial information of the persons who
directly or indirectly propose to own or control ten percent or more of the
capital of the IFE and the proposed directors and officers of the IFE; and (v)
the number of proposed employees of the IFE (as described above).
After the
application for a permit to organize is duly filed, the Commissioner shall
proceed to analyze and investigate the filed application and all other
additional documents deemed relevant.
The second stage of the application process
beings once the permit to organize the IFE is issued. At this time, the
applicant must file (i) the organizational documents, and (ii) a copy of the
permit to organize with the Puerto Rico State Department (PRSD). The permit
shall be in effect for a period of six (6) months from the date it is issued by
the Commissioner. After the entity has been organized, offices leased or
acquired, and capital contributed to the entity, the applicant may file for the
issuance of the IFE license. The Commissioner may grant, conditionally grant or
deny the final license application based upon his consideration of the
following documents:
1.
a certification issued by the Department of State of
Puerto Rico, under its official seal, specifying that the organizational
documents and the copy of the Permit to Organize have been duly filed
2.
the payment of a license fee in the amount of
US$5,000, in the form of a money order, official check or certified check
payable to the order of the Secretary of the Treasury of Puerto Rico
3.
certified copy of all documents filed at the
Department of State of Puerto Rico
4.
copy of the regulations or by-laws adopted by the
Board of Directors or ruling body of the IFE, certified by the secretary or
authorized person, before notary public
5.
evidence showing the principal place of business
6.
evidence that the authorized capital of the IFE has
been subscribed, issued and paid, and that the IFE complies with the
requirement regarding maintaining unencumbered assets (as discussed above) and
7. a statement or certificate of corporate
resolution, certified by the secretary or authorized person, before notary
public, indicating that the IFE has complied with all the provisions of the Act
and Regulation 5653 and that it is ready to commence operations.
After an IFE license is issued by the
Commissioner, a copy of the same must be filed with the Department of State of
Puerto Rico no later than 10 days from the date of issuance. Thereafter, the
IFE may request a tax exemption grant from the Puerto Rico Department of
Economic Development and Commerce (DDEC, for its Spanish acronym). In the event
the tax exemption grant is issued, the effectiveness of such tax grant is
retroactive to the time of its filing. Unlike IBEs, IFEs receive their
preferential tax treatment through a tax grant, or a contract with the
government, instead of by operation of law. The contractual protection of tax
grants under the IFE Act, secures the tax benefits for a period of 15 years,
and thus, cannot be repealed or modified by the Puerto Rico legislature. The
15-year period may be renewed for 2 additional 15-year terms, for a total of 45
years. The extensions must be requested 6to 24 months before the end of
the applicable 15-year term.
Under the IFE Act, both the IFE and its
shareholders receive preferential tax treatment. The IFEs have the following
tax benefits: (i) a fixed 4 percent income tax rate on the net income derived
by the IFE from Authorized IFE Activities; (ii) full property and municipal
license tax exemptions on such activities; and (iii) full exclusion of
interest, financing charges or participation in partnerships benefits, which
will not be considered gross income from Puerto Rico sources and therefore will
not be subject to taxation or withholding provisions for nonresidents of Puerto
Rico. As for the shareholders, the tax benefits include: (i) a 6 percent income
tax rate on distributions to Puerto Rico resident shareholders of earnings and
profits derived from Authorized IFE Activities; and (ii) full Puerto Rico
income tax exemption on such distributions to non-PR-resident shareholders.
At the heart of these incentives is the
potential interplay between the IFE Act and Act 22 of January 17, 2012, as
amended (see “Puerto Rico’s Act 20 and Act 22 − Key Tax Benefits”). In an effort to attract more investors and
further boost the Puerto Rico economy, the IFE Act can interact with Act 22 so
that dividends received by a bona fide PR resident from Authorized IFE
Activities that are Puerto Rico source income are fully exempt from Puerto Rico
income tax under Act 22 and are also exempt from US income tax pursuant to the
US Internal Revenue Code of 1986, as amended.
Finally, if you are considering to apply for a
license to do business as an IFE, the following may be of interest:
1. The IFE Act makes US anti-money laundering
statutes such as the Bank Secrecy Act, the USA PATRIOT Act and OFAC
pronouncements applicable to IFEs.
1.
The Commissioner may not establish interest rates to
be paid or payable to the IFE nor require that the IFE maintain reserves over
its deposits.
2.
The IFE Act does not establish lending limits for
IFEs.
3.
The IFE Act provides that all information submitted to
the Commissioner regarding the IFE will be treated as confidential, and may not
be revealed by the Commissioner, unless through a written court order from a
court of competent jurisdiction or a formal order from a governmental agency in
the course of its supervising powers of the IFE and when the Commissioner understands
that such action is in the best public interest.
4.
The Federal Reserve Bank of New York has opened
banking accounts to IFEs. In that sense the IFE becomes a client of the Federal
Reserve Bank of New York, which does not equate to becoming a member of the
Federal Reserve System or being regulated by the Fed. As long as the IFE is not
a banking subsidiary of a bank holding company under the US Bank Holding
Company Act of 1956, as amended, there is no requirement for the IFE to have
its deposits insured by the Federal Deposit Insurance Corporation (FDIC).
5. The application process typically takes around
three months.
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