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Common Reporting Standards (CRS) and Puerto Rico's Special Status

Common Reporting Standards (CRS) and Puerto Rico’s Special Status

Introduction to Common Reporting Standards (CRS)

The Common Reporting Standard (CRS) is an information standard for the automatic exchange of information (AEOI) regarding bank accounts on a global level, between tax authorities. The aim of the CRS is to combat tax evasion. It was developed by the Organization for Economic Cooperation and Development (OECD) and was first agreed upon in 2014.

Under the CRS, tax authorities in participating countries receive information from their financial institutions and automatically exchange that information with tax authorities in other CRS participating jurisdictions. The data pertains to accounts held by taxpayers, including individuals, businesses, and trusts.

The details collected and exchanged include:

  • Name, address, and tax identification number (TIN) of the account holder.
  • Account number.
  • Account balance or value at the end of the year.
  • Gross amount of interest, dividends, and other income generated.

Puerto Rico’s Exclusion from CRS

Puerto Rico, an unincorporated territory of the United States, is not a separate sovereign jurisdiction for purposes of international treaties and agreements. Instead, it is often covered by the United States in its international agreements. As a result, Puerto Rico itself does not independently sign onto the CRS.

However, the U.S. has not adopted the CRS either. Instead, the U.S. has its own standard for international tax compliance and information sharing, known as the Foreign Account Tax Compliance Act (FATCA). While FATCA has similar objectives to the CRS, it operates differently. FATCA specifically targets non-compliance by U.S. taxpayers using foreign accounts. In essence, it requires foreign financial institutions to report to the U.S. Internal Revenue Service (IRS) about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

Why International Banks in Puerto Rico Don’t Need to Report under CRS

Given that Puerto Rico falls under the U.S. umbrella for international agreements and that the U.S. has not adopted the CRS, international banks in Puerto Rico aren’t required to report under the CRS. Instead, they are subject to FATCA regulations when it pertains to U.S. persons. However, accounts held by non-U.S. persons are not subject to FATCA or CRS reporting if the bank in Puerto Rico has no other presence in a CRS-participating jurisdiction.

Benefits of Added Privacy and Protection

  • Competitive Advantage: The added layer of privacy can provide an edge for banks in Puerto Rico when attracting international clients, particularly those who are wary of the CRS’s extensive reporting requirements.
  • Less Regulatory Burden: Without the obligation to comply with CRS reporting standards, banks can save on operational costs related to data collection, management, and reporting.
  • Enhanced Client Trust: Certain clients may appreciate the added confidentiality and may perceive banks in Puerto Rico as more protective of their financial information.
  • Diversification: As more countries adopt CRS, individuals and entities seeking diversification of their banking relationships might look to Puerto Rico as an alternative.
  • Attractiveness for Certain Business Structures: Businesses and trusts that have no tax liability in their home country might find Puerto Rico appealing due to the reduced reporting requirements.

In conclusion, while the primary purpose of the CRS is to combat tax evasion, its broad scope has implications for financial privacy. Puerto Rico’s unique status provides a nuanced position in the global financial landscape. International banks operating there, serving non-U.S. persons, can offer a level of confidentiality that is becoming rare in the age of automatic information exchange.

Notes on Asia and CRS

Taiwan was the last country in Asia to adopt CRS. Taiwan signed on to the Common Reporting Standard (CRS). The CRS is an international standard for the automatic exchange of financial account information between tax authorities. It was developed by the Organisation for Economic Co-operation and Development (OECD) in 2014.

Taiwan committed to implementing the CRS in 2017, and it became effective on January 1, 2019. The first exchange of information under the CRS took place in September 2020, with Taiwan exchanging information with Japan and Australia.

Taiwan is also a signatory to the Multilateral Competent Authority Agreement (MCAA), which is a multilateral agreement that facilitates the automatic exchange of information under the CRS. The MCAA has been signed by 109 jurisdictions, including Taiwan.

China has also signed on to the Common Reporting Standard (CRS). The CRS is an international standard for the automatic exchange of financial account information between tax authorities. China signed the CRS in December 2015, and the first automatic exchange of information under the CRS took place in September 2018.

As a signatory to the CRS, China is required to collect certain information from financial institutions about their account holders, including their name, address, tax identification number, and account balance. This information is then exchanged with the tax authorities of other CRS signatory countries on an annual basis.

The CRS is designed to help tax authorities crack down on tax evasion and money laundering. By exchanging information about financial accounts, tax authorities can more easily identify individuals and businesses that are hiding income or assets from the authorities.

The CRS has been widely adopted by countries around the world. As of March 2023, there are 109 CRS signatories, including all European Union countries, China, India, Hong Kong, and Russia.

The United States is the only major economy that has not signed on to CRS. However, the US does have a similar law called the Foreign Account Tax Compliance Act (FATCA). FATCA is more restrictive than the CRS, and it requires financial institutions in all countries to report information about US account holders to the US Treasury Department. FATCA only applies to US persons with accounts outside of the United States. 

  – A US person is a US citizen no matter where he or she lives. It also includes green card holders, legal residents, and anyone spending at least 183 days in the United States. 

As of August 2023, there are 58 countries that have not signed on to the Common Reporting Standards (CRS). These countries are:

Afghanistan, Algeria ,Angola ,Bangladesh, Belarus ,Benin, Bhutan, Bolivia, Burundi, Central African Republic, Comoros, Congo, Cuba, East Timor, Equatorial Guinea, Eritrea, Eswatini, Ethiopia, Fiji, Georgia, Gambia, Guinea-Bissau ,Honduras, Iran, Iraq, Jordan, Kiribati, Kyrgyzstan, Laos, Libya, Malawi, Mali, Mozambique, Myanmar, Namibia, Nepal, Nicaragua, North Korea, Palau, São Tomé and Príncipe, Sierra Leone, Solomon Islands, Somalia, South Sudan, Sri Lanka, Sudan, Suriname, Syria, Tajikistan, Tonga, Turkmenistan, Tuvalu, Uzbekistan, Vatican City State, Venezuela, Vietnam, Yemen, Zambia, and Zimbabwe.

Here’s the process to start a bank in Puerto Rico

Here’s the process to start a bank in Puerto Rico

In order to form a new offshore bank in Puerto Rico, also referred to as an International Financial Entity (IFE), you will need to submit a number of documents to government regulators. Here’s a brief summary of the process to start a bank in Puerto Rico.

The process to start a bank in Puerto Rico can be broken down into 4 steps.

First, is the writing of a business plan.

In my experience, the most important step in securing and offshore banking license from Puerto Rico is a quality business plan. I suggest that drafting a quality business plan is 80% of the work that goes into an IFE application.

The introduction section of the business plan should match the Federal Reserve Bank of New York Business Plan guidelines. This is a summary of the business with financials and supporting information.

Then the business plan of an offshore bank in Puerto Rico should tell the story of the IFE. Who is building the bank, what market is it intended to serve, and what niche will it fill.

Writing the business plan can be a long and painful process. It just depends how long it takes me to learn your business and how many holes we need to fill in your plan and on your team. By the time the business plan is complete, all “risks” or areas of concern should have been dealt with and a solid image presented to government regulators.

To be honest, we look at the business plan for an IFE in Puerto Rico as a loss leader. Yes, we charge a flat fee to write the plan. But, the amount of effort that goes into most business plans far exceeds our hourly rate, thus we generally “lose” money on this stage of the project.

Second, file your permit to organize.

Once your business plan is complete, we prepare the application for a permit to organize (or preliminary license for an IFE). This submission will include the plan, financial reports on each shareholder, officer, and director, and police clearance reports from each shareholder, officer, and director.

Note that these police clearance reports can take time. If you’re from a foreign country, you’ll also need to have them notarized and apostilled (if from a treaty country).  For information on US reports, see the FBI website.

Please see the list below from OCIF on the steps to negotiate a permit to organize. For another of my articles on forming an offshore bank, see: Four Steps to Build an Offshore Bank.

Third, form your corporation or LLC, hire your employees and build out your bank.

A permit to organize is the authorization from government regulators to incorporate your banking entity and to set up an IFE on the island. You must have the permission to organize in hand before you can form a company that has the word “bank” in its name.

Now you need to build out your business. Set up an office, hire 5 people, buy and implement a core banking software and hardware system, contract with a correspondent banking partner, and do all of those things necessary to get ready to operate a bank from the island of Puerto Rico.

  • The statute says you need 4 employees. I always recommend 5 in case you lose one.

Note that your IFE must operate from Puerto Rico to receive the 4% tax rate. Any income generated in the US is US source and taxable by the IRS. That is to say, only income generated from work performed on Puerto Rico is PR source and taxable at the discounted rate. For more on this topic, see: What is Puerto Rico Sourced Income for an Act 20 Business.

Fourth, we file your permit to operate and complete an audit with government regulators.

When you’re ready to go live, and you’ve run test transactions with your correspondent partner, you can file your permit to operate. Once filed, regulators will send a team to audit your computer systems and ensure they’re secure. If you’ve used US core banking software and traditional hardware, this should be relatively easy.

Note that you’re not required to set up your own IT system. You can outsource this, along with many KYC and AML processes, to an outside vendor. Most IFEs use one of Puerto Rico based IT platforms.

Your lawyers will also need to file a number of documents and sworn statements from the President / CEO. These basically confirm that you’ve hired the correct people and will abide by the KYC, AML, operational manuals, and compliance documents you’ve provided.

Conclusion

I hope you’ve found this article on the steps to build an offshore bank or IFE in Puerto Rico to be helpful. For more information, please contact me at info@premieroffshore.com or call us at (619) 550-2743. We’ll be happy to assist you with an international financial entity in Puerto Rico.

Below is the process to negotiate a permit to organize from OCIF. You might also find my 300-page book on this topic to be helpful. See: Offshore Bank License Guide, available on Amazon Kindle.

Process for IFE permit to organize

Here is the process to negotiate a permit to organize with government regulators in Puerto Rico. This is a loose translation from the official Spanish version.

(1) The proposed articles of incorporation, partnership agreement or other written document establishing the international financial institution, or the certification required by § 3084 of this title;

(2) a nonrefundable application fee of five thousand dollars ($5,000) to defray the costs of the initial investigation, and

(3) such other documents as may be specified or required by the regulations of the Commissioner.

(a) Every application shall include:

(1) The identity and business history of the applicants;

(2) the city or town in Puerto Rico and the street and number or any other address where its principal   place of business in Puerto Rico shall be maintained;

(3) the identity and business and credit history of any person who, directly or indirectly, possesses or  controls or intends to possess or control ten percent (10%) or more in the capital of the proposed international financial institution;

(4) a statement of the assets and liabilities of any applicant and of any person who possesses or controls or intends to possess or control ten percent (10% ) or more of the interest in the capital of the international financial institution, or of the person of which the proposed international financial institution shall be a unit, for each of the three (3) years preceding the application;

(5) the identity and background of all proposed directors, and officials or persons who intend to act in a similar capacity in the international financial institution, and

(6) such additional information as may be required by the regulations of the Commissioner.

(b) Upon receipt of the sworn application, all the required documents, and the application fee, the Commissioner shall carry out any and all investigations of the applicants and the application, including a review of:

(1) The financial solvency, credit, banking experience and business integrity of the applicants, their directors and officers, or persons who intend to act in a similar capacity in the proposed international financial institution;

(2) the adequacy of the capital available for the operations of the proposed international financial institution;

(3) the adequacy of the articles of incorporation, partnership agreement or other written document belonging to any applicant and, when appropriate, of the articles of incorporation, partnership agreement or other written document establishing the proposed international financial institution, and

(4) the impact that the proposed international financial institution shall have on the economy of Puerto Rico.

(c) Expenses, in excess of the aforementioned five thousand dollars ($5,000), incurred by the Commissioner for the purpose of conducting the initial investigation, shall be defrayed by the applicants by means of a previous deposit made in accordance with the estimate. The Commissioner shall claim said investigation expenses from the applicants.

(d) Should the Commissioner determine that the results of his/her investigation are favorable, he/she may, at his/her sole and exclusive discretion, issue to the applicants a permit to organize an international financial institution, subject to such conditions as the Commissioner may establish.

(e) When the Commissioner issues a permit pursuant to the provisions of this section, the interested party shall file with the Department of State of Puerto Rico the articles of incorporation, partnership agreement, or other written document establishing the proposed international financial institution, or those of the person of which the international financial institution shall be a unit, as well as the certification provided for in § 3084(c) of this title in the case of a unit, and the permit issued by the Commissioner. The Department of State shall issue under its official seal a certification of the filing of the stipulated documents.

cryptocurrency exchange tax

Tax efficient structure for US cryptocurrency exchange

Here’s how to cut your corporate tax rate for a US cryptocurrency exchange to 4%. If you’re operating a licensed exchange in the United States, and you’re willing to move some or all of your employees, we can get your corporate tax rate down to 4%.

This article considers a tax efficient structure for US cryptocurrency exchange and is meant for larger exchanges licensed in the United States. It can also apply to international exchanges that require a US presence and US banking services. The 4% rate is a great offer compared to Switzerland and 12.43% in Zug and higher in other cantons.

Note that this tax-efficient structure for crypto exchange doesn’t replace your US licenses. It’s an add-on to your current structure that allows you to pay only 4% tax on corporate profits. Nor does it change any of your compliance or regulatory requirements.

This 4% tax rate applies to corporate tax reportable in your state of operation. For example, let’s say your headquarters is in California and this is where all of your employees are located. Move this headquarters, including all the employees, and you can exchange the combined Federal and state rates of 30%+ (21% federal and 8.84% for a c-corp or 10.84% for a financial c-corp in California) for 4%.

If you’re paying tax in the states where you’re licensed but don’t have employees, these taxes will remain the same. They’re based on being licensed in the state and not corporate income from work performed in California (your state of operation).

Without any more ado, here’s how to create a tax efficient structure for a US cryptocurrency exchange and pay only 4% in corporate income tax:

Move your business to the US territory of Puerto Rico and operate under the International Financial Entity license, or Act 273. Your corporate profits sourced to Puerto Rico will be taxed at 4% and not taxed in the United States. This is not corporate tax deferral available offshore… this is a corporate tax rate of 4% replacing a US rate of 30%.

Income is “sourced to Puerto Rico” if it’s earned from work performed in the territory. Likewise, income is sourced to the United States, and taxable there, if earned from work performed in the US.

For example, if half of your workforce is in California and half is in Puerto Rico, about half of your income might be attributable to Puerto Rico. Thus, 50% would be taxable at 4% and 50% at 30%.

If you move your business and all employees to Puerto Rico, sourcing is a simple matter… all corporate profits will be sourced to the island and taxed at 4%. When you split work between the US and PR, a transfer pricing study and in-depth analysis are required.

  • In practice, sourcing of income will look and the quality of work performed in CA vs PR and is much more complex than this example.
  • For more on sourcing, see: What is Puerto Rico Sourced Income for an Act 20 Business. This post is about Act 20 and not 273, but the sourcing concept is the same.

The corporate profits of your cryptocurrency exchange operated from Puerto Rico will be taxed at 4%. Dividends from the Puerto Rico company to a foreign corporation or non-US person are tax-free. Likewise, dividends from your Act 273 business to a resident of Puerto Rico who qualifies for Act 22 are tax-free. Dividends from the International Financial Entity to persons in the United States will be taxed in the United States.

That is to say, US persons can move to Puerto Rico, qualify under Act 22, and pay zero US tax on dividends from an Act 273 cryptocurrency exchange. You will pay PR tax on the salary you take out of the business and zero on dividend distributions. Shareholders that live in the US will pay US tax on dividend distributions.

For more on Puerto Rico’s various tax incentives, see: A Detailed Analysis of Puerto Rico’s Tax Incentive Programs.

To set up in Puerto Rico under Act 273, you will need the following:

  1. Puerto Rico corporation with $250,000 paid-in capital and a CD for $300,000, for a total of $550,000 in capital.
  2. Minimum of 5 employees on the island.
  3. Detailed business plan with projections, operating manuals, and KYC, BSA and AML documentation.
  4. Resumes and financial reports on all key employees.

With this documentation, we can apply for an International Financial Entity license for your cryptocurrency exchange. You will be granted a permit to organize and given time to build out an office, IT systems, hire your employees, etc.

When you’re ready to go live, you will give notice to government regulators. They’ll come out and review your systems and documents. When you pass the audit, you’ll be given a permit to operate.

An Act 273 license will allow you to move the operation of your cryptocurrency exchange to Puerto Rico and exchange your 30% tax rate for a 4% tax rate.  

I hope you’ve found this article on a tax-efficient structure for US cryptocurrency exchange to be helpful. For more on International Financial Entities, see my 300-page book on Amazon.

An IFE license can be used to set up many different businesses. In addition to a tax-efficient cryptocurrency exchange, an IFE license could be used to operate an international bank, family office, brokerage and FX firm, etc. My book is focused on the international banking components of the IFE, but you will find it useful for a cryptocurrency exchange.

For more on building an International Financial Entity in Puerto Rico, you can reach me at info@premieroffshore.com or call us at (619) 483-1708. We’ll be happy to assist you to redomicile your exchange to Puerto Rico and offer a turn-key solution for Act 273 exchange.

puerto rico after hurricane

What’s Next for Puerto Rico After Hurricane Maria?

Puerto Rico suffered the worst hurricane to hit the island in 100 years on September 20, 2017. Hurricane Maria destroyed Puerto Rico. So what’s next for the territory of 3.5 million US citizens? Where does Puerto Rico go from here and what about it’s unique tax incentive programs?

The US territory of Puerto Rico was first grazed by Hurricane Irma, which knocked out power for 1.5 weeks. Then, about 2 weeks after Irma. Maria absolutely obliterated the island. Now comes a long and difficult rebuilding effort. “It’s in very, very, very perilous shape,” Trump told reporters Thursday during a meeting with the president of Ukraine. “It’s very sad what happened to Puerto Rico.”

“Their electrical grid is totally destroyed and so many other things, so we’re starting the process now,” Trump said. The death toll in Puerto Rico is at 15 now, but it’s expected to go higher, possibly much higher, as crews spread out through the island. Click here for video.

As of this writing, 85% of government offices have not reported in to the Governor, the island is totally without power, and most don’t have cellular service. See: Puerto Rico Updates: In Puerto Rico, the Storm “Destroyed Us.”

Trump also tweeted Puerto Rico Gov. Ricardo Rosselló, saying: “We are with you and the people of Puerto Rico. Stay safe.”

I’m writing to you from Cancun, Mexico. I left Puerto Rico two days before the storm hit. I went to the airport and asked for the first ticket to anywhere, so here I am. I plan to be here for a few weeks at least, possibly a lot longer.

The most dramatic picture’s I’ve seen of Puerto Rico are here: Hurricane Maria flooding, damage

Many smaller towns in Puerto Rico were totally destroyed. What the winds left standing, the floods and mudslides took. The capital, San Juan, is still there and avoided the floods. Buildings in San Juan are built to a much higher standard than elsewhere, and mostly stood up to Maria.

Now that the storm has passed, the time for assessment and rebuilding is here.  Most of our client’s buildings, in the Golden Mile and Condado areas of San Juan, are intact and operating on generator power. Many will be returning to work by October 1st.

As we look to the future, it’s a lack of electric power and water that will slow business and those attempting to make a life in this new reality. Until power is restored, big buildings will operate on generators, but the vast majority of the island will be in the dark.

And, throughout Puerto Rico, water is pushed along by electric power. No electricity often means no fresh water. You can expect many of the cisterns to run dry in a week or so. A long term lack of water, electricity, and a devastated tourist industry, will make life in Puerto Rico very challenging.

Ricardo Ramos, director of government-owned Puerto Rico Electric Power Authority, told CNN the island’s electrical infrastructure had been “destroyed” and will take months to restore. U.S. utility crews from the mainland were headed to Puerto Rico to help with the effort.

More than 95% of the island’s wireless cell sites were not working, the U.S. Federal Communications Commission said. See: Puerto Rico’s power grid ‘destroyed’ by Hurricane Maria, leaving millions cut off. As far as I can tell, only San Juan has cel service.

Ramos also said that residents “need to change the way they cool off. For entertainment, buy a ball and a glove and change the way you entertain your children.” Locals will need to go old school for some time… possibly for several months.

Keep in mind that Puerto Ricans are US citizens. They can pick and move to United States at any time. A major exodus to Florida and Texas will further deplete the islands tax base, as will a drop in tourism (November to January are key months for the industry). All of these issues are going to compound on each other and make the recovery all the more challenging.

Against this backdrop, President Trump approved a disaster declaration for Puerto Rico, making federal funds available to people and cities on the island. And in this lies Puerto Rico’s long term salvation… hopefully.

As a resident, Act 20 business owner, and someone researching and writing on Puerto Rico daily, I can tell you that the power grid is the territory’s greatest weakness. Power goes out once or twice a week. A light breeze or a little rain and the power’s out.

The hope is that FEMA and the United States will allocate enough disaster relief to build a new power grid, and not just duct tape the current one back together. We’re rooting for the storm in some ways, such that it was strong enough to totally destroy the current system.

We’re also rooting for President Trump and the US Congress. While there was no appetite to bail out Puerto Rico from its financial crisis, there may be enough political wind behind the sails of the recovery to blow a pile of cash to Puerto Rico. If that’s used to rebuild the power system, businesses and residents alike will benefit.

The question is, will President Trump come to the aid of Puerto Rico or will this be his Katrina?

In the long term, I’m hopeful that the US government will do the right thing and that FEMA dollars will go to rebuild infrastructure, not just keep the island alive. A rebuilding of the power grid will go a long way to  improving the island’s future and could be a bright spot in these dark days (no pun intended).

In the short term, expect areas like Condado and Isla Verde to be back within 60 days. Business districts, especially Hato Rey and the Golden Mile, will be functional in 30 days. Other business areas, such as Guaynabo, were harder hit and will have a longer road.

This timeline assumes that gasoline and diesel fuel are available for the generators. It also assumes that clean water is available, which is not certain today because of the dam failure.

I also expect Puerto Rico’s government to redouble its efforts to bring jobs and retain residents. New jobs will prevent flight to the mainland and bring good press to the government. Now is the time to join arms with the government and show that Act 20, 273 and 22 residents are a vital part of the community and a part of the solution to making Puerto Rico stronger than ever.  

Those who show up and put up now are sure to see the benefits down the road. I’m encouraging my clients to pitch in, get involved, and post statements of support for Puerto Rico. If the people know their jobs are there for them when this is over, and that companies are committed to the island, moral will improve.

We all need to be a part of the solution. Supporting the government and the people of Puerto Rico will be good for the island and good for business.

Remember that the tax incentives offered by Puerto Rico can’t be matched by any country on earth. Only the US territory can offer corporations a tax rate of 4%. Only Puerto Rico can eliminate capital gains tax for new residents under Act 22. Only Puerto Rico sourced income is exempted from the US tax code under Section 933.

We need to preserve and expand these tax benefits by supporting Puerto Rico’s government. It’s time to invest in our international tax plan through hard work and community involvement.

I hope you’ve found this article helpful. For more information on how you can help, or to talk about how to bring jobs to Puerto Rico, you can reach me at info@premieroffshore.com or call us at (619) 483-1708.

Puerto Rico Employee Requirements

Puerto Rico Employee Requirements

This article is to clear up issues concerning employment and payroll under the tax incentive programs in Puerto Rico. These requirements for the tax incentive programs are to be used in determining how much salary you must take (taxed at ordinary rates) vs. how much corporate profits the entity can make (taxed at 4%).

Keep in mind that all employees of Puerto Rico Act 20 and 273 companies are required to take a “reasonable” salary. This salary is taxed at ordinary rates of about 35% in Puerto Rico. The 4% tax incentive rate is then applied to corporate net profits after all salaries are paid. For more on the various tax incentive programs, see: A Detailed Analysis of Puerto Rico’s Tax Incentive Programs.

It’s because of these salary requirements that I suggest small businesses, earning less than $300,000, are better off operating offshore. When you live abroad, qualify for the Foreign Earned Income Exclusion, and operate a business through an offshore corporation, you can earn up to $102,100 in salary tax free. If both a husband and wife are working in the business, they can earn a combined $200,000 tax free.

Puerto Rico’s tax incentive programs are basically the opposite of the FEIE. Your salary is taxed at ordinary rates and the profit after that salary is taxed at 4%.

If your business nets $100,000 or less offshore, you pay zero tax. If your business nets $200,000 offshore, and both spouses are working in the company, then you pay zero US tax..

Let’s say your business nets $200,000 in Puerto Rico. If you operate in Puerto Rico, you might pay yourself a salary of $100,000 (to compare apples to apples). That salary is taxed at 35%, or $35,000. Then the excess is taxed at 4%, for a total bill of $39,000. This is basically the same tax deal you have available offshore through the FEIE (you pay zero on the first $100,000 and ordinary rates on the second $100,000).

Puerto Rico’s tax incentives really begin to make a big difference as your net income increases. Let’s say you net $1 million. You pay yourself a salary of $100,000, taxed at ordinary rates, and then $900,000 is taxed at 4%. Your total tax bill is $71,000.

If that same business was operated offshore, with one employee, you would earn $100,000 tax free and pay ordinary rates on $900,000 at 35%. In this case, your net tax paid is $315,000. As your net profits increase, so do the benefits of Puerto Rico’s tax incentive program vs the FEIE.

Here’s a summary of the salary and payroll requirements under Puerto Rico’s tax incentive programs. Keep in mind that the $100,000 referenced above was simply an example… an easy way to compare Puerto Rico to the FEIE.

In 2015 the government determined that all companies under an Export Service Tax Incentive Program decree must pay a fair market salary to owner / operators. This only applies to top tier executives, and for regular level positions labor law changed in 2017, and employee requirements also changed entirely in Act 20 regs.

The following specifies how the government views top tier owners/shareholders who actively work for their tax exempt company in Puerto Rico.

Official-owner means any shareholder or partner who maintains at the end of the tax year a beneficial interest in an eligible service exporting company that:

  • dedicates no less than 80% of their time to the activity eligible under the export service laws and
  • is a resident of Puerto Rico during the taxable year

Any partner or shareholder, who is an employee of a company with a tax exemption decree under Act 20 / Act 273 / Act 399. All official-owners shall have a reasonable annual salary that clearly reflects their income from services rendered to the Eligible Services Company, in which they maintain a proprietary interest at the end of the taxable year.

For the purposes of the provisions of Section 1040.09 of code, a maximum limit of $ 350,000 of annual salary will be established. Therefore, in those cases in which an Official- Owners earns an annual salary of less than $350,000 for his services rendered to the company, in which he maintains a proprietary interest at the end of the contributory year, the Secretary, in his discretion will evaluate the reasonableness of said income, in comparison with the services rendered by the Official Owner, and may impose additional salaries up to a maximum of $350,000 per year in order to clearly reflect the income of Official-Owner.

The evaluation will be based on the facts and circumstances of each case considered but not limited to the economic reality of the company, the functions performed by the Official-Owner within the company’s organizational structure and the salary trend of the market in comparable positions.

Remember that the government of Puerto Rico views these tax incentive decrees is a way attracting capital. Many company owners are not reporting substantial income. So, this is just a way to assure that some form of tax is paid from even though it would be miniscule.

If you’re considering forming an Act 20 company in Puerto Rico, there’s a lot of opportunity through these tax incentive programs. This is truely tax planning while there’s blood in the streets. Due to mass loss of public service jobs in the last month ($ 500 million in budget cuts for government jobs). The peculiar political status of the island makes for a different type of professional.

The literacy rate in Puerto Rico is higher than all of the US (with Puerto Rico registering 93.3% and the US with 86% literacy rate).

Also, Act 20 just changed the employment requirements so the gate are open for a huge private sector overhaul! (See Changes to Act 20 Tax Incentive Program). To motivate job growth, this year the Puerto Rican government changed labor laws to benefits employers.

Below is a outline of the Labor reform in Puerto Rico. After that you will see the a full breakdown of labor laws in Puerto Rico.

The first big change was the initial probation period, which was changed from 3 months to 9 months. This is significant because employers now have a lot more leeway with hiring and firing employees. Facilitating longer probation periods, makes it difficult for employees to apply for bonuses, significant reductions of vacation time, sick days and so forth.

Here are the labor laws for Puerto Rico. They apply to all companies doing business on the island, both tax incentive companies such as Act 20 and standard corporations.

Article 1.2 establishes that employees hired prior to the validity of this Law (January 1, 2017) will continue to enjoy the same rights and benefits as previously had, as expressly provided in the Articles of this. This clause was inserted in the amendments of the Senate and seeks to address the claim of who applies this law.

Article 2.20, which establishes as public policy in favor of alternative procedures for the settlement of disputes related to disputes arising from the application of the law to be approved, such as mediation and arbitration provided by the Department of Labor and Resources Human Rights, including its Office of Mediation and Arbitration.

Article 3.1 of the project establishes and defines what will be overtime. As proposed, overtime will be the hours an employee works for his employer in excess of eight (8) hours during any period on a calendar day rather than twenty-four (24) consecutive hours.

The next article states that the employer may establish an alternating weekly work schedule by means of a written agreement between the employee and the employer (flexitime), which will allow the employee to complete a work week not exceeding forty (40) hours with schedules Daily that will not exceed ten (10) hours per day of work. However, if the employee works in excess of ten (10) hours per day of work, he will be compensated for hours in excess of a time and a half (NO MORE DOUBLE TIME PAY) of the agreed wage rate for the regular hours.

The accumulation of vacations and sick days will be staggered in the following order:

The minimum monthly accumulation for vacation leave will be half (1/2) day during the first year of service. After the first year of service, up to five (5) years of work service, it will accumulate at three quarters (3/4) of a day. Accumulation of (1) day after serving five (5) years of service until fifteen (15). After fifteen years of service, it will accumulate at the rate of one and a quarter (1 1/4) of a day. This last computation is the one that is used today uniformly for all the employee who works more than one hundred and fifteen (115) hours per month. Basically for the first year instead of 2 weeks vacation traditionally per year you accumulate only 6 days after 1 yrs  approx 9 day, and this only applies to those working 115 + hours per month.

The sick leave was amended and is now one (1) day per month.

Article 3.21 of the bill provides that, as regards Law 180-1998, all claims of this law shall be prescriptive within a term of one (1) year, thus amending the current term of three (3) years.

Regarding the proposed amendments to Act No. 80 of May 30, 1976, it establishes a probationary period of nine (9) and twelve (12) months in certain employees under the Fair Labor Standards Act.(NO MORE 3 MONTHS OF PROBATION)

As for the compensation of the unjustifiably dismissed employee, an allowance is established for three (3) months of salary and two (2) weeks for each year of service. However, the allowance will never exceed nine (9) months of salary without distinction of the years of service.

Article 4.12 of the draft amended article 11 of Law 80, in order to eliminate the text that established the presumption that in the case of a lawsuit for unjustified dismissal, the employer had the burden of proof. The bill provides that article 11 of Law 80 only establishes that in the cases arising from Law 80, “the court shall hold a conference no later than sixty (60) days after the response to the complaint or complaint is filed, Which parties will be required to appear or be represented by a person authorized to make decisions, including the transaction of the claim. During that hearing, the parties’ arguments will be examined, the essential disputes will be identified and the possibilities for an immediate settlement of the claim will be discussed. If the claim is not settled, the court will order the discovery to be pending and expedite the date marking to hold the conference in advance of the trial. “

Likewise, the “Puerto Rico Employment Security Act” (Act No. 74 of June 21, 1956) is hereby amended to allow for the gradual increase of unemployment benefits, so that effective July 1, 2019, The minimum weekly benefit increases to sixty (60) dollars and the maximum weekly benefit increases to two hundred forty (240) dollars.

As for the Christmas bonus, any employer employing more than twenty (20) employees for more than twenty-six (26) weeks within the twelve (12) months from October 1 of any year until September 30 of the subsequent calendar year, you must grant to each employee who has worked for at least 1,330 hours or more within that period, a bonus equivalent to two percent (2%) of the total salary earned up to the amount of six hundred dollars ($ 600.00).

Basically a new Act 20 company under Puerto Rico’s tax incentive program can hire up to 19 employees without paying the Christmas bonus.

We can assist you in get a tax exemption decree and draft employment contracts, help you plan an employment strategy to avail the benefits of the new labor laws.

Puerto Rico Tax Incentive Labor law:

Be it enacted by the Legislature of Puerto Rico:

Article 2. – (29 L.P.R.A. § 271)
Eight (8) hours of work constitute the daily legal working day in Puerto Rico, Forty (40) hours of work constitute the weekly working day.
[Amendments: Law 223 of July 23, 1974; Law 83-1995]

Article 3. – (29 L.P.R.A. § 272)
They are regular hours of work eight (8) hours during any working day and forty (40) hours during any working week.
[Amendments: Law 223 of July 23, 1974; Law 83-1995]

Article 4. – (29 L.P.R.A. § 273)

These are extra hours of work:

(a) The hours an employee works for his employer in excess of eight (8) hours during any calendar day. However, the employer may notify the employee of an alternate cycle of twenty-four (24) hours, provided the notice is in writing in a term not less than five (5) days prior to the start of the alternate cycle and there are at least eight (8) hours between consecutive shifts.

(b) The hours an employee works for his or her employer in excess of forty (40) during any one week of work.

(c) The hours an employee works for his employer during the days or hours in which an

establishment must remain closed to the public by legal provision. However, the hours
worked on Sundays, when by law provision if the establishment must remain closed to the public, will not be considered overtime for the mere reason of being worked during that period.

(d) The hours an employee works for his employer during the weekly rest day, as established by law.

(e) The hours that the employee works for his employer in excess of the maximum hours of work per day set in a collective bargaining agreement.
[Amendments: Law 223 of July 23, 1974; Law 1 of December 1, 1989; Law 143-2009; Law 4-2017]

Article 5. – (29 L.P.R.A. § 273a)

For purposes of computing overtime in excess of forty (40) hours, the workweek shall constitute a period of one hundred and sixty-eight (168) consecutive hours. It shall commence on the day and at the time the employer determines and notifies the employee in writing. In the absence of notice, the work week will begin at 12:01 am on the Monday of each week. Once the employer sets the beginning of the work week, any change will need to be notified to the employee at least five (5) calendar days in advance to be effective.
[Amendments: Law 83-1995; Law 7-2002; Law 4-2017]

Article 6. – (29 L.P.R.A. § 274)

The norms and requirements for the payment of overtime will be the following:

(a) An employer who employs or permits an employee to work during overtime shall be required to pay for each overtime a salary not less than one-and-a-half times the rate of pay agreed upon for regular hours. Provided that the employees entitled to higher benefits hired prior to the validity of the “Law of Transformation and Labor Flexibility” will preserve the same.

(b) An alternate weekly work schedule may be established by a written agreement between the employee and the employer, which will allow the employee to complete a work week not exceeding forty (40) hours with daily schedules not to exceed ten ( 10) hours per work day. However, if the employee works in excess of ten (10) hours per day of work, he will be compensated for the excess hours at a rate of time and a half of the agreed wage rate for the regular hours.

(c) Voluntary or approved weekly alternating work schedule agreements may be revoked by mutual agreement of the parties at any time. However, either party may unilaterally terminate the voluntary agreement after one (1) year of its adoption.

(d) Alternate weekly work itinerary agreements adopted pursuant to this Article may be continued by a third party acquiring the business, without it being necessary to establish a new contract.

(e) The employer may grant an employee request to replenish hours not worked in the week for personal reasons of the employee. The hours thus worked will not be considered overtime when they are worked in the same week of absence, do not exceed twelve (12) hours in a day, nor exceed forty (40) hours in the week.

[Amendments: Law 223 of July 23, 1974; Law 83-1995, Law 4-2017]

Article 7. – (29 L.P.R.A. § 275)

For the purpose of determining the compensation for overtime pay when no wage type has been agreed for the payment of regular hours, the daily, weekly, monthly or otherwise agreed wage shall be divided by the total number of hours during the same period.

[Amendments: Law 83-1995, Law 4-2017]

Article 8. – (29 L.P.R.A. § 276)

An employee may request in writing a change of schedule, the number of hours or the place where he / she should do his / her job. The employee’s written request will need to specify the requested change, the reason for the request, the effective date, and the duration of the change.

The employer shall be obliged to provide a reply within a period of twenty (20) calendar days counted from the receipt of said request. In the cases of an employer with more than fifteen (15) employees, the response will be in writing. If the employer meets with the employee within twenty (20) calendar days of receiving the change request, his / her response may be notified within fourteen (14) calendar days following such meeting.

In its response, the employer may grant or deny the employee’s request. A concession may be subject to conditions or requirements that the employer deems appropriate. A denial must contain the reasons for the decision and any alternative to the application submitted. The employer will treat with priority the requests by heads of families who have the sole custody or sole custody of their minor children. The provisions of this Article shall apply only to employees who regularly work thirty (30) hours or more per week and who have worked for the employer for at least one (1) year. In addition, they shall not apply to another application filed within six (6) months of receipt of the employer’s written decision or grant of change, whichever is greater.

Article 9. – (29 L.P.R.A. § 277)

The additional compensation established by this Law for overtime, except in the situations authorized in Article 6 of this Law, is hereby declared unenforceable. Any clause or provision under which the employee agrees to waive payment of the extra compensation for overtime fixed by this law. No judgment, award, award or other provision of a claim for compensation, right or benefit under any law, mandatory order, salary order, collective agreement or work contract, may be raised as a defense of res judicata by division cause of action, in order to defeat another claim, unless in the previous procedure had been expressly adjudicated, the same cause of action, for the same facts, between the same parties.

[Amendments: Law 83-1995; Law 4-2017]

Article 10. – (29 L.P.R.A. § 282)

Any employee who receives compensation lower than that fixed in this Act for regular hours and overtime work or for the period designated to take the food will be entitled to recover from the employer by civil action amounts not paid, plus an equal amount per concept of liquidation of damages, in addition to the costs, expenses and legal fees of the procedure. No employer may retaliate, terminate, suspend or otherwise affect the employment or employment conditions of any employee because he or she refuses to accept an alternate weekly work schedule authorized in Section 6 of this Act or for having filed a request for modification of the schedule, number of hours or place of work as provided in Article 8 of this Law. The employer who engages in such conduct may be civilly liable for an amount equal to the amount of damages that the act caused to the employee and if it is shown that the employer committed such conduct with malice or reckless indifference to the employee’s rights, a maximum maximum amount may be imposed as punitive damages equivalent to the actual damages caused. In order to determine the amount that should be imposed as punitive damages, the financial situation of the employer shall be taken into account, how reprehensible has been the conduct, duration and frequency of same, the amount of damage caused and the size of the company. In addition, it may be required that the worker be replaced in his employment and that he cease and desist from the act in question. Any employee who is affected in his tenure or employment condition as incurred by the employer in the conduct described in the preceding paragraph may file an appeal to the Court of First Instance. The Secretary of Labor and Human Resources of Puerto Rico may urge such action on behalf of and on behalf of the affected employee. In the ventilation of the resource the employer will have the weight of evidence to rebut the presumption that retaliation has been taken against the employee for not having accepted a flexible work schedule.

These claims may be processed in accordance with the ordinary procedure or the complaint procedure established in Act No. 2 of October 17, 1961 [32 L.P.R.A. secs. 3118 et seq.] As it has been or is subsequently amended. The judicial claim may be made by one or more employees for and on behalf of themselves or of them and other employees who are in similar circumstances; Provided, that after the claim is filed, the claim may be compromised between the parties, with the intervention of the Secretary of Labor and Human Resources or any of the attorneys of the Department of Labor and Human Resources, appointed by said Secretary and the approval of the court . The Secretary of Labor and Human Resources will determine administratively which judicial or extrajudicial transactions will require his personal intervention, fixing the criteria that will govern to that effect through regulation or administrative order. Any extrajudicial transaction will be void on the payment of the salary corresponding to the regular hours, overtime, the period indicated to take the food or on the payment of the sum equal to the amount established by this law for liquidation of damages; Provided, however, that any transaction that is verified before the Secretary of Labor and Human Resources or any of the attorneys or officials of the Department of Labor and Human Resources designated by said Secretary shall be valid for the purposes of this law. Any extrajudicial transaction that is carried out through the intervention of mediators of labor-management conflicts of the Department of Labor and Human Resources, subject to the norms or criteria established by the Secretary for such purposes, shall also be valid regulation or administrative order [Amendments: Law 25 of April 26, 1968; Law 47 of May 19, 1976; Law 8 of May 10, 1982; Law 83-1995; Law 4-2017]

Article 11 – (29 LPRA § 283)

Every employer shall notify in writing to its employees the number of hours of work required each day of the week, the hours of commencement and termination of work, and hour in which the period destined to take the food inside the regular commando begins and finishes. The schedule thus notified shall constitute prima facie evidence that such work hours in the establishment constitute the division of the working day. The employer who requires or permits an employee to work for a period of more than five (5) consecutive hours without providing a rest period to take food, will have to pay to the employee the time worked by means of extraordinary compensation, as provided in this Article. In those cases in which the total number of hours worked by the employee during the day does not exceed six (6) hours, the rest period for food can be ignored. The period to take the food should begin to be enjoyed not before the end of the second or after the beginning of the sixth hour of consecutive work. An employer may not employ an employee for a period of work exceeding ten (10) hours per day, without providing the employee with a second rest period for food, except that total hours worked does not exceed twelve (12) hours. In cases where the total number of hours worked does not exceed twelve (12) hours, the second rest period for food may be waived, provided that the first period of rest for food is taken by the employee. food occurring within or outside the employee’s regular hours may be reduced to a period of not less than thirty (30) minutes, provided a written stipulation is made between the employer and the employee. In the case of croupiers,nurses, nurses and security guards and those authorized by the Secretary of Labor and Human Resources, the period of rest for food may be reduced up to twenty (20) minutes when a written stipulation is made between the employer and the employee, without requiring approval of the Secretary. However, the other provisions of this Article shall apply.

The stipulations to reduce a period of rest to take food will be valid indefinitely and neither of the parties, without the consent of the other, can withdraw its consent to the stipulated until one (1) year after the stipulation is effective. Said provisions shall continue in force when a third party acquires the business of the employer. An employer who employs or permits an employee to work during the period of time for the taking of the food shall be obligated to pay for such period or fraction thereof a rate equal to one and a half hours of the rate agreed for regular hours, provided that employees entitled to payment of a rate higher than the time and a half prior to the validity of the “Labor Transformation and Flexibility Act”, will preserve the same.

[Amendments: Act 121 of June 27, 1976; Law 88 of June 22, 1962; Law 223 of July 23, 1974; Law 27 of 5 May 1976; Law 61 of June 3, 1983; Law 83-1995, Law 4-2017]

Article 12. – (29 L.P.R.A. § 284)

It shall be the duty of every employer to make, keep and keep the payroll of the persons employed by him, expressing the wages earned and the regular hours and overtime worked by each and other conditions and employment practices maintained by him . Payrolls shall be kept in accordance with the reasonable rules prescribed by the Secretary of Labor and Human Resources and shall be kept for the time they determine.

The Secretary of Labor and Human Resources, or any agent of his authorized, may examine in working hours the payroll of any employer in order to take data and reports for the statistics, studies, and investigations related to compliance with this Law.

[Amendments: Law 83-1995, Law 4-2017]

Article 13. – (29 L.P.R.A. § 285)

The provisions of this Law shall not apply to:

(a) administrators, executives and professionals, as defined by regulations of the Secretary of Labor and Human Resources;

(b) traveling agents, street vendors and external vendors, as defined by regulations of the Secretary of Labor and Human Resources;

(c) officers or organizers of workers’ unions when they act in such capacities;

(d) drivers and drivers of public and private motor vehicles working on a fee, fee or route basis;

(e) persons employed in domestic service who, however, shall be entitled to one day of rest for every six (6) consecutive days of work, in accordance with the provisions of Law 206-2016;

(f) Employees, occupations or industries exempt from the overtime provisions provided by the Fair Labor Standards Act, approved by the Congress of the United States of America on June 25, 1938, according to amended;

(g) persons employed by the Government of the United States of America, including each of its three branches and its instrumentalities or public corporations;

(h) persons employed by the Government of Puerto Rico, including each of its three branches and its instrumentalities or public corporations;

(i) persons employed by municipal governments and their agencies or instrumentalities;

(j) employees covered by a collective bargaining agreement negotiated by a workers’ organization, unless the collective agreement itself establishes that the provisions of this Law shall apply to the relationship between the parties. However, all overtime provisions provided by the Fair Labor Standards Act, approved by the Congress of the United States of America on June 25, 1938, shall apply.

amended;

(k) persons exempted by provision of a special law. [Amendments: Act 27 of May 5, 1976; Law 83-1995; Law 33-1996; Law 4-2017]

Article 14. – (29 L.P.R.A. § 286)

The Secretary of Labor and Human Resources shall be empowered to adopt and promulgate the regulations necessary to administer the provisions of this Act. These regulations shall be consistent with the “Fair Labor Standards Act,” approved by the Congress of the United States of America on June 25, 1938, as amended, and the regulations issued thereunder, as applicable to Puerto Rico, unless expressly provided otherwise by this Act.

Article 15. – (29 L.P.R.A. § 287)

Any employer who fails to pay the type of salary stipulated in this and for regular hours or overtime, or that allows, induces or compels an employee to waive, or to accept, or agree to waive, compensation based on a double rate of overtime wage, or not to carry the employee payrolls. wages as determined by the Secretary of Labor and Human Resources, or fails to provide the salary reports requested by the Secretary of Labor or Human Resources, or precludes the examination of said payroll by the Secretary of Labor and Human Resources or his authorized agents, or knowingly include false information in said payrolls or reports, or that violates any provision of this Act of the orders, rules or regulations issued by the Secretary of Labor and Human Resources as determined herein, or who dismiss or otherwise discriminate against any employee because he has initiated or initiated any procedure in accordance with this Law or related thereto, or that it uses any remedy, fraud, simulation or subtraction for not pay, cheat, deny or deprive any employee of the right to receive a double wage rate for overtime, shall incur a misdemeanor and, if convicted, shall be punished by a fine of not less than fifty dollars ($ 50) or imprisonment for a period of less than fifteen (15) days, or both penalties at the discretion of the court. In case of recidivism,shall be punished with a fine of one hundred ($ 100) to five hundred dollars ($ 500) or imprisonment for a term of thirty (30) to ninety (90) days, or both penalties at the discretion of the court.

Article 16. – (29 L.P.R.A. § 288)

In this Act, unless otherwise stated, the following definitions of words and phrases of the same shall be accepted.

(1) “Employee”. – means any natural person who works for an employer and receives compensation for his or her services. It does not include independent contractors as well as officers or workers’ union organizers when acting as such.

(2) “Patron”. – means any natural or legal person of any nature who hires and uses the services of an employee.

(3) “Employ”. – means to tolerate or allow to work.

(4) “Salary”. – includes salary, wages, salary, and any other form of pecuniary remuneration. It will not include that part of tips received that exceed the amount used to meet the payment of the legal minimum wage, nor the charges for services.

(5) “Tipping.” – means any gift or gratuity which it grants, directly or indirectly,

indirectly, a person who is not the employer to an employee in recognition of the services received.

(6) “Charges for services”. – means any amount of money added to an account, and required by an establishment, which is distributed in whole or in part to employees. It also includes charges negotiated between an establishment and a customer.

[Amendments: Act 11 of April 26, 1963; Law 223 of July 23, 1974; Law 27 of May 5, 1976; Law 61 of 3 June 1983; Law 83-1995; Law 4-2017]

Articles 17 – 19. – [Note: The subsequent amending laws renumbered Arts. originals of this Law]

Article 20. – (29 L.P.R.A. § 271 note)

If any clause, paragraph, article, section or part of this Act is declared unconstitutional, by a court of competent jurisdiction, said ruling shall not affect, impair or invalidate the rest of this Law, but its effect shall be limited to the clause, paragraph, article, section or part of the law that has been declared unconstitutional.

Article 21. – (29 L.P.R.A. § 2)

Law No. 49, approved on August 7, 1935, entitled “An Act to regulate the hours of work of persons employed in commercial, industrial and other lucrative businesses, and for other purposes, is hereby expressly repealed. “.

Article 22. – (29 L.P.R.A. § 271 note)

Any law or part of law that opposes the present, is hereby repealed; Provided, however, that the provisions relating to the duration of the workweek and to the payment of overtime that appear in mandatory decrees nos. 11, 16, 20 and 21, approved by the Salary Board Minimum under Law No. 8 of April 5, 1941, as amended, which would be of greater benefit to the employee, the

which shall remain in force until the corresponding provisions established in Section 8 of this law are more favorable to those established in said decrees, in which case the provisions of the law shall prevail; Article V of Mandatory Decree number 4 approved by the Minimum Wage Board under the aforementioned law, which provides a Minimum Weekly Compensation Guarantee, which is hereby modified to be an amount to the product that results in multiplying the type of regular salary per hour that the worker is receiving for forty; Law no. 73, entitled “Law regulating the work of women and children, and protecting them against dangerous occupations,” approved June 21, 1919, as amended; Act No. 230, entitled “Law to regulate the employment of minors and to provide compulsory attendance of children of Puerto Rico to public schools”, to repeal Act No. 75, adopted on June 20, 1921, as subsequently as amended, and for other purposes, approved May 12, 1942, as amended; Article 553 of the Penal Code, generally known as the “Law on the Closure of Commercial and Industrial Establishments”, as amended, and Act No. 289, adopted on April 9, 1946, as it has been or has subsequently been amended.

Article 23. – (29 L.P.R.A. § 2)

This Act, being of an urgent and necessary character, will take effect immediately after its approval.

Puerto Rico tax incentives

A Detailed Analysis of Puerto Rico’s Tax Incentive Programs

Below is an updated review of Puerto Rico’s tax incentives for 2017. Major changes were made to Act 20 and Act 22 on July 11, 2017 (the most popular of Puerto Rico’s tax incentives). In addition, some of the tax incentives have been added and others have been amended. Below is a complete list of the tax holidays available in Puerto Rico as of August 2017.

A new business friendly government has been elected in Puerto Rico and they’re making you a tax deal you can’t refuse. Move a business to the island and pay only 4% in tax, move yourself to Puerto Rico and pay zero in capital gains, set up a bank or hedge fund and pay only 4% tax, etc. The list of tax incentives in Puerto Rico has become very impressive.

And only Puerto Rico can offer you these tax incentives. We US citizens are taxed on our worldwide income. The ONLY exception to this is residents of the US territory of Puerto Rico.

Residents of Puerto Rico don’t pay US taxes on Puerto Rico sourced income. They pay only Puerto Rico tax on local profits and capital gains (including stock gains in publicly traded companies). See US Tax Code Section 933.

This means that Puerto Rico is free to set whatever tax rates it wants. In years past, the government would charge residents about the same as the US IRS, so there was no benefit to relocating.

Today, Puerto Rico has many tax incentives for business and high net worth individuals. The government is very motivated to attract quality businesses to the island and has pulled out all the stops with these updated tax incentives. For more, see How to benefit from Puerto Rico’s bankruptcy.

Puerto Rico’s tax incentives have turned this territory into a tax haven on steroids. Whether you’re a high net worth individual, a one man shop, or a multinational, there’s a tax incentive for you.

Few places in the world offer a better return on investment than Puerto Rico. With a growing variety of services and emerging industries, the island’s success will be directly attributable to the incentives available. To diversify the economy, the local government has developed an aggressive economic stimulus package in the form of tax incentives to help make operations on the island more profitable for companies settling here.

Ranging from exporting services, practicing medicine, tourism, and manufacturing, there are a variety of tax incentives available in Puerto Rico. Below is an updated list of tax incentives the territory has to offer:

A List of Puerto Rico’s Tax Incentives for 2017

Act 20 Known as the law to promote the export of services, Act 20 offers attractive tax incentives for companies at fixed rate of 4% and minimal requirements that establish and expand the export services industry on the island. The tax incentive is guaranteed for 20 years. See below for more information.
Act 22 Law to Encourage the Relocation of Individual Investors to Puerto Rico seeks to attract new residents to the Island. It offers a total tax exemption on passive income generated or accumulated once the individual is a bona fide resident of Puerto Rico. Tax exemption on capital gains and much more.
Act 73 Known as the Puerto Rico Economic Incentives for Development Act, was established to provide an efficient environment and opportunities for the development of local industry, to offer an attractive contributory proposal, to attract foreign direct investment and to promote the economic and social development of Puerto Rico.
Act 273 Regulates the organization and operation of international financial institutions authorized by the Office of the Commissioner of Financial Institutions to operate in Puerto Rico, and grants tax exemption decrees, among other benefits. The export of services is an economic activity that has been identified as one of the key pieces for the economic development of Puerto Rico and financial services employ the largest number of people per business under the tax incentives. The IFE tax incentive is generally used by international banks, investment funds, hedge funds and family offices.
Act 399 International insurers and reinsurers act allows entities to organize a captive insurance in Puerto Rico. International insurers may incorporate a holding company for the interest in another company. Tax exemptions for insurers that qualify for an international insurer license are 100% exempt on all income (including liquidation and dissolution of its operations in PR) derived by the international insurer or international insurer holding company. Also, 100% tax exemption on municipal license tax, property tax, dividends, and distributions to its shareholders. Moreover, interest, dividends or distributions paid to foreign entities or non-residents, not engaged in business in Puerto Rico are tax free. Captive insurance in Puerto Rico facilitates business through alternative risk management strategies and as a vehicle to enter Latin America and US markets. Integrated insurance plans and segregated assets plans serving high net worth individual markets are the focus of most companies using this tax incentive.
Act 185 Private Equity Funds not only represent a proven alternative to investment, but also constitute a financing and economic propulsion tool that facilitates the pooling of private capital in order to finance the expansion of companies, restructure businesses at risk and to promote pioneering businesses in full development. In addition, by promoting this investment vehicle used by investors around the world, it promotes the creation of jobs for professionals in the field of securities and financial business in Puerto Rico, as well as the development of the securities industry on our Island. Private equity funds generally pay a 4% tax rate on gains.
Act 135 The Young Entrepreneurs Act was established for hard working young adults within the ages of 16 to 35. The subsections of this Act grants tax exemption for individuals (from ages 16 to 26 making under $40,000) and new business (from ages 16 to 35 until $500,000).
Act 74 The Act for Tourism Development, offered through the Puerto Rico Tourism Company, provides incentives for the development of world-class tourist industry. The benefits granted under this law will be valid for 10 years from the time that the eligibility of the tourism project is established and if they are eligible they can be extended to apply to the operational phase for an additional 10 years. Act 74 is most commonly used by large  hotel projects, but a variety of projects can qualify.
Act 14 The law for the retention and return of medical professionals hopes to keep and return some doctors to the island by offering them a tax deal. In order to establish a rate of contribution on income and dividends accrued in medical practice to doctors residing in Puerto Rico the law hopes to halt the mass exodus of the Puerto Rican medical class and encourage the return or transfer of medical professionals to Puerto Rico, especially medical specialists. As of July 11, 2017, Act 14 can be combined with the telemedicine components of the Act 20 tax incentive program.
Act  83 Establishes standards to promote renewable energy, in accordance with short, medium and long-term compulsory targets, known as the Renewable Energy Portfolio

These are benefits of the Puerto Rico Tax Incentives in 2017:

Act 20 Export Services from Puerto Rico attempts to create a “World Class International Service Center” in the Commonwealth of Puerto Rico. The Act 20 tax incentive is for businesses providing a service from Puerto Rico to companies or person’s outside of Puerto Rico. Just about any portable, online, or service business can qualify.

Remember that residents don’t pay US federal taxes on Puerto Rico sourced income (Section 933). Under the umbrella of the Act 20 tax incentive, the entity in Puerto Rico will pay 4% corporate tax for eligible export services and receive a 100% exemption on dividends for PR bona fide resident shareholders. That means the corporation will pay 4% on net profits and can distribute those profits to a residents of Puerto Rico tax free. You can exchange your US rate of 40% for a PR rate of 4% overnight.

In general, businesses providing eligible services in the categories of corporate headquarters, call centers, internet marketing, online businesses, and just about any portable business will pay 4% in corporate tax and enjoy 100% exemption from property taxes during the first five years of operations. After the 5 years period, a 90% exemption will apply to property taxes and the 4% rate is good for 20 years. The Act 20 decree is granted for a 20-year term, renewable for 10 additional years, provided certain conditions are satisfied. That is to say, the 4% Act 20 tax incentive is guaranteed for 20 years.

To obtain an Act 20 decree, the business must meet minimal requirements. For example, the entity should be a new entity incorporated and the owners must pass a background check (can’t have a criminal record). Local businesses may apply for the Act 20 tax incentive program.

As of July 11, 2017, there is no minimum number of employees of an Act 20 tax incentive. As you read articles on the web, note that the number of employees was 3 in 2012. It increased to 5 in December of 2015 and is now zero. For more information, see: Puerto Rico Eliminates 5 Employee Requirement.

There are a few exceptions to this rule. If the Act 20 tax incentive company offers a substantial amount of employment outside of Puerto Rico, the Secretary of DDEC may mandate reasonable ratios of local to non resident employees. For example, you have 100 employees in the Philippines and 2 in Puerto Rico. The government is likely to require you increase your PR workforce.

Also, the Act 20 tax incentive business must provide eligible export services specified under the regulations. You will find a list of those services below. Also, an Act 20 company is prohibited from offering services to locals.

That is to say, an Act 20 tax incentive company must be providing a service from Puerto Rico to companies or persons outside of Puerto Rico.

Only Puerto Rico sourced income qualifies for this 4% tax incentive. Puerto Rico sourced income is usually income generated by work done in Puerto Rico.

Likewise, income earned from work done in the United States is always US source income and taxable in the US. US source income is never Puerto Rico source income and doesn’t qualify for the tax incentive. For more, see: What is Puerto Rico Sourced Income for an Act 20 Business.

Eligible Activities For Act 20 Tax Incentive in Puerto Rico

  • Research and development;
  • Advertising and public relations;
  • Consulting services, including, but not limited to, economic, scientific, environmental, technological, managerial, marketing, human resources, computer and auditing consulting services; Advisement on matters of any industry or business;
  • Creative industries defined as any business with the potential to create jobs and income, principally on exportation of good and services in the following sectors: Design (graphic, industrial, fashion, interior) Art (music,visual art, performing arts, publications)
  • Media (app development, video games, online media, digital content and multimedia)
  • Creative Services (architecture and creative education);
  • Production of blueprints, architectural and engineering services, and project management;
  • Professional services such as legal, tax and accounting services;
  • Centralized management services, including, but not limited to, strategic direction, planning, distribution, logistics and budgetary services carried out by the headquarters or similar regional offices of an entity engaged in rendering such services;
  • Centers for electronic data processing;
  • Development of computer software;
  • Voice and data tele-communications between persons located outside of Puerto Rico;
  • Call centers;
  • Shared services centers, including, but not limited to, accounting, finance, tax, auditing, marketing, engineering, quality control, human resources, communications, electronic data processing, and other centralized management services;
  • Storage and distribution centers of businesses dedicated to transportation of products and articles pertaining to third parties, also known as hubs;
  • Educational and training services;
  • Hospital and laboratory services;
  • Investment banking and other financial services, including but not limited to, asset management, management of investment alternatives, management of activities related to private capital investment, management of hedge funds and high risk funds, management of pools of capital, management of trusts that serve to turn different types of assets into stocks, and management of escrow accounts;

New Eligible Activities for the Act 20 Tax Incentive as of July 2017

  • Hospital services and laboratories including medical tourism and telemedicine facilities.
  • Companies dedicated to international trading (known as trading companies) – Trading companies will mean any entity that produces no less than 80% of gross income from the following:
    • Sales to any persons or entities that are outside of Puerto Rico, for use, consumption or disposition outside of Puerto Rico, of products which have been manufactured inside or outside of Puerto Rico and have been bought by the eligible business for resale;
    • From commissions derived from sales of goods for consumption and use outside of Puerto Rico will be considered industrial development income. The property used for this income is not used for other activities not authorized under tax decree; and
    • Other eligible exportation services as described under this law.

Puerto Rico’s Act 22 Tax Incentive

The Act 22 tax incentive, also known as the Act to Promote the Relocation of Investors to Puerto Rico, provides a total exemption from tax on Puerto Rico sourced capital gains, interest, and dividends realized once the individual is declared a bone fide resident. Once the investor becomes a bona fide resident, Puerto Rico’s Act 22 tax incentive will also grant them a 100% tax exemption with respect to gains from the sale of Puerto Rico property acquired if the sale takes place before 1/1/2036 and after their bonafide residence status. In addition, 90%-100% exemption on short and long-term capital gains, and 100% exemption on passive income, and 100% exemption on federal taxes on Puerto Rico source income for bona fide residents.

Act 22 decree holders may also qualify for Act 20 and various other tax holidays.

If you’re already a resident of Puerto Rico, you can’t use the Act 22 tax incentive. To obtain decree, you must not have been a resident of Puerto Rico at any time during the 6-year period prior the effective date of the Individual Investors Act (Jan 11, 2012). (Amended to 6 years before 2012 – it was previously 15 years.)

A Puerto Rico bona fide resident is an individual who is domiciled in Puerto Rico. Physical presence in Puerto Rico for a period of 183 days during the taxable year will create a presumption of residency for tax purposes. Other requirements are the individual cannot have a tax home outside of Puerto Rico and can’t maintain closer connections to United States or any other foreign country than to Puerto Rico.

Also, you must purchase a residence in Puerto Rico within 2 years of applying for Act 22. I suggest you do this ASAP because you must prove to the IRS that Puerto Rico is your home and you’re not there on a temporary basis. Buying a home within 2 years is required under the law and buying a home as soon as possible will help you if you’re selected for audit in the United States.

Basically, Puerto Rico should be your home for the foreseeable future. The territory should be where you call home, where you return to when you travel, and where most of your business interests are located. On a similar note, you should break as many ties to the United States as possible and focus your life in Puerto Rico.

Annual reports with the Office of Industrial Tax Exemption including evidence of compliance of conditions and requirements of the grant for taxable year immediately before the filing date of report.

Government Fees

$5,000 fee is due upon the approval of decree under Act 22 in addition to fees due with filing of Grant application. These fees do not include legal and other fees associated with negotiating the decree.

New July 2017 amendment requires you to donate at least $5,000 per year to an official charity in Puerto Rico each year. See: Changes to Puerto Rico’s Act 20 and Act 22

To qualify for the full Act 22 incentives, individual must become a bona fide resident of Puerto Rico.

Again, applicants must acquire a residential property in the first 2 years since the date of the notification of residency. (2015 amendment). The presentation of the Deed of Purchase & Sale is mandatory.

The focus of the Act 22 tax incentive is to eliminate capital gains on assets acquired after you move to the island. It’s also possible to allocate gains on assets acquired before you move to Puerto Rico between the United States and Puerto Rico.

Puerto Rico Tax Incentive Allocations

Tax exemptions on capital gains for Act 22 has a 10 year rule.

  • If the gain is Puerto Rico sourced income, the 10 year rule doesn’t apply and you pay zero tax. This usually applies to gains on stocks purchased after you move to Puerto Rico.
  • For Non-PR sourced income, which is usually assets purchased prior to becoming a Puerto Rico bona fide resident, you pay 10% in capital gains to Puerto Rico if you sell before before 10 years of residency and 5% to Puerto Rico if you sell after 10 years residency but before 1/1/2036.
  • A US investor with a US source gain, that sells before the 10 year term, pays US capital gains tax on the sale. After the 10 year term, you pay no federal income taxes.

Let’s say you buy Microsoft stock in 2010. When you move to Puerto Rico in October of 2017 you have an accrued gain of $200 per share. You live in Puerto Rico for 5 more years and accrue another $100 in gains. So, your total appreciation in the stock from 2010 to 2022 is $300 per share.

You sell the stock in 2022 and allocate the $300 gain between the United States and Puerto Rico. $200 of the gain is taxable at standard US capital gains rates, or 20% (assuming Trump does away with the Obamacare tax).

You also pay 10% on the $100 Puerto Rico sourced gain – the gain that accrued while you were a resident of Puerto Rico.

Had you held the stock for 10 years in Puerto Rico, or until October of 2027, you would have paid only 5% in capital gains tax on the $300 gain. You would not have paid any tax to the United States.

It’s important to note that Puerto Rico’s tax incentive for investors applies to Puerto Rico sourced gains and not US sourced gains. So, real estate in the United States, and rental properties in the United States do not qualify for Act 22. These are always US sourced gains and taxable by Uncle Sam. The same applies to partnership income (K-1s), interest income from banks in the United States, and any other US source income.

Remember that only Puerto Rico can offer these tax incentives on capital gains. When a US citizen moves to a foreign country, they must pay US tax on their passive income. Only Puerto Rico is exempted from US tax on capital gains.

So, in the stock example above, if you were living in France or Panama, you would pay US capital gains tax on your stock sale. Regardless of whether you sold those Microsoft shares in 2022 or 2027, you would pay US long term capital gains on the transaction.

Puerto Rico’s Act 273 Tax Incentive

Act 273-2012 was approved with the intention of ​​expanding International Financial Centers into Puerto Rico and significantly increasing the promotion and knowledge of the Island throughout the world’s financial circles. The result has been to turn Puerto Rico into a major international banking center.

Most who secure an Act 273 tax decree and license use it to build an international or offshore bank. A full service international bank that provides services to people and companies outside of Puerto Rico. Act 273 tax incentive for financial entities may offer services in the United States. Activities for the IFE must comport by AML and KYC regulations, BSA, FDIC “Standards” (does not need to be FDIC regulated) under the government of Puerto Rico.  

What makes Act 273 unique is that the charter can be used to build any type of financial services entity you require. It’s not just a simple banking charter as is available from other jurisdictions. With Puerto Rico’s tax incentive program you select from a menu of services you wish to offer. Depending on the services you select, you can setup either a bank, fund manager, investment advisory firm, family office, etc.

And Puerto Rico’s Act 273 has been an amazing success. While other tax havens are adding 1 or 2 banks a year, Puerto Rico issued 15 licenses in 2016 and looks to approve 20 IFE’s in 2017. Puerto Rico is already the largest offshore banking jurisdiction in the Caribbean after the Cayman Islands… and Cayman has a 20 year head start. It seems that Puerto Rico could pass Cayman in 3 or 4 years. For more, see Top 5 Offshore Bank License Jurisdictions for 2017

To date, International Financial Entities licenses have been issued to operate an international bank, a fund and investment manager, a family office, trading desks for international banks, and “in-house” correspondent bank, brokerages (additional license required), Bitcoin exchange, blockchain based bank, money transmitters / remitters, merchant services, and many other types of financial service entities.

In its most basic form, Puerto Rico’s Act 273 tax incentive is Act 20 for banks. It’s used to incorporate and license offshore banks in the territory, most of which do business with companies and individuals outside of Puerto Rico and outside of the United States. For an introductory article on using this tax incentive from Puerto Rico to operate an offshore bank, see: Lowest Cost Offshore Bank License is Puerto Rico.

In addition to operating as a bank, IFEs, along with the support of the Office of the Commissioner of Financial Institutions, are allowed to the purchase loans in Puerto Rico that are classified or high risks, from any bank that is considered to be a domestic person or any branch of Puerto Rico of a foreign bank. This include the execution of collateral related to said loans and the sale of the property that served as collateral of such loans.

If an investor wanted to come in and buy up properties in Puerto Rico while the bankruptcy is in process, they could do so in a tax advantaged way by forming and IFE under the Act 273 tax incentive.

Requirements For Puerto Rico’s Tax Incentive Under Act 273

  • Non refundable application fee of $5,000.00
  • BSA, KYC, AML compliance program requiredAuthorized capital stock no less than $5 million
  • Paid in capital of at least $250,000
  • Deposit with a local bank as a bond of $300,000
  • Minimum of 4 employees in Puerto Rico
  • Local office and IT infrastructure approved by regulators.
  • Financial Statements for the past 10 years, for shareholders with 10% or more in capital of the proposed IFE

Puerto Rico’s Act 273 tax incentive is guaranteed for 15 years and may be renewed.

Your IFE will pay corporate tax at 4% on its net profits. This tax rate applies to Puerto Rico sourced income. PR sourced income is earnings and profits from work performed in Puerto Rico. Therefore, most IFE’s have a significant number of employees in Puerto Rico. For a detailed article, see: Tax Planning for an International Bank License

List of Services Permitted Under Act 273

  1. Accept deposits from foreign individuals in accounts as well as demand or fixed term deposits and interbank deposits of funds, or otherwise borrow money from international financial institutions and any other foreign person;
  2. Make, procure, place, guarantee, secure , bond or service loans;
  3. Issue, confirm, give notice, negotiate or refinance letters of credit, including transactions for the financing of exports, even if the beneficiary is a domestic person;
  4. Discount, rediscount, deal or otherwise trade in money orders, bills of exchange and similar instruments;
  5. Invest in securities, stocks, notes and bonds of the Government;
  6. Carry out any banking transactions allowed by the Act in the currency of any country, or in gold or silver, and participate in foreign currency trade;
  7. 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 the jurisdiction;
  8. Engage in trade financing of import, export, barter and exchange of raw materials and finished products activities with domestic persons;
  9. Engage in any activity of a financial nature outside of the jurisdiction 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;
  10. Act as fiduciary, executor, administrator, registrar of stocks and bonds, property custodian, assignee, trustee, attorney in fact, agent, or in any other fiduciary capacity;
  11. Acquire and lease personal property at the request of a lessee who is foreign person, pursuant to a financial lease agreement that complies with the Regulations;
  12. Buy or sell securities and provide investment advice in relation to such transactions;
  13. Act as a clearinghouse in relation to financial contracts of instruments of foreign persons;
  14. Organize, manage, and provide management services to international financial institutions, and other types of financial entities located outside of the jurisdiction, such as investment companies and mutual funds;
  15. Engage in such other activities as are expressly authorized by the Regulations or order of the Director/Commissioner, or are incidental to the execution of the services authorized by the Act;
  16. Participate in the granting and/or securing of loans that originate and/or are secured by the stated governmental authorities mentioned in the Act;
  17. Establish branches outside of the jurisdiction, in the continental United States or its possessions, or in other foreign countries. Puerto Rico excludes the acceptance of deposits for these branches;
  18. Establish a service unit or office in the jurisdiction, in which only specific operations related to the services of the international financial institutions shall be conducted;
  19. Provide to other international financial institutions or to foreign persons outside of the jurisdiction, those services of a financial nature, as these are defined and generally accepted in the banking industry of the United States and the jurisdiction, and which are not listed in this section.
  20. Accept  properly collateralized deposits or otherwise borrow duly secured money from the Government Development Bank for Puerto Rico and the Economic Development Bank for Puerto Rico;
  21. Make or place deposits in, and otherwise give money on loan to, the Government Development Bank for Puerto Rico and 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;
  22. 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;
  23. 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;
  24. 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 Treasurer and the Commissioner;
  25. Engage in rendering 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 investment; (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.  

Puerto Rico’s Act 73 Tax Incentive

The industrial incentives program of the Commonwealth of Puerto Rico began in 1947 with the purpose of developing a manufacturing and export economy. The program has been transformed over time adapt to challenges of the economy.

Law No. 73 of 2008, known as the Economic Incentives for Puerto Rico Development Act, is the result of over six decades of experience in industrial development. This statute offers contributory incentives to attract new operations to the Island, as well as retain and stimulate the development of existing ones. The Law grants contributory credits for the creation of jobs and for the investment made by the company in research and development activities. Companies can access other incentives to reduce their operating costs and energy consumption, so that their operations are efficient and profitable.

The offer of tax incentives of the Commonwealth of Puerto Rico is particularly attractive for global high technology companies that require manufacturing processes with high added value. Likewise, they are a very effective instrument to promote innovation, since the Puerto Rico offers companies the most complete protection of their intellectual property rights under US laws.

Tax Incentives Available Under Act 73

  • Maximum income tax of 4%; Can be reduced to 1% and 0% for activities involving the use of pioneering technology
  • Tax credits of up to 50% for the purchase of local and recycled products
  • Tax credits up to $5,000 for job creation
  • Tax credits up to 50% for research and development (R&D)
  • Special deductions for investment in infrastructure, machinery and equipment
  • Tax credits of up to 50% for the investment in machinery and equipment for the production of renewable energy

Puerto Rico wishes to develop a productive business culture based on quality and competitiveness. Also invested in maximizing the yield of high potential land while developing sustainable operations. Monsanto, Pioneer Hi-Bred, BASF, Agrochemical, Bayer-Cropscience, Syngenta Seeds and Rice Tec are among the many companies that have identified Puerto Rico as fertile land for agriculture because of the tropical climate, and water supply. Due to weather conditions in Puerto Rico, 4 to 5 harvests per year can be produced compared to the United States whereas seasonal harvest produce only once a year.

Puerto Rico’s Act 399 Tax Incentive Program for International Insurance Centers

Puerto Rico is the ideal gateway for insurers and reinsurers wishing to enter the insurance market and the financial market because it enjoys direct access to the United States and other international markets.

Legal Background

Law No. 399 of 2004 and Act No. 400 of 2004 of Chapter 61 of the Puerto Rico Insurance Code were adopted in order to establish the basis for the International Insurance Center (IIC).

International Insurance Centers offer a competitive environment for insurers and reinsurers to cover risks outside of Puerto Rico, in accordance with a safe and flexible regulatory system that offers highly attractive tax benefits. Law No. 98 of 2011 provides a long-term contributory framework that will guarantee the treatment of international insurers and reinsurers for an initial term of 15 years, renewable for two additional periods of 15 years.

International insurers have a variety of options for organizing and operating within Act 399. These options include operating as an international insurance holding company, such as an international insurer or a branch of an international insurer and segregated asset regimes.

Tax Incentives Under Law 399

Among the tax incentives granted by the Puerto Rico International Insurers and Reinsurers Act are:

  • Tax exemption on premiums.
  • Tax exemption on dividends and other profit distributions generated by the international insurer and the holding company of the international insurer.
  • Exemption from taxes on municipal franchises, personal income and real property.
  • Exemption in the tax withheld on the payment of dividends and other distribution of profits to third parties, as well as exemption from the filing of tax returns with the Department of Treasury of the Commonwealth of Puerto Rico.
  • Tax exemption on the first $2.2 million of net income, applicable to individual cells within segregated and company-level asset plans. Any excess income will benefit from a tax rate. This amount was increased from $1.2 million to $2.2 million in 2016.
  • Preferential rate of 4%, guaranteed by Puerto Rico’s tax incentive program for 15 years and renewable.

Business Opportunities Under Law 399

The International Insurance Center is a platform to serve as:

  • Alternative risk management strategies as captive insurers or associated captives
  • Insurers or reinsurers access to Latin American or US markets.
  • Special Purpose Vehicles
  • Vehicle for integrated insurance plans
  • Corporate reorganization through holding companies of international insurers
  • Segregated asset plans to serve the market of individuals with high net capital
  • Risk assessment programs

Puerto Rico’s Act 185 Tax Incentive Program

The purpose of the Act 185 tax incentive is to establish the “Private Equity Fund Act” to promote the development of private capital in Puerto Rico. This is done through the formation of investment capital funds aimed at investing in companies that do not have access to public  markets and establish the applicable tax incentive framework.

The purpose of creating a Puerto Rico Private Equity Fund is to encourage the injection of private capital into Puerto Rico in various industries. Private equity funds that invest in securities that do not have access to public capital markets (such as the New York Stock Exchange, NASDAQ or other international markets), have become a key part of the recovery Economic development of the United States.

During the calendar year 2009, investment from private equity funds around the world totaled approximately ninety (90) trillion dollars, of which 36% was invested in the United States, which has particular significance in light of constraints faced by traditional banks in providing financing to private businesses.

Private Equity Funds not only represent a proven alternative to investment, but also constitute a financing and economic propulsion tool that facilitates the pooling of private capital in order to finance the expansion of companies, restructure businesses at risk and / or to promote pioneering businesses in full development.

In addition, by promoting this investment vehicle used by investors around the world, the government hopes to bring quality jobs in securities and financial businesses in Puerto Rico, as well as the development of the securities industry in the Island.

The Act allows for domestic or foreign investments, structured as partnerships and limited liability companies to elect to be treated as a fund under the Act (“Fund”) and to obtain tax benefits to Fund investors, among others, under the Puerto Rico Internal Revenue Code of 2011, as amended, (the “Code”).

Eligibility for Act 185

Any corporation or limited liability company, organized under the laws of the Commonwealth of Puerto Rico, of any State of the United States or of any foreign jurisdiction, engaged in investments in promissory notes, bonds, notes,  with or without collateral and including such collateral, shares, or any other value of a similar nature issued by entities that at the time of purchase, which are not quoted or traded in public securities markets of the United States or foreign countries, will qualify to be treated as a Fund, under the provisions of this Act, during each fiscal year that meets the following requirements:

  • Office located in Puerto Rico;
  • Engaged in business in Puerto Rico;
  • Accredited investors must be among the qualified investors;
  • The advisory board must include at least one resident of Puerto Rico;
  • Registered investment officer EBT-PR with an office in Puerto Rico;
  • Minimum $10 million capital within 2 years of receiving the license to operate;
  • A minimum of eighty percent (80%) of the capital contributed to the Fund by its paid-in capital, (excluding from such capital the money held by the Fund in bank accounts and other investments that are considered equivalent to cash) is invested in promissory notes, bonds, notes (including loans with and without collateral and including such collateral), shares or any other value of a similar nature that, at the time of purchase, are not quoted or traded In the public securities markets of the United States or foreign countries;
  • Up to 20% allowable in short term investments;
  • With 4 year restrict investment in and one business to 20% funds capital;
  • Foreign private equity must derive at least 80% of gross income from PR source;
  • Foreign PEF must within 4 years maintain at least 15% of funds capital invested in private securities; and
  • For PR PEF must within 4 years maintain at least 60% of funds capital invested in either private securities or exempt investment trust.

Certain income of the fund may be exempt from tax. General withholding tax provision are applicable. For investors interest and dividends received from fund are taxed at fixed 10%, and capital gains pay zero tax. Sale of ownership interest has a fixed rate 5% on capital gains unless reinvested. PR resident investors benefit from deductions of capital loss and deductions for initial investment. General partners (advisors, and PEF) to receive income are taxed at fixed 5% and capital gains at 2.5%.

The 185 Act will not affect tax treatment in respect to other tax incentive programs or future incentive programs. Remember that this Act is focused on those who wish to invest in Puerto Rico. Act 273 should be used by those wanting to manage US or international funds.

Puerto Rico’s Tax Incentive Act 135

The Law on Incentives and Financing for Young Entrepreneurs aims to expedite and facilitate the creation of new businesses by young residents of Puerto Rico.

Eligibility for the Young Entrepreneurs Tax Incentive Program

“Young Entrepreneur” means any individual who is a resident of Puerto Rico between the ages of 16 and 35 and who wishes to create and operate a new business in the territory. Also must have obtained a high school diploma or an equivalent certification or college degree.

A written agreement for youth entrepreneurship with CCE (Compañía de Comercio y Exportación de Puerto Rico) before starting commercial operations is required. This Act shall take effect immediately after its approval, and shall be effective for taxable years beginning before January 1st, 2020.

New Business Created by Young Entrepreneurs

  • Business that begins its main commercial operation after signing a Special Agreement for the Creation of Companies.
  • It must be operated exclusively by Young Entrepreneurs, as defined in the Law.
  • It will not be considered as New Business that has been operating through affiliates or is the result of a reorganization.

Puerto Rico Tax Incentives Available

  • Income tax exemption for youth ages 16 to 26 on the first $40,000 of gross income generated by wages, services and / or self-employment;
  • Student loan refinancing which shall not exceed 6%
  • Total tax exemption on income, municipal patent and property tax on new businesses established by young people aged 16-35 over the first $500,000 of gross income generated during the first three (3) years of operation;
  • Program for financing and for Venture Capital Investment with the BDE ( Banco de Desarrollo Economico) for young entrepreneurs;
  • PRIDCO Preferential Property Rentals and Land Authority;
  • Expedited process for the granting of permits and certifications.

To obtain the Act 135 decree applicant must provide:

  • Online application
  • US or PR government issued ID
  • Original birth certificate
  • Recent no debt certificate with Treasury Department of Puerto Rico (Hacienda)
  • Recent certificate of filed tax returns for last 5 years
  • Recent certificate of no debt with CRIM (and financial statement)
  • Recent certificate of compliance with ASSUME (Child support)
  • Any reasonable information asked for by the Commerce and Exportation Company (CCE)

Act 135 is limited to one new business per each applicant. Registration and permits up to date are required. A specific list of other incentive acts can not be availed in combination with Act 135.

Puerto Rico’s Act 74 Tax Incentive Program

The Tourism Development Act desires to transform Puerto Rico into a world class tourist destination by providing tax credits and tax incentives for businesses engaged in eligible activities.

Specifically focused on the development of the hotel industry, the act seeks to move capital onto the island. Act 74 provides 90% of most tax exemptions if the activity is in most areas of Puerto Rico (such as San Juan) and 100% if in Vieques. The tax incentive period is 10 years.

Eligibility for Act 74 Tax Breaks

  • Hotel administration and ownership including timeshares, vacation club programs condo hotels, guest houses, theme parks golf courses, marina, port facilities, agro hospices, agro tourism, medical tourism, nautical tourism among others.
  • Ownership of leases made with an Act 74 decree
  • Development of natural resources such a cavern, forest, natural reserve, and others
  • Purchase of existing hotels

Description of Puerto Rico’s Tax Incentives Under Act 74

The following is a brief description of the tax incentives available under Act 74. In most cases these are being used for the purchase of large hotels. But, Act 74 has many uses in Puerto Rico for the right small and medium sized investor. For a hotel deal, see: Chinese investor buys Marriott casino hotel in San Juan for $184M

  • The 10% of net profits are taxed at the regular rate and zero tax on 90% of the net profits (ie. 39% corporate tax on first 10% = 3.9% of full tax);
  • 100% exemptions on alternative minimum tax and undistributed income (retained earnings);
  • 90% tax exemption on personal property tax (up to 8.83% = .888%) and real property tax (10.83% = 1.083%);
  • 90% tax municipal license tax (up to 5% = .5%);
  • Up to 100% tax exemption on excise tax on imported goods;
  • Up to 100% tax exemption on sales and use tax (11.5% to 0);
  • Up to 100% tax exemption on municipal construction excise tax; and
  • Persons with equity interests in approved activities may receive tax credits of up to 50% of the cash paid for equity or 10% tax credit on total project cost.

Under Act 74, anyone acquiring an equity interest or who contributes land to an entity that develops an exempt tourism business will be entitled to an investment tax credit equal to 50% of the cash paid for equity investment or 10% tax credit on total project cost, whichever is lowest. The tax credit is to be taken in two installments. Half of the credit during the first year of the investment, while the remaining tax credit may be used in the second year. Any unused tax credits may be carried forward. The tax credits may also be assigned, transferred or sold. Puerto Rico has a healthy secondary market for the immediate sale of such credits. Many developers choose to inject such credits into the project, reducing the amount of equity required.

Puerto Rico’s Tax Incentive Act 14

Puerto Rico’s tax incentive Act 14 is titled the Return and Retention of Doctors in Puerto Rico and was established on February 21, 2017. This tax decree is for all qualified doctors with Puerto Rico source income. Puerto Rico sourced income is income from work performed in Puerto Rico.

Qualified Physicians who have a Decree under this Act will be subject, excluding any other contribution on eligible income provided by the Code or any other law, to a fixed rate of income tax of 4% on their eligible income generated by offering professional medical services.

Qualified physicians who have a decree under this Act may make voluntary contributions, after the payment of income taxes, up to twenty-five percent (25%) of the net income in the case of individual retirement plans (Keogh) or up to one Twenty five percent (25%) of their salary in the case of corporate retirement plans.

Eligible dividends shall be exempt from withholding tax on income at source and from payment of income taxes of Puerto Rico, including the alternate minimum tax provided in the Code, up to a limit of two hundred and fifty thousand ($250,000) dollars per taxable year.

As of July 11, 2017, Puerto Rico’s tax incentive Act 14 can be combined with Act 20. This new section allows for telemedicine and other “export services.” Through this combination, a medical doctor in Puerto Rico can receive tax free dividends and a 4% rate on income in excess of Act 14’s $250,000 cap.

Term to Apply for the Decree

All Qualified Physicians will have a term of two (2) years from the date of this law to submit their application to the department. Any request submitted to the Department after that date will not be accepted or evaluated.

Period of Tax Incentive

A Qualified Physician who holds a Decree granted under this Act, shall enjoy the tax holiday for a period of fifteen (15) years provided that during the term standards are met.

Doctor must comply with:

  • One hundred and eighty (180) hours of community service specified in the regulations or
  • By providing medical services as part of a service contract with the Health Plan of the Government of Puerto Rico. The Qualified Physician must provide one hundred and eighty (180) hours of service to health plan patients (typically low income persons). This work will not need to be offered free of charge and may be offered as an employee or independent contractor of the person or entity contracting with the Health Plan of the Government of Puerto Rico.

Puerto Rico’s Tax Incentive Act 83

An exempt business operating in Puerto Rico under the Green Energy Incentives Act by means of a Puerto Rico entity is not subject to any taxes (such as a dividend tax, import tax or other similar taxes) on its income from its eligible activities in Puerto Rico, other than the Puerto Rico fixed income tax rate established in the tax decree, regardless if said income is distributed or retained by the entity.

Upon repatriation, the distributed income will be subject to the tax imposed by the jurisdiction in which the owners of the Puerto Rico entity reside, if any. If the owners are residents of Puerto Rico, these distributions are likely tax free.  If the owners are residents of the United States, these distributions will be taxed as qualified dividends at 20 to 23.5% (depending on what happens with the Obamacare tax).

For the purpose of promoting the generation of green energy markets and the development
of mechanisms to incentivize the establishment, organization, and operation of green energy
production units in Puerto Rico at commercial level, and to stimulate the development of
sustainable energy systems that further energy use savings and efficiency, a special fund
denominated the Green Energy Fund of Puerto Rico was established pursuant to the
short, medium, and long-term objectives of this Act.

Eligibility for Act 83

Under the Green Energy Incentives Act, businesses engaged in the following activities will be considered eligible to apply for a tax decree:

  • Production and sale of renewable energy;
  • Operating renewable energy production units;
  • Businesses involved in the assembly of renewable energy equipment; and
  • Owners of property, real or personal, used by an exempt business in its exempt operations, such as a lessor of real estate used in operations of an exempt business.

Tax Exemptions Under Act 83

  • 4% fixed income tax rate on income derived from the production of energy in Puerto Rico;
  • 12% fixed income tax rate, withheld at source, on royalties paid to foreign entities with respect to intangible property used in the exempt business;
  • 100% tax exemption on dividend distributions;
  • 4% fixed income tax rate on gains derived from the sale of ownership interests or substantially all the assets of the exempt business, in lieu of any other Puerto Rico income tax imposed on such gains;
  • 90% tax exemption from personal property taxes. The taxable portion will be subject to the regular tax rate, that currently can be up to 8.83%; therefore, after considering
    the 90% exemption, the effective tax rate would be up to 0.883%;
  • 90% tax exemption from real property taxes. The taxable portion will be subject to the regular tax rate, that currently can be up to 10.83%; therefore, after considering the 90% exemption, the effective tax rate would be up to 1.083%;
  • 60% tax exemption on municipal license taxes, with the first 3 semesters being 100% exempt. Any taxable portion will be subject to the regular tax rate, that currently can be up to 0.5%; therefore, after considering the 60% exemption, the effective tax rate would be up to 0.02%;
  • 100% tax exemption on municipal construction taxes;
  • 100% tax exemption on excise taxes and sales and use tax on renewable energy equipment; and
  • Accelerated depreciation – 100% first-year bonus depreciation, with ability to carry over to subsequent tax years until exhausted.

Tax Credits

The Green Energy Incentives Act also provides various tax credits, including:

  • 25% tax credit on purchases of products manufactured in Puerto Rico;
  • 35% tax credit on purchases of products manufactured in Puerto Rico made from recycled materials;
  • Tax credit for job creation during the first year of operations that ranges from $1,000 per job created in an industrial area of intermediate development (as determined by the Office of Industrial Tax Exemption) to $2,500 for jobs created in an industrial area of low development. In the case of businesses established in the municipalities of Vieques and Culebra, this tax credit is $5,000 per job;
  • 50% tax credit on eligible research and development activity costs; and
  • 12% tax credit for royalties paid to foreign entities with respect to intangible property used in the exempt business.

Conclusion

Thank you for sticking with me on this article on all of Puerto Rico’s tax incentive programs. The territory of Puerto Rico is making a series of offers that can’t be matched by any foreign jurisdiction… at least for US citizens and US owned businesses.

Only Puerto Rico can offer a zero percent tax on dividends to its residents under Act 20. Only Puerto Rico can offer a zero percent tax rate on capital gains. Only Puerto Rico can offer an offshore bank charter without all the headaches of Federal oversight (not to mention the 4% tax rate). Only Puerto Rico can distribute dividends to its residents under Act 20 tax free.

If you want to reduce your worldwide tax on business income and capital gains, give the tax incentives of Puerto Rico a shot. For more information, please contact me at info@premieroffshore.com or call us at (619) 483-1708. We’ll be happy to help you to set up in Puerto Rico.

Puerto Rico Bankruptcy

How to benefit from Puerto Rico’s bankruptcy

The US territory of Puerto Rico is going through some tough times and will enter bankruptcy in the next few months. Puerto Rico is set to become the largest bankruptcy case in the history of the American public bond market. Here’s how you and your business can benefit from Puerto Rico’s bankruptcy.

Puerto Rico plans to file bankruptcy on $123 billion of debt owed by the government and its public corporations. Most is owed to bondholders and public employee pension systems. The bankruptcy is an attempt to deal with creditors while keeping public services going and will likely mean a 60% haircut for bondholders.

By comparison, Detroit’s bankruptcy was for $18 billion — one-ninth the size of Puerto Rico’s. Puerto Rico has a long way to go to reach the largest bankruptcy in history. Greece owed $220 billion in bailout cash when it defaulted.

Bottom line: Puerto Rico is in financial crisis… there’s blood in the streets… now is the time to make money!

Now is the time to setup a business in Puerto Rico.

Because of these financial woes, Puerto Rico is offering a number of tax holidays to new businesses. If you move a service business to Puerto Rico, and hire 5 employees on the island, you’ll cut your business tax rate to 4% on Puerto Rican sourced income.  

EDITORS NOTE: On July 11, 2017, the government of Puerto Rico did away with the requirement to hire 5 employees to qualify for Act 20. You can now set up an Act 20 company with only 1 employee (you, the business owner). For more information, see: Puerto Rico Eliminates 5 Employee Requirement

Just about any business that can provide a service from Puerto Rico to companies and persons outside of Puerto Rico will qualify for this tax deal. This includes banks, brokerages, investment advisors, internet marketers, call centers, technical support, and most online business.

If your business is portable, and requires at least 5 full time employees, you should consider relocating to Puerto Rico. For more see: Puerto Rico is the Top Offshore Business Jurisdiction for Americans.

EDITORS NOTE: On July 11, 2017, the government of Puerto Rico did away with the requirement to hire 5 employees to qualify for Act 20. You can now set up an Act 20 company with only 1 employee (you, the business owner). For more information, see: Puerto Rico Eliminates 5 Employee Requirement

In addition to online and portable service businesses, the following licenses qualify a 4% tax holiday guaranteed for 20 years:

And here’s the killer: Individuals who spend 183 days a year or more in Puerto Rico, and qualify as residents under Act 22, have a zero percent rate on passive income. Dividends from your Act 20 company are tax free, as are capital gains on assets acquired after moving to Puerto Rico. For more, see: Who is a Resident of Puerto Rico for US Tax Purposes.

Move your business to Puerto Rico and get tax deferral at 4%. Move you and your business to Puerto Rico and get tax free!

Puerto Rico is offering some amazing tax deals to businesses and high net worth individuals. The purpose of these tax deals is to bring employment to the island. The reason these tax deals exist is that Puerto Rico desperately needs jobs.

That is to say, Puerto Rico is making you an offer you can’t refuse because they’re broke… because Puerto Rico is in bankruptcy… because there’s blood in the streets.

And these offers from Puerto Rico come with a number of guarantees and protections. Yes, you’re investing in a distressed territory, but you have the protection of the US government and the guarantee of the Puerto Rican government.

As a territory, Puerto Rico is a hybrid. The island is exempted from US Federal tax law and free to create it’s own tax code. At the same time, most other Federal laws apply, such as employment, FDIC, etc.

Only Puerto Rico can offer these tax deals to US citizens because only Puerto Rico is exempted from the US tax code. Of the territories, only Puerto Rico has built a business friendly tax code.

Banking in Puerto Rico

Federal tax law applies to all US owned business abroad and all American citizens and green card holders living in foreign countries. Only American’s living in Puerto Rico are exempted from US Federal tax. For a comparison of Federal income tax of American’s abroad and Puerto Rico’s tax deal, see: Panama vs. Puerto Rico.

Yes, Puerto Rico is in bankruptcy, but their banks are protected by US law. Puerto Rico won’t go the way of Cyprus because all of their local banks are FDIC insured. There’s no risk of the government seizing the assets of depositors.

  • Local banks that accept deposits from Puerto Rican residents are required to have FDIC. Offshore banks licensed under Act 273 generally don’t apply for FDIC coverage.

And the state of banks in Puerto Rico is irrelevant to you. There’s no requirement to hold your income or retained earnings in Puerto Rico. The only requirement for retained earnings is that they remain inside a Puerto Rican corporation.  

So, form a Puerto Rican company and open a bank account in the United States. You can hold your cash at your favorite US bank with zero risk from Puerto Rico.

That is to say, a Puerto Rican company can open an account anywhere in the US. You can take your company documents into any Wells Fargo, Bank of America, or Citibank and get an account opened in a matter of minutes. While it’s impossible to open a US account for an offshore corporation, a Puerto Rican company is treated just like a structure from Delaware or Nevada by US banks.

20 Year Tax Holiday Guarantee

More importantly for a business seeking stability in Puerto Rico, your 4% tax holiday is guaranteed for 20 years. No matter how the political winds blow, your tax deal can’t be reviewed or revoked by the government of Puerto Rico. Even if the law is amended or repealed, you’re golden.

And only the government is locked in. So long as you have 5 employees in Puerto Rico and comply with the rules, you’re guaranteed a 4% tax rate on your Puerto Rico source income. If you want to walk away, you can shut down at any time without penalty.

As to a change in the law, once your company is set up and your tax deal approved, a change could be a great thing. I often tell clients that they should hope the law is repealed. When that door closes, the acquisition value of their Puerto Rican business will increase significantly.

Conclusion

Puerto Rico is offering you a tax deal you can’t refuse… and a deal that can’t be matched by any foreign country. For more information, please contact me at info@premieroffshore.com or call us at (619) 483-1708  for a confidential consultation on moving you and/or your business to Puerto Rico.

offshore bank license

The 8 Components of an Offshore Bank License

When building a new offshore bank, you need the following 8 components: The business plan, the capital, the people (board of directors, management, and employees), the computer systems, the compliance system, the license, a correspondent account, and a tax plan. These are the 8 components to negotiate an offshore bank license and set up a new international bank.

These 8 components are somewhat unique to offshore banking. Because you’re entering a licensed and highly regulated industry, building a new offshore bank requires you develop each of these areas to the satisfaction of your licensing board.

A new offshore bank obviously needs all the same things any startup would, such as a solid business strategy, sales, money, experienced people, etc. This article is on the 8 components an offshore bank required which are different from a standard business.

The Business Plan

An offshore bank requires a very detailed business plan. The business plan is the heart of the license application and should include audited financials from the parent company or accounting and tax records from the beneficial owners.

The plan should also include 3 to 5 years of projections broken down by business unit. These projections should cover use of funds, risk and liquidity ratios, reserves, break-even analysis, etc. across all divisions of the bank.

The bottom line is that the business plan must convince the regulator that the applicant is of fine character, has the requisite experience, has a well thought out and funded plan, and understand the risks and compliance requirements of operating an offshore bank.

Each of the next 7 components of a startup offshore bank must be described in great detail in the business plan. Again, remember that the business plan must convince the regulators, auditors, and licensing board that you and your team are qualified to operate a bank and won’t cause trouble for the jurisdiction.

The Capital

All offshore bank licensed require a minimum amount of capital to comply with the statute. In Dominica, the required capital is $1 million on deposit in the government bank. In Puerto Rico it’s $250,000 of paid in capital plus $300,000 on deposit with the government.

Those two jurisdictions typically issue licenses with the minimum amount of capital under the law. Other countries require much more cash. For example, Belize law allows for a license with $1 million, but experience tells me that you’ll need $3 million to $5 million to get an offshore banking license.

Then there are the larger jurisdictions that negotiate capital on a case by case basis. For example, a subsidiary of a bank from a major jurisdiction can get an offshore license in Panama with around $5 million in capital. If you don’t have a major license already, then you’ll need a Class A license from Panama and about $25 million in capital.

When selecting the best jurisdiction, you should first consider the capital required. This will usually narrow down your search significantly. But, as you can see, knowing the capital requires experience and not just a review of the law as written.

The People

Your business plan should include the resumes of your key personnel and your board of directors. Both of these groups must have extensive experience in banking. Presumably your management and employees will be locals (residents of the country where you get your license).

It’s also important that your board of directors include one or two locals. The licensing authority will look upon your team more favorably if it includes professionals with a solid track record in your country of license. These board members should have experience in banking law and/or compliance.

At a minimum, you’ll want to handle account openings, KYC and AML, correspondent banking, and compliance in the same country that issued your license. Many banks in small jurisdictions put support and trading / investment management in larger countries such as Switzerland or Panama.

Thus, your country of license should be large enough provide a sufficient number of quality employees. While Dominica and St. Vincent might be fine for banks with 4 or 5 employees, there’s no way to build a staff of 200 there.

Puerto Rico is a country of 3 million and any US citizen can move to the island and work legally. No matter the size of the business, you’ll find quality employees on the island… and, if you can’t find them, you can import them.

The largest offshore bank on the island has over 400 employees and the next has about 180.  The banks in Puerto Rico are larger than all of the competitors in the Caribbean combined excluding Cayman. I expect Puerto Rico to surpass Cayman in two years.

Where your staff is located will play a major role in determining the tax costs of your bank. See Tax Considerations below.

The Computer Systems

The foundation of your operation will be the computer system. The IT system for an offshore bank will handle KYC and AML, compliance, background checks, account openings, transfer, document management, etc. All of these modules will be looked at carefully by the government regulators before they allow you to “go live” with the business.

The core system and compliance modules are typically the largest startup cost for a new offshore bank. Most clients spend $100,000 to $1 million on their IT system. The largest quote I’ve seen in 2017 was from Terminos for $3.5 million.

A typical IT implementation will take 3 to 6 months. Once the provisional license is granted, the IT system will be what will delays your launch. Get to work on this while you’re building your business plan and you’ll get to market much quicker.

The Compliance Systems

The compliance system will be built around your IT system. From there, you can build an in-house team or outsource compliance monitoring to a local law firm.

Basically, all the operational risk of an offshore bank comes from a possible failure of your compliance program. If you run afoul of the money laundering rules, know your client requirements, or FATCA / OCEF reporting, you’ll be fined and shut down faster than you can blink. Either your licensing board will get you or your correspondent partner will kick you out of the system.

No matter your jurisdiction, government regulators will watch your compliance program very carefully. Any error will be dealt with swiftly and without a second chance.

The reason regulators monitor compliance so carefully is that a major error by one bank can bring down the entire country’s banking system. For example, back in 2015, Bank of Belize was shut down by US regulators. As a result, all of the banks in Belize lost their correspondent partners because none of these banks wanted anything to do with Belize. The entire system was tainted by one allegation against one offshore bank.

It took months for these banks caught in the crossfire to get new banking partners. To this day, it’s very difficult for a Belize bank to find a correspondent partner. See: Belize Banks Under Attack by US Government.

For these reasons, your business plan must explain your compliance program and procedures in great detail. Also, your employees and board of directors must have significant compliance experience.

Once your preliminary license is granted, building a solid compliance program will be your first priority. All processes and procedures must be in place, and everyone trained in the IT system, before you board even one client.

The License

Regardless of what their law says, very few counties will grant international banking licenses to startup banks. For example, Panama and Cayman will only issue offshore licenses to banks that already have a license from a major jurisdiction.

If you have a license from the US or Germany, you can easily get a license in Cayman Islands. Cayman’s reasoning is that your bank is already highly regulated in your home country, so their regulators don’t need to worry about you too much.

If you have an existing license, you can get an offshore license from Panama with $5 million. If you want to start a new bank in Panama, you can form a Class A bank with $25 million in capital.

The most active jurisdictions for offshore bank licenses are Puerto Rico and Dominica. For a comparison of these two options, see: Best Offshore Bank License Jurisdictions in 2017

Of course, there are others in Europe and less active jurisdictions in the Caribbean. I would avoid African nations and Vanuatu. You’ll never get a correspondent account from those countries.

Once you’ve selected your jurisdiction and prepared your business plan, you can apply for your preliminary license.

Preliminary Offshore Bank License: The preliminary license, sometimes referred to as your “permit to organize,” allows you to incorporate a company using the word “Bank” in the name. It also allows you you to hire employees, buy your IT system, and do all of those things necessary to begin to operate the business.

Once your systems and people are in place, you send notice to the regulator that you’re ready to launch. The government will audit your systems and procedures. If they pass, you’ll receive your offshore bank license or permit to operate.  

Offshore Bank License: The second step in the licensing process is to take the bank live and begin to board on clients. The operational license will require you provide audited statements to the regulator each quarter. Now is the time to hire an outside auditor.

The Correspondent Account

The life blood of an offshore bank is its correspondent account. The correspondent account allows you to hold money and transact through the facilities of a larger bank. Ask any experienced offshore banker what’s the most important component of their business and every one will answer, “the correspondent account, obviously!”

For example, if a bank in Dominica want’s to hold accounts in US dollars, they need a US correspondent banking partner. The US partner has US Fedwire capabilities and is authorized to transact in US dollars.

Likewise, if you want to hold accounts in Swiss Francs, you need a Swiss correspondent bank. An offshore bank will need a separate correspondent account for each currency it wishes to hold.

And its the correspondent account that will require the most capital. While you can negotiate a license from Dominica with $1 million, no USD correspondent will open an account with that small of a deposit. I doubt you can get a correspondent account with less than $5 million… and $12 million is the preferred size.

These accounts are also the bane of the offshore banking industry. Any slip in compliance, or attention from the US government, can mean the loss of your correspondent account. When that happens, your bank is basically out of business and unable to send and receive funds.

The exception to the correspondent account dilemma is a license from Puerto Rico. As a bank licensed in a US territory, a bank in Puerto Rico has an easier time setting up and maintaining a US correspondent partner.

Also, if the bank so desires, it can apply to the Federal Reserve for a primary account. In that case, a Puerto Rico bank would eliminate the need for a USD correspondent account. In fact, such a bank structured in Puerto Rico could offer correspondent services to other offshore banks.

I’m not saying Puerto Rico is always the best solution. If you don’t mind being subject to US anti-money laundering rules, Puerto Rico is great. If you want to do business without US oversight, then Dominica or elsewhere might be better.

I caution you from jumping to conclusions in this regard. Always remember that your US correspondent bank will require you to comply with all US regulations. If you want to be completely free of US compliance costs, you must get a license from a very small offshore jurisdiction and not hold US dollars or transact n US dollars. Only then will you avoid US correspondent banking issues.

Tax Considerations

Most offshore banking jurisdictions won’t tax the your corporate profits. Instead, they charge a large annual license fee. For example, Cayman charges $85,000 per year to maintain an international banking license.

In contrast, Puerto Rico charges a 4% rate on corporate profits and a $5,000 annual fee.

The tax benefits of operating an offshore bank are substantial. But you’ll need a solid tax plan to maximize the value of these tax deals.

Let’s say you set up a bank in Dominica and hire 3 people on the island. Then you open office in the UK and hire 23 people. Obviously, most of the work to generate customers and income is coming from the UK while Dominica is just the licensing jurisdiction with a few people doing menial tasks.

In that case, the UK will want to tax the majority of your income at 21%, leaving only a small fraction tax free in Dominica.

The same goes for Puerto Rico. Let’s say you have 5 employees on the island, which is the minimum allowed under the law. Then you open an office in Florida with 50 employees.

The US government will want to tax the income generated by the Florida workers at 35%, leaving a small bit left over for Puerto Rico to tax at 4%.

Your global tax plan is important during the startup phase because you want to maximize income in the low tax jurisdiction and minimize income in high tax countries.  Thus, when you select your country of licensure, it must be one large enough to provide a sufficient number of quality employees and allow for growth in coming years.

If you all you require is 5 to 10 employees, and don’t plan to grow much past this number, a license from Dominica, St. Vincent, St. Lucia, or elsewhere is fine. If you’ll need 50 employees, you’ll need to look to a larger jurisdiction such as Puerto Rico.

If you do incorporate in Dominica, you might also consider a Panama Financial Services License. This will allow you to hire employees to manage your bank remotely and maintain your tax free status.

Conclusion

I hope you’ve found this article on the 8 components of an offshore bank license to be helpful. For assistance in licensing and building an offshore bank in Dominica, Puerto Rico, or elsewhere, or in negotiating a correspondent account for an existing bank, please contact me at info@premieroffshore.com or call us at (619) 483-1708. Our team has over 100 combined years of experience in offshore banking and we’ll be happy to help you structure your bank.

international financial entities in puerto rico

International Financial Entities Licenses in Puerto Rico

An International Financial Entities licensed in Puerto Rico under Act 273 is one of the most powerful international banking and financial services structures available. As the rules continue to tighten around offshore transactions, offshore tax benefits are reduced under President Trump, and the US increases FATCA and other regulations, expect more financial services companies to move to an International Financial Entities license in Puerto Rico.

This International Financial Entities in Puerto Rico can offer all manner of international banking, brokerage, investment management, and financial services from Puerto Rico to clients outside of Puerto Rico. Below I will detail all of the services which may be provided by this structure.

In order to qualify as an IFE in Puerto Rico under Act 273, you must hire 4 employees on the island (I usually advise clients hire 5). Then you set up an office, submit a very detailed business plan to the banking regulator, and negotiate the terms of your license.

Once approved, you will be eligible for a 20 year tax holiday on all income earned by your International Financial Entity in Puerto Rico. You will pay a 4% tax rate on all corporate profits earned by the business.

That is to say, the corporate tax rate on Puerto Rico sourced income in your IFE will be 4%.

You will also get full property and municipal licenses tax exemptions and a 6% income tax rate on distributions to PR residents. Dividends to non-PR residents will be tax free. Likewise, dividends paid to residents of Puerto Rico who qualify under Act 22 are tax free to the IFE and to the receiving party.

An IFE in Puerto Rico must be capitalized with a minimum of $550,000. Of this, $300,000 is placed on deposit with a local bank as a surety. The balance of $250,000 is your minimum corporate capital. Total authorized shares of your International Financial Entities in Puerto Rico must be $5 million (but only $250,000 of this is paid-in).

The largest firms structured under Act 273 as a International Financial Entities in Puerto Rico are international banks. For an article on this topic, see: Lowest Cost Offshore Bank License is Puerto Rico

The IFE license not limited to international banks. Family offices, insurance companies, investment advisors, hedge fund operators, currency traders, and others all operate under Act 273 as an International Financial Entities in Puerto Rico. For this reason, Act 273 is the most powerful financial services license available today.

Here’s a list of the services an Act 273 International Financial Entity licensed in Puerto Rico can offer:

  1. Accept deposits, including demand deposits and interbank deposits (or otherwise borrow from banks outside of PR and other IFEs)
  1. Place deposits with banks outside of PR and other IFEs.
  1. Make, procure, place, guarantee, syndicate, or service loans.
  1. Issue, confirm, give notice, negotiate or refinance letters of credit provided both the client and the beneficiary requesting the letter of credit are not residents of Puerto Rico.
  1. Discount, rediscount, deal or otherwise trade in money orders, bills of exchange, and similar instruments, provided that neither side of the transaction is a resident of Puerto Rico.
  1. Engage in any banking transaction permitted by Act 273 in the currency of any country, or in gold or silver, and participate in foreign currency trades.
  1. Underwrite, distribute, and otherwise trade in securities, notes, debt instruments, drafts and bills of exchange issued by a firm outside of Puerto Rico and purchased by a client of the IFE who is not a PR resident.
  1. Engage in any activity of a financial nature outside of Puerto Rico which would be permissible for a bank licensed in the United States.
  1. If the International Financial Entity licensed in Puerto Rico gets an additional license, it may act as a fiduciary, executor, administrator, registrar of stocks and bonds, property custodian, assignee, trustee, attorney-in-fact, agent, or in any other fiduciary capacity.
  1. Acquire and lease personal property.
  1. Buy and sell securities outside of Puerto Rico.
  1. Provide investment advice to persons outside of Puerto Rico.
  1. Act as a clearinghouse in relation to financial contracts or instruments of persons who are not residents of Puerto Rico.
  1. Organize, manage, and provide management services to international financial entities such as investment companies and mutual funds. This is the section of the law used by hedge funds to manage master / feeder structures set up in Cayman with feeders in the US and Cayman.
  1. Dedicate itself to provide the following Services:
  • Asset management,
  • Management of activities related to the investment of private capital,
  • Management of hedge funds and high-risk funds,
  • Management of pools of capital,
  • Administration of trusts utilized for converting different types of assets into securities (such as REITs),
  • Management of Escrowed  fund for persons who are not residents of Puerto Rico.
  1. Engage in any other activities approved by the Commissioner.
  1. With the Commissioner’s prior approval, establish branches outside of Puerto Rico. This includes the United States and foreign countries.

Section 15 above is commonly used by family offices. The clause “dedicated to” means you may only engage in these activities and will thereby be subject to reduced compliance.

For more on operating an investment fund from Puerto Rico, see: How to operate an investment fund tax free from Puerto Rico

Note that an International Financial Entities in Puerto Rico is prohibited from doing business with persons or businesses in Puerto Rico. Therefore, all of the above are limited to persons outside of Puerto Rico. An Act 273 IFE can do business with Puerto Rico’s Development Bank and its Economic Development Bank.

I hope you’ve found this article on the International Financial Entities of Puerto Rico licensed under Act 273 to be helpful. For more information on setting up an IFE in Puerto Rico, please contact me at info@premieroffshore.com or call us at (619) 483-1708.

You might also find my articles Puerto Rico’s Act 20 to be helpful, as well as a comparison between offshore tax planning and Act 20.

For more on Puerto Rico’s Act 273 vs a traditional offshore banking license, see: Top 5 Offshore Bank License Jurisdictions for 2017. For my post on the offshore FinTech, see: Offshore FinTech Bank License.

For more of my articles on the offshore bank licensing and operations, see:

tax planning for payday lenders

International Tax Planning for Payday Lenders

The US tax costs for Payday lenders in the United States is harsh. The interest component of your income is taxed where the borrower is located. This means you get to file returns is every state and deal with a web of complex tax laws.

Then, the portion of your income which is not considered interest, is taxable where you and your business is located. This must be in the United States, so you’re paying 35% corporate tax plus up to 12% in state tax on net profits.

What if I tell you that you can operate in the United States and pay only 4% on the majority of your net profits? That you can get a banking license and operate the business through this entity while still maintaining your 4% corporate tax rate?

That’s exactly what I’m saying. You can setup a fully licensed credit union in US territory Puerto Rico and make loans throughout the United States. Then you structure an Act 20 company in Puerto Rico to service the loans, which is taxed at 4%. The credit union breaks-even or makes a small profit for its members, but the bulk of the income moves to the Act 20 company.

This structure will allow a large payday lender to exchange their 40% US tax rate on corporate profits for a 4% tax rate in Puerto Rico.

Puerto Rico is the ONLY jurisdiction such a tax deal can be had. If you set up offshore, US Federal tax laws apply to your US owned business. Plus, it’s nearly impossible to make loans into the United States from abroad.

Puerto Rico is unique. It’s a US territory, so US Federal laws apply. This means that forming a payday loan company in Puerto Rico is equivalent to forming the company in any US state… with one major exception… taxes.

Section 933 of the US tax code exempts any income earned in Puerto Rico from US taxes. A business operating from Puerto Rico pays only Puerto Rican taxes, not US Federal income taxes.

For this reason, Puerto Rico can offer payday lenders a deal. Setup your company here, negotiate an Act 20 business license, hire at least 5 employees on the island, and your Puerto Rico sourced income will be taxed at 4%.

To clarify: You will still pay US income tax on the interest component. It’s the business component of your corporate profits that are taxable in Puerto Rico at 4%. To qualify for this 4% rate, the work to generate those corporate profits must be done from Puerto Rico.  

Here’s how you might allocate income between interest income / US source income and corporate income / Puerto Rico sourced income taxable at 4%:

Some tax experts take the position that the interest component of payday loans should be about the same as that of a junk bond. That’s a rate of around 6% to 10% per year.

However, payday loans often have an effective cost to the borrower of 200% to 600% per year. The average cost of a payday loan that rolls over a few times is 400%.

Thus it can be argued that US source income taxable where the borrower is located is 10% while the balance, 390% is Puerto Rico sourced income.

In very rough numbers, a payday lender might be able to move 98% of their income out of the Federal tax system and into the more favorable Puerto Rico tax regime. This will reduce your tax rate from 40% to 4% on any Puerto Rico sourced income.

Now for the kicker: if you’re willing to move to Puerto Rico, and qualify under Act 22, you can withdraw the profits of your Act 20 company tax free.

Also, any capital gains earned on personal investments you make after becoming a resident of Puerto Rico are taxed at zero. That’s right, your personal income tax rate on capital gains is 0% as a resident of Puerto Rico.

To be considered a resident of Puerto Rico, you must spend at least 183 days a year on the island and buy a home there. Basically, you must give up your home base in the United States and move your life to Puerto Rico.

I’ll conclude with a quick note on Act 273 banks.

Those who follow my blog know that I’m a big proponent of Puerto Rico’s offshore bank license, referred to as an Act 273 bank license. This is an excellent option for those looking to setup an offshore bank that doesn’t accept US clients or doesn’t make loans.

The reason Act 273 doesn’t fit the payday loan model is because such a bank would require FDIC insurance and all manner of Federal regulations would apply. Any US bank, even a 273 bank in Puerto Rico, that takes deposits, makes loans, and accepts US clients, must apply for FDIC. This is impossible for most payday lending banks.

A credit union in Puerto Rico is not obligated to apply for FDIC. This is why I recommend the credit union combined with an Act 20 management company for a payday lender looking to redomicile their business to a low tax jurisdiction.

I hope you’ve found this post on international tax planning for payday lenders to be helpful. For more information, please contact us at info@premieroffshore.com or call us at (619) 483-17083. 

You might also find this article interesting: How to operate an investment fund tax free from Puerto Rico

The above is a very general summation of complex tax issue and the related sourcing rules. Each payday loan company will have a different taxable rate. I strongly recommend you research this matter carefully and secure an opinion letter from a top firm before making any decisions.

operate an investment fund tax free from Puerto Rico

How to operate an investment fund tax free from Puerto Rico

The best tax deal available to hedge fund traders and investment fund managers is Puerto Rico. There’s no tax holiday available anywhere in the world that can compete with the offer from Puerto Rico. Here’s how to setup and operate an investment fund tax free from Puerto Rico.

First, let me explain why Puerto Rico can make an offer to US hedge fund managers that no one can match. It’s because Puerto Rico is a US territory with its own tax code. Any US citizen that becomes a resident of Puerto Rico, and operates a business from the island, is exempted from Federal tax laws and pays only tax in Puerto Rico.

The same is not true when you move abroad or setup an offshore company. Federal tax laws apply to any business owned by a US citizen or green card holder… unless that business is in the US territory of Puerto Rico.

The fact that Puerto Rico is exempted from Federal tax laws is codified in US Code Section 933. It states, in part:

“In the case of an individual who is a bona fide resident of Puerto Rico during the entire taxable year, income derived from sources within Puerto Rico (except amounts received for services performed as an employee of the United States or any agency thereof); but such individual shall not be allowed as a deduction from his gross income any deductions (other than the deduction under section 151, relating to personal exemptions), or any credit, properly allocable to or chargeable against amounts excluded from gross income under this paragraph.” (26 U.S. Code § 933 – Income from sources within Puerto Rico)

So, if you’re living and operating your investment fund from Puerto Rico, you’ll pay only Puerto Rico tax. A resident of Puerto Rico is someone who spends at least 183 days a year on the island and otherwise qualifies for Act 22. In addition, Puerto Rico should be your home base and the center of your financial activity.

Your fund will need to be licensed under Act 73, the Economic Incentives for the Development of Puerto Rico Act. Act 73 offers a tax holiday to any investment fund providing services from Puerto Rico to individuals and companies outside of Puerto Rico. Eligible services include investment banking or other financial services including but not limited to:

  • Asset management,
  • Alternative investment management,
  • Management of private capital investment activities,
  • Management of hedging funds or high risk funds,
  • Pools of capital management,
  • Administration of trust that serve to coovert different groups of assets into securities, and
  • Escrow account administration services.

Note that Act 73 requires you provide services from Puerto Rico to persons or businesses outside of Puerto Rico. You don’t incorporate your fund in Puerto Rico… you operate it from Puerto Rico to qualify for Act 73. Operate as a standard offshore master feeder fund in Cayman or another tax free jurisdiction. Basically, the service of operating the fund is being exported from Puerto Rico to Cayman.

Your feeder funds should be organized based on where your clients are domiciled. For example, a Delaware LLP for US investors and an offshore feeder for foreign and tax exempt investors (such as US IRAs and pension funds). You, the general partner and manager would be a resident of Puerto Rico.

Under Act 73, your profits in the fund are taxed at 4%. When those profits are transferred to you, the fund owner/manager resident in Puerto Rico, they will be tax exempt dividends. Thus, your total tax burden is 4% on your profits.

Remember that, as a resident of Puerto Rico, Federal taxes do not apply to you. Thus, you will never pay US tax on these profits. This is not tax deferral as you see offshore… this is a tax rate of 4%, plain and simple.

I should point out that these tax benefits are not meant for your US resident investors. They get their K-1s just as they normally would from your domestic feeder. These tax incentives are meant for the owners of the fund who are resident in Puerto Rico.

  • Nonresident shareholders of the fund can achieve tax deferral on Puerto Rico sourced income while resident shareholders can take distributions tax free.

Also, the 4% rate applies to Puerto Rico sourced income. It does not apply to any US effectively connected income or US source income. Funds and REITS may have US taxable income from lending or any number of other activities in the States.

Structuring and operating a fund from Puerto Rico will dramatically decrease your US taxes. It will also reduce the complexity of your tax planning. So long as you meet the requirements of Act 73, you’re clean in the eyes of the IRS.

Act 73 is only one of several tax incentives available in Puerto Rico. For example, Act 20 allows any service business relocated to the island to receive this same 4% tax rate. For more, see: Puerto Rico is the Top Jurisdiction for US Businesses.

Large funds might decide to enter Puerto Rico using the offshore banking statute, Act 273. For more on this, see: Lowest Cost Offshore Bank License is Puerto Rico. This article is focused on deposit taking banks. There is a section of 273 for International Financial Entities that is used by some investment managers.

I hope this article on how to operate a fund or investment business tax free from Puerto Rico has been helpful. For more information, or to setup a business under Act 20 or 273, please contact us at info@premieroffshore.com or call us at (619) 483-1708. We will be happy to assist you to negotiate a tax holiday with the government of Puerto Rico.

offshore bank license

Top 5 Offshore Bank License Jurisdictions for 2017

There have been big time changes in the offshore bank license industry over the last year. If you’re looking to form an international bank, here are the top 5 offshore bank license jurisdictions for 2017.

In this post, I’m talking about countries where you can get a license… countries that will issue a license to a startup bank.  This is not a list of the largest or most respected banking jurisdictions. It’s a list of countries where you will be approved if you have a solid business plan, an experienced board of directors, and the requisite capital.

My list of the top 5 offshore bank license jurisdictions for 2017 is focused on offshore options where you will get a license and a correspondent account from a reputable institution. Sure, you can buy a cheap license from Africa or elsewhere, but good luck using it.

1. Dominica

The best “pure” offshore bank license is from the Caribbean nation of Dominica. The Commonwealth of Dominica is a sovereign island country and part of the Windward islands in the Lesser Antilles archipelago of the Caribbean Sea. It’s current population is about 75,000 and it’s a member of the Eastern Caribbean group of countries and the ECC banking system.

Dominica is a leader in the offshore banking and second passport industries. Many who establish a bank on the island also buy a passport from Dominica. For more on second passports, see A Second Passport from Dominica.

The reason I have Dominica at the top of my list is that this island is actively seeking new candidates, has a reasonably efficient application process, has a relatively low capital requirement, and banks from Dominica are able to find correspondent banking partners.

The capital required to secure a license on Dominica is only $1 million. That’s the lowest of any reputable offshore jurisdiction.

I should point out that, once you have your license, you will probably need more capital to get a correspondent banking account. It will be difficult to find a partner bank to take on a client with only $1 million in cash. The costs and compliance overhead on correspondent accounts make small clients unattractive.

For more on a bank license from Dominica, see: How to get an Offshore Bank License in Dominica.

2. Puerto Rico

Above, I wrote that the best “pure” offshore license is from Dominica. The best hybrid bank license, and possibly the best overall depending on your objectives, is from the U.S. territory of Puerto Rico.

Capital required is only $550,000. Of this, $200,000 should be paid-in capital to your corporation and $350,000 on deposit with the government.

The costs of formation, licensure and operation in Puerto Rico will be a fraction of the other options on this list. For this reason, the lowest cost offshore bank license is Puerto Rico. For example, the annual license fee in Cayman is about $85,000 compared to $8,000 in Dominica and only $5,000 in Puerto Rico.

Finally, there are no FATCA or U.S. reporting for the bank or the customers of the bank. U.S. citizens can go offshore to Puerto Rico with zero IRS reporting headaches. This is a major competitive advantage and cost savings for an international bank licensed in Puerto Rico.

I’ve listed all the positives as to why you should consider an offshore bank license from Puerto Rico.

The negatives are that your bank will be tied to U.S, government oversight, SEC and other rules, U.S. immigration considerations, and your bank must have a minimum of 5 employees in Puerto Rico.

This low license fee is balanced against your tax costs. If you have 5 employees in Puerto Rico, and qualify under Act 273, your tax rate will be 4%. If you do not meet these requirements, your tax rate will be about 35%.

Immigration can be an issue for some. All employees must be U.S. citizens and you must meet Federal immigration criteria to move to Puerto Rico. If you buy a passport from Dominica you can become a citizen in about 90 days. It’s not so easy to immigrate to the United States.

If you want to run a bank without U.S. oversight, Puerto Rico is not for you. If you want a bank with a solid reputation based on a rigorous compliance and regulatory environment, then give Puerto Rico a chance as a low cost high value hybrid license.

3. Cayman Islands

Puerto Rico is the second largest offshore banking jurisdiction after Cayman Islands. Cayman is the most reputable and highest cost “pure” offshore banking jurisdiction. There are about 70,000 companies registered in Cayman, along with 350 banks and 700 insurance companies. There’s over US $1 Trillion in assets in Cayman banks.

The cost of a banking license in Cayman Island (the fees paid to the government upon issuance) are quite high. They range from $160,000 to $600,000 for a Class A license. Add on to this about $500,000 in legal fees, not to mention auditors and other required professionals, and the startup costs add up quickly.

Also, the vetting process will take over 12 months and a Cayman banking license is notoriously difficult to negotiate. For more on the costs and process, see the Cayman Islands Monetary Authority website.

If you can make it through the gauntlet, you’ll come out the other end with a world class offshore banking license.

4. Belize

The banking law in Belize says an international license requires $1 million in capital and a full license required $3 million in capital. In practice, be prepared  to deposit $5 million for the international license. No one bothers with the full license any longer (which allows you to sell to Belizeans).

If you’d like to do some market research, annual and quarterly reports for all Belize banks are available on the Central Bank’s website. This is a great resource if you’re considering a bank license from Belize.  

The due diligence process in Belize will be a minimum of 12 months (compared to 3 to 4 months in Puerto Rico). Some offshore bank licenses have taken as long as 18 months to complete.

If you are planning to setup an investment management bank, Belize has some of the highest capital ratios in the world (20% in many cases). For this reason, Belize banks are considered safe by depositors.

5. Panama

Panama is a top tier banking jurisdiction with many billion dollar institutions and a well developed regulatory system. If I were to describe Panama in one sentence, it would be “the best offshore bank license when cost / capital is no issue.”

Like Belize, Panama has an international license and a full license. The problem is that Panama won’t issue an international license unless you already have a full license from your home country. For example, if you have a U.S. license, you can get a subsidiary bank license in Panama.

This means that a startup bank will need to open under the full license which is likely to require $24 million in capital. The law says $10 million for a general license and $3 million for an international license, but these values will increase significantly when negotiations begin with the Central Bank.

I should point out that Panama has many different financial services licenses. For example, a bank in Dominica or Belize, that wants to manage client funds in Panama, might apply for a Financial Services license. This would allow you to operate a trading desk and open a correspondent account in Panama without a local license.

Another option in Panama is to set up a Credit Union. Similar to U.S. cooperatives, Panama’s credit unions are savings and loans where each depositor is a shareholder.  Known as “Cooperativas”, Panamanian credit unions are licensed as financial co-op institutions.  They are regulated under Law 17 of 1997 which granted them non-profit tax free standing.

There are hundreds of credit unions in Panama, but most are for employees of one industry or another. For an example of a public cooperativa, see Cooptavanza.

Depending on your business model, it might be possible to set up in Panama with capital of $1 to $3 million as a credit union. The IPACOOP “Instituto Panameno Autonomo Cooperativo regulates all of Panama’s credit unions.  For more informaiton, see: www.ipacoop.gob.pa

For more how to accept deposits from clients, and alternatives to an offshore banking license, take a read through Offshore Money Management Business: How to Accept Client Funds and Deposits.

To delve deeper into offshore bank licensing and operation, please review my articles on offshore bank licensing and operation. I’ve been working in offshore banking for over a decade. My recent articles on the topic are:

If you’re considering forming an offshore bank or filing for an offshore banking license, you need to be ready for a lot of red tape, a significant vetting process, and to maintain a sizable deposit with the central bank (your corporate capital).

Countries are cautious when issuing offshore banking licenses. If any bank fails in a small country, it can result in a loss of confidence in the entire system. And, of course, no country wants to risk upsetting the mighty U.S. of A, as Belize did. This little spat shut down their banks for about 6 months.

If you want to enter the offshore banking market today, you need a solid business plan, an experienced board of directors, and an agent to quarterback your application.

I hope you’ve found this review of the top 5 offshore bank license jurisdictions to be helpful. If you’d like more information, please contact me for a consultation at info@premieroffshore.com or call (619) 483-1708

Puerto Rico Bank License

Lowest Cost Offshore Bank License is Puerto Rico

Want to setup an offshore bank? Looking for an international banking license? Obtaining an offshore bank license and negotiating offshore correspondent accounts have become extremely difficult in every jurisdiction except one. The lowest cost offshore bank license is Puerto Rico. Yes, the US territory of Puerto Rico is the best island in the Caribbean to negotiate an offshore bank license.

Puerto Rico is the lowest cost offshore bank license available anywhere in the world. And, it comes with the ability to get US correspondent banking relationships more efficiently than other offshore bank licensing jurisdictions.

Let me first clarify two terms.

When I write about an offshore bank license, I mean a banking license that allows you to do all types of international banking business. The only limitation is that you can’t accept clients from the issuing jurisdiction. So, an offshore bank licensed in Puerto Rico can accept clients from anywhere in the world (including the United States) except Puerto Rico. Likewise, an offshore bank licensed in Panama can accept clients from anywhere but Panama.

And, when I say Puerto Rico is the lowest cost offshore bank license jurisdiction, I mean the lowest set up, capital, and operating cost by a long shot. I mean that an offshore bank license in Puerto Rico can be had for a fraction of the cost and capital of any other jurisdiction.

To give you an idea of the cost difference, it would require 10 times the capital of Puerto Rico to set up in the country of Belize. The cost of operating in Cayman would be 17 times higher than the cost of operating in Puerto Rico.

  • The annual fee for the international banking license in PR is $5,000. This compares to $85,365.85 in Cayman. The cost of labor and all other services are dramatically higher in Cayman than Puerto Rico.

Puerto Rico has been aggressive in courting financial service, hedge fund, and banking companies since 2013. Their Act 20 which any US business to move to Puerto Rico and pay only 4% in tax. They also approved Act 22 which cuts the capital gains rate to zero for any American who moves to Puerto Rico and spends at least 183 days per year on the island (becoming a legal and tax resident of Puerto Rico).

An offshore bank licensed in Puerto Rico under Act 273 receives the same  4% tax rate. This tax holiday is guaranteed for 15 years. Also, full property and municipal license tax exemptions, 6% income tax rate on distributions to PR resident shareholders and a 0% tax rate on distributions to non-PR resident shareholders, are available to offshore banks licensed in Puerto Rico.

  • This article focuses on Act 273 and not Act 20  and 22. When doing your research, note the distinction between 273 for banks and 20 / 22. For example, Act 273 guarantees you a 4% rate for 15 years where Act 20 guarantees you the same for 20 years. Act 273 requires 4 employees where the latest version of Act 20 requires 5 employees.

Here’s a summary of the offshore bank license options in Puerto Rico:

Puerto Rico Full International Banking License – Requires capital of at least $300,000 to held by the central bank or in a bond (as stated in the Act: $300,000 financial guarantees acceptable to OCFI). Authorized shares are to be at least $5 million. Of this, only $250,000 must be paid-in.

Puerto Rico Restricted International Banking License – Capital held by the central bank or in a bond of $300,000 (as stated in the Act: $300,000 financial guarantees acceptable to OCFI). The authorized capital stock or the proposed capital, as the case may be, shall not be less than $500,000, out of which at least $50,000 shall be paid in full at the time the license is issued. This can also be referred to as a captive license.

In most cases, a full international banking license is required. Of the many banks licensed in Puerto Rico, only 1 has a restricted license.

A full international license in Puerto Rico allows you to provide financial services to other international financial institutions or to persons outside of Puerto Rico.  “Financial services” are any service which is generally accepted in the banking industry of the United States and Puerto Rico including:

  1. Accept deposits and borrow money from non-residents of PR.
  2. Accept deposits and borrow money from certain government institutions
  3. Place deposits in any PR bank and foreign banks organized in PR.
  4. Make loans to non-residents of PR. Issue letters of credit to non-residents or PR.
  5. Issue letters of credit for export activities to both PR resident and non-residents.
  6. Discount money orders and bills of exchange to non-PR residents.
  7. Invest in securities and stocks as well as PR government bonds exempt from tax
  8. Carry transactions in any currency and gold or silver and foreign currency trade.
  9. Underwrite and trade notes and debt instruments issued by a non-PR residents
  10. Engage in trade financing of import  and export of raw materials and finished goods.
  11. Act as a fiduciary, executor, administrator, registrar of stocks and bonds, custodian, trustee, agent and any other fiduciary capacity with non-residents of PR after obtaining a special permit from the government.
  12. Acquire and lease personal property on behalf of non-PR residents.
  13. Buy and sell security outside of PR on behalf of non-PR residents.
  14. Act as a clearinghouse of instruments of foreign persons
  15. Organize and manage international financial entities not related to residents of PR.
  16. Lend or guarantee loans originated in some governmental institutions.
  17. Purchase sub-standards non-performing loans from a PR bank.
  18. Establish branches outside PR in the continental USA or in other foreign country.
  19. Provide the following services:
    • Asset management.
    • Management of alternative investments.
    • Management of private capital.
    • Management of hedge funds
    • Management of pools of capital
    • Administration of trusts
    • Management of escrow  funds for non-residents of PR.

An offshore bank licensed in Puerto Rico gives you access to the US market and a wide range of corresponding banks.  In addition to the usual suspects, corresponding bank options include:

  • Scotiabank *
  • FirstBank Puerto Rico
  • Banco Popular de Puerto Rico
  • Banco Popular North America (US Bank at https://www.popularcommunitybank.com/)
  • Centennial Bank (a US bank in FL https://www.my100bank.com/)

    * Scotia has a partnership deal with Bank of America that can be leveraged.

Puerto Rico is the second largest offshore banking jurisdiction in the Caribbean after Cayman Islands. The Cayman Island has decades more history, 40 of the top 50 banks in the world, and a total of 196 banks licensed as of the end of June 2015.

This compares to about 50 offshore banks operating from Puerto Rico. That’s more than all of the other Caribbean islands combined… not counting Cayman, of course.

So, next time you hear about offshore banking jurisdiction “hotbed” like Belize with 6 banks, all combined holding less capital than one bank in Puerto Rico, you will have some sense of scale.  

Here is a partial list of the active banks in PR.

  • Pfizer International Bank – Int. License
  • Santander Overseas Bank – Int Lic.
  • Bank of Nova Scotia – General
  • Chase Manhattan – Int Lic
  • Citibank – General, but operate as an international bank
  • Popular Bank – General & Int. Lic ( publicly traded, operated in PR for 120 years, 52 yrs in US)
  • Puerto Rico International – Int. Lic
  • Metro America Int – Int Lic
  • Amtrade International Bank of Georgia – General
  • Charles Schwab Bank – General
  • BNC International – Int Lic
  • FirstBank International – Int Lic
  • Santander Overseas – Int Lic
  • WesternBank – Int Lic
  • OBT International – Int Lic
  • SB Pharmco (owned by Glaxo) – Int Lic
  • Bank of Southeast Europe – Int. Lic.
  • First Bankcorp – Int Lic
  • Oriental Bank – This is one of the larger local banks
  • VS International – Int Lic
  • Face Bank – Int Lic
  • BST – Int Lic
  • BBO Private – Int Lic
  • Paramount International – Int Lic
  • Bancredito Int – Int Lic
  • Italbank – Int Lic
  • Activo – Int Lic
  • ARCA – Int Lic
  • Nodus – Int Lic
  • Andcapital – Int Lic
  • Elite International – Inc Lic

For more information, please review my articles on offshore bank licensing and operation. I’ve been working in offshore banking for over a decade, so there are a few older posts floating around the web. My recent articles on the topic are:

I hope you have found this review of offshore bank licenses in Puerto Rico helpful. If you would like to setup a licensed bank in Puerto Rico, please contact me for a confidential consultation at info@premieroffshore.com or call (619) 483-1708.