Tax Incentives for International Financial Entities
Subject to the licensing requirement and regulatory powers of the Commissioner of Financial Institutions of Puerto Rico, an International Finance Entity (IFE) and its owners are offered preferential tax treatment:
- A 4% fixed income tax rate on net income derived by an IFE from the permitted activities. Dividend or profit distributions made out of such income to the EFI’s shareholders or partners, who are residents of Puerto Rico, are subject to a 6% fixed tax rate. The effective tax rate for this qualifying income is 7.36%. However, dividends and profit distributions will be 100% tax free if received by a shareholder or partner who is an individual that has a tax exemption grant for relocating to Puerto Rico under Act No. 22.
Interest, finance charges, dividend and partnership profit distributions paid by an IFE to non-resident individuals, and non-resident foreign corporations or partnerships are not subject to Puerto Rico income and withholding taxation.
Total tax exemption from real and personal properties taxes on the assets, tangible and intangible, owned by an IFE.
- Total tax exemption from the gross receipts tax assessed by municipalities on the volume of business derived by the EFI.
To benefit from the preferential income tax rate, the IFE must apply for and obtain a tax exemption grant once the license is issued. The term of the grant may be for 15 years and a single 15-year extension may be granted. No new grants will be issued after December 31, 2019.
One of the permitted activities is providing one or more of the following services: asset management, private equity management, hedge funds management, pool of capital management, management of trusts securitizing pool of assets, and management of escrow accounts. Among the other permitted activities are:
- With the prior approval of the Commissioner, accept deposits from foreign persons in checking accounts as well as demand or fixed term deposits and interbank deposit of funds, or otherwise borrow money from international banking entities and from any foreign person pursuant to the regulations adopted by the Commissioner.
- Make, procure, place, guarantee, or service loans provided that none of such loans may be granted to a domestic person, except in certain circumstances.
- Invest in securities, stocks, notes, and bonds of the Government of Puerto Rico that are exempted from Puerto Rico income taxes.
- Carry out any banking transactions permitted by the IFE Act in foreign currencies, 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 any activity of a financial nature outside of Puerto Rico which would be allowed to be realized, 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.
- Buy and sell securities outside 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.
- Organize, manage and provide management services to international financial entities and other financial entities locates outside 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 banking entity to domestic persons.
- With the prior authorization of the Commissioner, provide financial services, as defined and generally accepted in the banking industry of the United States and Puerto Rico but not otherwise mentioned in the IFE Act.
2013 Modifications to Income and Sales Taxes Regimes