You are interested in setting up an offshore bank or an international financial entity in the USA. Have you considered Porto Rico International Financial Entity or Offshore Bank License . Do not hesitate to contact us at connect@swissfintechpro.com
Legal Basis
what is the legal basis for Porto Rico International Financial Entity
They 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 that replaced 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.
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.
Is an IFE a bank and can it use the word banks in its name?
If the IFE is authorized to conduct both deposit taking and lending, it may use the word “Bank” in its name.
However, the local banking regulator has made it clear that since IFEs are not organized and licensed under the local banking law pursuant to which the local commercial banks are chartered, they will not be considered to be “banks” for purposes of the US banking and securities laws.
IFE Requirements
Company Requirements
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.
- 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;
- the address of the principal place of business in Puerto Rico of the IFE;
- the authorized or proposed capital of the IFE (as described below);
- 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.
An IFE organized pursuant to the provisions of the IFE Act must have
- at least four full-time employees at its business offices in Puerto Rico, unless a lesser amount is authorized by the Commissioner; AND
- office space in Puerto Rico; AND
- 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
- 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 relation to Authorized capital; please note that:
The issuance of additional paid-in capital from said authorized capital will depend on the capital needs of the entity in accordance with its Business Plan.
The OCFI may require a paid –in capital in excess of the $250,000 minimum, if the entity is to accept deposits.
This is a determination made by the OCFI on a case by case basis. Please note that IFEs are required to maintain capital levels following Basel III standards.
Application process to establish an IFE
First stage and second stage may takes between 3 to 5 months depending how quickly you answer our queries
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.
The second stage of the application process beings once the permit to organize the IFE is issued. At this time, the applicant must file
- the organizational documents, and
- 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 third stage:
Part 1
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:
- a fixed 4 percent income tax rate on the net income derived by the IFE from Authorized IFE Activities;
- full property and municipal license tax exemptions on such activities; and
- 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 non-residents of Puerto Rico.
As for the shareholders, the tax benefits include:
- a 6 percent income tax rate on distributions to Puerto Rico resident shareholders of earnings and profits derived from Authorized IFE Activities; and
- full Puerto Rico income tax exemption on such distributions to non-PR-resident shareholders.
Part 2: In parallel to Part 1
After the second stage it is also when you apply for the Master Account with the Federal Reserve Bank in New York
The Federal Reserve Bank of New York has already 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
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What activities a Porto Rico IFE can do?
Upon authorization of the Commissioner,
- accept deposits from foreign persons in checking accounts, as well as demand or fixed term deposits, including interbank demand deposits and fund deposits, or otherwise borrow money from international financial institutions and any foreign person pursuant to the regulations of the Commissioner. Every international financial institution may borrow money on loan, provided, that said transactions are not tantamount to the acceptance of deposits.
- accept properly collateralize deposits or otherwise borrow duly secured money from the Government Development Bank for Puerto Rico and the Economic Development Bank for Puerto Rico.
- Make or place deposits in, and otherwise give money on loan to, the Government Development Bank for Puerto Rico, the Economic Development Bank for Puerto Rico, any international financial institution, or any bank, including banks organized under the laws of Puerto Rico, and branches in Puerto Rico of banks that are foreign persons.
- Make, procure, place, guarantee, or service loans; none of such loans may be granted to a domestic person, with certain exceptions subject to the approval of the Commissioner.
- (a) Issue, confirm, give notice, negotiate, or refinance letters of credit; provided, that the client and the beneficiary requesting the letter of credit is not a domestic person, or
(b) issue, confirm, give notice, negotiate, or refinance letters of credit in transactions for the financing of exports, even if the beneficiary is a domestic person.
- Discount, re discount, deal or otherwise trade in money orders, bills of exchange, and similar instruments; provided, that the drawer and the original debtor is not a domestic person.
- Invest in securities, stocks, notes, and bonds of the Government of Puerto Rico exempt from the payment of taxes in Puerto Rico.
- Carry out any banking transactions allowed by the IFE Act in the currency of any country, or in gold or silver, and participate in foreign currency trade.
- Underwrite, distribute, and otherwise trade in securities, notes, debt instruments, drafts, and bills of exchange issued by a foreign person for final purchase outside of Puerto Rico.
- Engage in trade financing of import, export, barter and exchange of raw materials and finished products activities with domestic persons, when the Commissioner has determined through regulations, administrative determination, or order that the international aspects of the underlying transaction override any involvement of the local financial and business community, and that such activities would be appropriate for the international financial institution.
- Engage in any activity of a financial nature outside of Puerto Rico which would be allowed to be done, directly or indirectly, by a bank holding company or by a foreign office or subsidiary of a United States bank under applicable United States law.
- After obtaining a special permit from the Commissioner, act as fiduciary, executor, administrator, registrar of stocks and bonds, property custodian, assignee, trustee, attorney-in-fact, agent, or in any other fiduciary capacity; provided, that such fiduciary services shall not be offered to, nor inure to the benefit of domestic persons.
- Acquire and lease personal property at the request of a lessee who is a foreign person, pursuant to a financial lease agreement that complies with the Regulations of the Commissioner.
- Buy and sell securities outside of Puerto Rico, on the order of, or at its discretion, for foreign persons and provide investment advice in relation to such transactions or separate therefrom, to such persons.
- Act as a clearinghouse in relation to financial contracts or instruments of foreign persons, as authorized by regulations adopted by the Commissioner.
- Organize, manage, and provide management services to international financial institutions, and other types of financial entities located outside of Puerto Rico, such as investment companies and mutual funds, provided, that the stock or participation in the capital of such companies is not distributed directly by the international financial institution to domestic persons.
- Engage in such other activities as are expressly authorized by the regulations or order of the Commissioner, or are incidental to the execution of the services authorized by the IFE Act and the Regulations of the Commissioner, except those expressly prohibited by the IFE Act.
- Participate in the granting and/or securing of loans that originate and/or are secured by the Government Development Bank for Puerto Rico and the Economic Development Bank for Puerto Rico.
- Upon approval of the Commissioner, participate in the granting and/or securing of loans originated and/or secured by any bank considered a domestic person, excluding transactions between any bank considered a domestic person and an affiliate entity. These transactions shall only be authorized until 2018.
- Upon authorization of the Commissioner, acquire classified or bad loans, as well as any personal or real property (tangible and intangible) that serves as collateral for such loans, from any bank considered a domestic person or from any branch of a foreign bank in Puerto Rico. This includes the execution of the collateral related to the aforementioned loans and the sale of property serving as collateral for said loans. The acquisition of these loans shall be authorized until December 31, 2018. The execution of related collateral or the sale of property serving as collateral may be carried out within a period that reasonably meets industry standards, or the original term of the acquired loan, whichever is greater.
- (a) Finance, through loans or financial securities, projects in areas of priority for the Government of Puerto Rico in those cases designated as extraordinary by the Secretary of the Treasury and the Commissioner; and (b) in all cases, the prior authorization of such loans by the Secretary of the Treasury and the Commissioner shall be required.
- Establish, upon authorization of the Commissioner, branches outside of Puerto Rico, in the continental United States and its possessions, or in other foreign countries; provided, that said branches do not accept any kind of deposit. The Commissioner is hereby empowered to prescribe, by regulations, the procedure to obtain said authorization, and the amount payable for application investigation expenses and annual quota fees for each one of said branches.
- Upon authorization of the Commissioner, provide to other international financial institutions or to foreign persons outside of Puerto Rico, those services of a financial nature, as these are defined and generally accepted in the banking industry of the United States and Puerto Rico and which are not listed in this section.
- Engage in rendering of the following services: (i) asset management; (ii) alternative investment management; (iii) management of private capital investment activities; (iv) management of hedging funds or high risk funds; (v) pools of capital management; (vi) administration of trusts that serve to convert different groups of assets into securities; and (vii) escrow accounts administration services; provided, that such services are offered to foreign persons.
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