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Puerto Rico is the only International Tax Plan for US Citizens

Puerto Rico is the Only International Tax Plan for US Citizens

The IRS is targeting offshore tax plans, especially those in Malta. This is due to concerns that these plans are being used to avoid paying U.S. taxes. The IRS has been cracking down on offshore tax evasion in recent years, and this is likely to continue.

The IRS’s crackdown on offshore tax plans will have a negative consequence for those who have used these plans. These individuals may be subject to penalties and interest, and they may have to pay back taxes that they should have paid in the first place.

One of the only safe international tax plans for a U.S. citizen can be found in the U.S. territory of Puerto Rico. Under the Puerto Rico Act 60, U.S. citizens who move to Puerto Rico and become bona fide residents are exempt from federal income tax on their Puerto Rican source income. This includes income from employment, self-employment, and investments.

However, it is important to note that the Puerto Rico Act 60 is not a get-out-of-jail-free card. U.S. citizens who move to Puerto Rico and take advantage of the Act 60 tax benefits must still file U.S. federal income tax returns. They must also report all of their worldwide income on their U.S. tax returns, even if it is not subject to U.S. tax.

If you are considering moving to Puerto Rico to take advantage of the Act 60 tax benefits, you should speak with a tax advisor to make sure that you understand the rules and that you are complying with all applicable laws.

Act 60, also known as the Puerto Rico Tax Incentives Code, is a law that offers tax benefits to U.S. citizens who move to Puerto Rico and become bona fide residents. Some of the benefits of Act 60 include:

  • Exemption from federal income tax on Puerto Rican source income. This includes income from employment, self-employment, and investments.
  • Exemption from federal capital gains tax on gains realized on assets that are located in Puerto Rico.
  • Reduced corporate tax rate of 4%.
  • Exemption from municipal taxes.
  • Exemption from property taxes on certain types of property.

The requirements for eligibility under Act 60 include:

  • Becoming a bona fide resident of Puerto Rico. This means that you must spend at least 183 days in Puerto Rico during the taxable year.
  • Not being a resident of Puerto Rico at any time between January 17, 2006 and January 17, 2012.
  • **Not having been a resident of Puerto Rico for any part of the three taxable years immediately preceding the taxable year for which you are claiming benefits under Act 60.

If you are considering moving to Puerto Rico to take advantage of Act 60, you should speak with a tax advisor to make sure that you understand the rules and that you are complying with all applicable laws.

Here are some additional things to keep in mind about Act 60:

  • The benefits of Act 60 are not automatic. You must file a special tax election with the Puerto Rico Department of Treasury in order to claim the benefits.
  • The benefits of Act 60 are subject to change. The Puerto Rico government has the right to amend or repeal Act 60 at any time.
  • Act 60 does not apply to all U.S. citizens. There are certain categories of U.S. citizens who are not eligible for the benefits of Act 60, such as government employees and members of the military.

In summary, the IRS is targeting offshore tax plans, especially those in Malta. This will have a negative consequence for those who have used these plans. One of the only safe international tax plans for a U.S. citizen can be found in the U.S. territory of Puerto Rico. 

However, it is important to note that the Puerto Rico Act 60 is not a get-out-of-jail-free card. U.S. citizens who move to Puerto Rico and take advantage of the Act 60 tax benefits must still file U.S. federal income tax returns. They must also report all of their worldwide income on their U.S. tax returns, even if it is not subject to U.S. tax.

If you are interested in learning more about Act 60, please contact us at info@premieroffshore.com. We’ll be happy to assist you to set up your business in Puerto Rico.

doing business in mexico

An Inside Look at the Business Climate in Mexico for FinTech and Crypto Businesses

The dynamic business landscape in Mexico is offering fertile ground for both FinTech and crypto businesses. Driven by a potent mix of regulatory evolution, market potential, and consumer demand, Mexico has emerged as one of Latin America’s hotspots for these disruptive technologies. Here’s a look at the vibrant business climate in Mexico for FinTech and crypto enterprises.

Mexico’s Favorable Regulatory Landscape

In 2018, Mexico established itself as a regional pioneer by enacting the first FinTech Law in Latin America. This comprehensive legislation provides a regulatory framework for companies in the FinTech space, including crypto businesses, ensuring their operations’ safety, security, and transparency.

Under the law, FinTech companies can operate as Financial Technology Institutions (ITFs), while crypto-related businesses must be authorized by the Mexican Central Bank (Banxico). The law paves the way for increased consumer protection, fosters competition, and encourages financial inclusion.

While there are still aspects of the law that require further clarification, its presence symbolizes the government’s commitment to fostering an environment conducive to FinTech and crypto innovation.

Untapped Market Potential

Despite significant strides in financial inclusion, a substantial portion of Mexico’s population remains unbanked or underbanked. These individuals and businesses, underserved by traditional financial institutions, represent a considerable untapped market for FinTech and crypto businesses.

FinTech solutions, including digital wallets, peer-to-peer lending platforms, and microfinance services, offer a potential route to financial inclusion. Simultaneously, cryptocurrencies, by their decentralized nature, can provide an accessible alternative for individuals who struggle to access traditional banking services.

Consumer Demand

Mexico’s digital economy is growing, with increasing internet and smartphone penetration. The demand for digital financial solutions, from online banking and digital payments to investment platforms, is on the rise.

Furthermore, the younger demographics of Mexico are more open to adopting these new technologies, creating a vast user base for FinTech and crypto businesses. Crypto, in particular, is gaining popularity among millennials and Generation Z due to its potential for quick returns and its decentralized, global nature.

Crypto Climate

Despite regulatory uncertainty in many countries, Mexico’s attitude towards crypto has been mostly positive. While Banxico does not consider cryptocurrencies as legal tender, it acknowledges their use as a medium of exchange, unit of account, and store of value.

Mexico’s crypto market is rapidly growing, with several crypto exchanges operating in the country. Mexicans use cryptocurrencies for various purposes, including remittances, a sector where cryptocurrencies can offer quicker and cheaper cross-border transfers.

However, it’s important to note that crypto businesses must adhere to strict regulations, particularly concerning money laundering and customer protection. Crypto businesses planning to launch in Mexico should prepare for rigorous compliance procedures, including getting authorization from Banxico and implementing robust KYC (Know Your Customer) protocols.

Market Demand for Fintech and Crypto Businesses

The market for FinTech companies in Mexico has grown significantly in recent years, fueled by a convergence of economic, technological, and demographic factors. As of 2021, Mexico is considered the leader in the FinTech ecosystem in Latin America, boasting the largest number of FinTech startups in the region. This has primarily been spurred by the demand for digital financial services, which are more inclusive, efficient, and user-friendly compared to traditional banking methods.

Market Landscape

Mexico’s FinTech market is diverse, with companies specializing in a wide array of services such as digital banking, payments and remittances, insurance (InsurTech), personal finance, crowdfunding, and blockchain technology. Each of these sectors caters to different user needs, from offering unbanked populations access to financial services to providing small businesses with efficient and cost-effective banking solutions.

Significant progress has been made in regulations too, making Mexico an attractive location for FinTech innovation. In 2018, Mexico became the first country in Latin America to enact a FinTech law, aimed at promoting financial stability and defending against money laundering, while also nurturing innovation and competition in the financial sector.

Demand Drivers

A critical demand driver for FinTech companies in Mexico is financial inclusion. A sizable proportion of Mexico’s population remains unbanked or underbanked. Traditional banks often have stringent requirements or high fees that many citizens can’t meet. FinTech companies, with their flexible and accessible solutions, present an opportunity to address this issue by offering services such as mobile banking, microloans, and digital wallets.

Digital remittances have also emerged as a significant market, with Mexico being one of the largest remittance-receiving countries in the world. FinTech solutions for quick, cost-effective cross-border transfers are in high demand, opening up opportunities for startups in this field.

In addition, Mexico’s thriving e-commerce market is driving demand for digital payments solutions. Consumers are increasingly turning to online shopping, necessitating secure, efficient payment systems that traditional banking often fails to deliver.

Finally, Mexico’s young, tech-savvy population contributes to the increasing demand. With one of the youngest demographics in Latin America and high smartphone penetration, Mexico’s population is well-positioned to adopt digital financial services.


The combination of a growing need for financial inclusion, increasing digitalization, a thriving e-commerce sector, and a young, tech-oriented population sets the stage for substantial growth in Mexico’s FinTech market. As traditional banks struggle to meet evolving consumer needs, FinTech companies can step in to fill the gaps, leveraging technology to provide more accessible, affordable, and efficient financial solutions. Given these conditions, Mexico’s FinTech market presents considerable opportunities for existing companies and new entrants alike.

Mexico’s burgeoning FinTech and crypto sectors reflect the country’s broader commitment to embracing digital transformation and promoting financial inclusion. The favorable regulatory landscape, coupled with untapped market potential and increasing consumer demand, creates a fertile environment for FinTech and crypto businesses.

While challenges remain, including refining the regulatory framework and improving digital infrastructure, the momentum is clearly with FinTech and crypto. As these sectors continue to evolve, Mexico is well-positioned to be a leader in the FinTech and crypto revolution in Latin America.

For more information on where I recommend you set up a Fintech, financial services, or crypto business in Mexico, please have a read through Where to do Business in Mexico as a Fintech, Financial Services, or Crypto Company. For more on the suggested structure, see Incorporating a Financial Services Company in Mexico – the Mexican SOFOM.I hope you’ve found this article helpful. For more information on setting up a business in Mexico, and on forming a SOFOM, please contact me at info@premieroffshore.com

where to do business in Mexico

Where to do Business in Mexico as a Fintech, Financial Services, or Crypto Company

In this post, I’ll explain why I believe Tijuana is the best business city in Mexico in which to set up a fintech, financial services, or crypto business. I’ve traveled and done business throughout Mexico for over 20 years and can say without a doubt that Tijuana is the most efficient option for setting up a fintech business. Here’s why. 

Mexico’s burgeoning FinTech landscape is diverse, innovative, and geographically rich, with Tijuana emerging as the city of choice for setting up a FinTech business. Here, a confluence of strategic location, global business acceptance, linguistic proficiency, cost efficiency, and regulatory allowances merge to create an environment that is uniquely supportive of FinTech growth. Let’s dissect why Tijuana is the best city in Mexico for FinTech enterprises.

Proximity to the U.S. Borde

Tijuana’s strategic location, sitting just across the border from the United States, renders it a natural nexus between two significant economies. This proximity is not just geographical but also deeply intertwined within the fabric of business and culture in the region, offering enormous benefits to the FinTech sector.

Being adjacent to the United States, Tijuana is ideal for businesses targeting a cross-border audience. With easy access to the U.S. market, FinTech companies in Tijuana can exploit the advantages of both countries, navigating market trends, consumer behaviors, and regulatory landscapes with ease. Furthermore, the proximity enables a seamless flow of knowledge, technology, and talent between the two nations, thereby fostering innovation and growth.

Accepting of International Businesses and Investors

Tijuana’s open-door policy towards international businesses makes it a hotbed for globalization. The city’s economic policies are geared towards attracting foreign investment, boosting its global competitiveness, and enhancing its status as a cosmopolitan city. For FinTech businesses, this translates into a supportive, innovation-driven environment that fosters both domestic and international success.

Moreover, Tijuana is home to numerous international tech conferences and events, encouraging networking and collaboration. Such gatherings generate opportunities for FinTech startups to forge partnerships, secure investments, and enhance their global visibility.

Ease of Finding English-Speaking Workers

With a large percentage of its population bilingual in English and Spanish, Tijuana offers a considerable advantage for FinTech companies. English proficiency is a critical factor in the global FinTech landscape, and having access to a skilled, English-speaking workforce is crucial for businesses that wish to operate on an international level.

Why are there so many English speakers in Tijuana compared to other large cities in Mexico? First, many of the people deported from the Western United States end up in Tijuana. They need jobs and have excellent English skills. Second, many in Tijuana middle class have US visas and families in America. They learned English from a young age and travel to San Diego frequently. 

Cost of Labor Compared to the U.S.

Labor costs in Tijuana are significantly lower than in the United States, even though the level of skills and expertise can be comparable. This cost advantage makes Tijuana an attractive location for FinTech startups looking to operate lean while maintaining high-quality services. By reducing the labor cost burden, companies can invest more in product development, marketing, and other critical areas to boost their competitiveness and growth.

Ability to set up a SOFOM (Sociedad Financiera de Objeto Múltiple)

In Mexico, FinTech companies have the option to establish themselves as a SOFOM – a non-bank financial entity that can operate in Baja and the rest of Mexico. This legal entity, dedicated to providing loans and credit, offers the opportunity to conduct financial operations without the need for a traditional banking license.

Setting up a SOFOM in Tijuana means your FinTech business can operate across Baja California and Mexico as a whole, delivering financial services and innovative solutions to a broad and diverse market. Additionally, the ability to set up a SOFOM underscores the flexibility and supportiveness of Mexico’s regulatory landscape towards the FinTech sector.

About Tijuana

Tijuana, an eclectic border city that melds Mexican culture with a dynamic international influence, is a bustling metropolis that attracts people from across the globe. Known for its vibrant cultural scene and burgeoning economic potential, Tijuana is a fascinating city that holds promise for the future. Here’s an overview of Tijuana’s size, population, and demographics.

Size and Location

Tijuana is situated in the Baja California Peninsula, the second-longest peninsula in the world, right at Mexico’s border with the United States. It is the largest city in the state of Baja California and covers an area of around 637 square kilometers.

The city’s strategic location on the U.S.-Mexico border plays a significant role in shaping its economic, cultural, and demographic makeup. Its proximity to San Diego, with which it forms an international metropolitan area, gives it a unique cross-border characteristic.


As of 2023, the estimated population of Tijuana is over 1.8 million people, making it the sixth-largest city in Mexico. The population has seen substantial growth over the past few decades, largely fueled by internal migration from other parts of Mexico and an influx of international immigrants, particularly from the U.S., China, and the rest of Latin America.

The city has a high population density due to its role as a regional hub for employment, culture, and commerce. It also serves as a magnet for individuals and families seeking opportunities in the bustling border economy.


Tijuana boasts a diverse demographic makeup, contributing to its rich cultural fabric. The majority of Tijuana’s inhabitants are of Mexican descent, but there’s a significant presence of residents with international roots, primarily from the United States, China, and other Latin American countries.

The age distribution of Tijuana tends to skew younger, aligning with the general trend in Mexico. The city’s median age is in the late twenties, a testament to the youthful energy that drives Tijuana’s economic and cultural dynamism. This young demographic is critical to the city’s labor force and its potential for innovation and growth.

Given its border location, a significant proportion of Tijuana’s population is bilingual, with proficiency in both Spanish and English. This linguistic capability is a valuable asset, particularly in the business and service sectors, fostering cross-border commerce and cultural exchange.

In terms of socioeconomic status, Tijuana exhibits a broad spectrum. The city houses affluent neighborhoods with high-income households, alongside areas characterized by lower income levels. Over the years, economic development efforts have been aimed at addressing these disparities and promoting inclusive growth.

The Bottom Line

Tijuana’s unique blend of size, population, and demographics creates a lively and dynamic city that serves as a nexus of cultures, economies, and opportunities. With its strategic border location, youthful population, and rich cultural diversity, Tijuana offers a vibrant environment ripe for economic growth and international collaboration. As Mexico continues to progress, the city of Tijuana is poised to play a significant role in the nation’s journey toward a prosperous future.


Tijuana’s strategic location, supportive environment for international business, English-speaking talent, competitive labor costs, and legal flexibility make it an ideal setting for a thriving FinTech business. By harnessing these attributes, FinTech entrepreneurs in Tijuana are well-positioned to drive innovation, foster growth, and pave the way for a robust, future-proof financial landscape in Mexico.

I hope you’ve found this article helpful. For more on setting up a fintech, financial services business, or crypto company in Tijuana, or on incorporating a SOFOM, please contact me at info@banklicense.pro

building a fintech crypto card issuing business

Building a Compliance Program for a Fintech, Crypto, or Credit Card Issuing Business

In this post, I will review how to build a compliance program for a new or startup fintech, crypto, or credit card issuing business. Most startups focus on tech, testing, and finding customers in the early days. But, a complete compliance program should be the first thing a fintech, crypto, or credit card issuing business should build because this governs onboarding and nearly all aspects of the business. 

Also, your compliance program and documents are the keys to maintaining good relations with your bank, brokerage, exchange, processor, or issuer. Many providers will open an account with minimal documents. But, once you begin transacting, they will ask all kinds of questions. If you don’t have a compliance program in place, your fintech, crypto, or credit card issuing business will be paused or closed until you can build a proper compliance program. 

Building the Program – First Steps

Building a compliance program for a credit card issuing company requires adherence to various regulatory requirements, including those from payment networks like MasterCard and Visa, as well as complying with Know Your Customer (KYC) and Anti-Money Laundering (AML) policies. Here is an overview of the process:

  1. Understand MasterCard and Visa requirements: Both MasterCard and Visa have their own set of rules and regulations for credit card issuers. These may include guidelines on transaction processing, chargeback management, fraud prevention, data security, and reporting. Review the MasterCard Rules and the Visa Core Rules and Visa Product and Service Rules to familiarize yourself with their requirements.
  2. Develop internal policies and procedures: Create comprehensive internal policies and procedures that adhere to MasterCard and Visa requirements, as well as applicable federal and state laws and regulations. This may include policies for card issuance, underwriting, account management, billing, dispute resolution, and fraud management.
  3. Implement a KYC program: A robust KYC program should include customer identification procedures, risk-based customer due diligence, and ongoing monitoring of customer transactions. Ensure that your program aligns with applicable KYC regulations and industry best practices.
  4. Implement an AML program: Develop an AML program that includes risk-based customer due diligence, transaction monitoring, suspicious activity reporting, record-keeping, and employee training. Ensure that your program complies with applicable AML regulations, such as the Bank Secrecy Act (BSA) and the USA PATRIOT Act.
  5. Establish a Compliance Management System (CMS): A CMS is a formalized system for managing compliance within the organization. It should include components like compliance policies and procedures, a compliance officer, employee training, and monitoring and corrective action processes.
  6. Develop a data security program: Implement a data security program that complies with the Payment Card Industry Data Security Standard (PCI DSS) and any applicable data privacy regulations, such as the General Data Protection Regulation (GDPR) or the California Consumer Privacy Act (CCPA).
  7. Train employees: Train employees on your compliance program, policies, and procedures. Regularly update training materials to ensure that employees stay informed about regulatory changes and industry best practices.
  8. Monitor and audit: Regularly monitor and audit your compliance program to identify any gaps or areas for improvement. Implement corrective actions as necessary to maintain compliance with all applicable regulations and requirements.

Creating a compliance program for a credit card issuer is similar to creating a compliance program for a bank in several ways:

  • Both require adherence to federal and state regulations, as well as KYC and AML policies.
  • Both need to establish a CMS to manage compliance within the organization.
  • Both require employee training to ensure understanding of and adherence to the compliance program.
  • Both need to conduct regular monitoring and audits to maintain compliance with applicable regulations and requirements.

However, credit card issuers must also comply with the specific rules and regulations set forth by payment networks like MasterCard and Visa, as well as adhere to the PCI DSS for data security.

Building a Program – Toolbox

A robust compliance program for a credit card issuer should include various tools and resources to ensure adherence to regulatory requirements and mitigate risks. Some common and popular compliance tools include:

  1. Compliance Management System (CMS): A CMS is a centralized platform to manage, track, and report on all aspects of the organization’s compliance program. It can help automate and streamline processes, such as policy management, risk assessment, training, and reporting.
  2. Risk Assessment Tools: Risk assessment tools can help identify, assess, and prioritize risks associated with credit card issuing activities. These tools may include questionnaires, checklists, or software solutions designed to assess risks in areas like fraud, AML, and data security.
  3. Policy Management Software: Policy management software can be used to create, maintain, and distribute internal policies and procedures related to credit card issuing operations. This software typically includes version control, approval workflows, and audit trails to ensure consistency and compliance with regulations.
  4. Transaction Monitoring System: A transaction monitoring system can be used to detect suspicious activities, potential fraud, and other risks related to credit card transactions. This may involve rule-based systems or machine learning algorithms to analyze transaction data and generate alerts for further investigation.
  5. Fraud Detection Tools: Fraud detection tools, such as artificial intelligence (AI) and machine learning algorithms, can help identify patterns indicative of fraudulent activities. They may be used to analyze transaction data, monitor user behavior, and identify potential risks in real time.
  6. Know Your Customer (KYC) and Customer Due Diligence (CDD) Solutions: KYC and CDD solutions can help automate customer identification, verification, and risk assessment processes. These tools may include identity verification services, watchlist screening, and ongoing customer monitoring.
  7. Anti-Money Laundering (AML) Software: AML software can help automate the process of monitoring transactions for suspicious activity, filing suspicious activity reports (SARs), and maintaining compliance with AML regulations. This may include rule-based systems or more advanced AI-driven solutions.
  8. Data Security Solutions: Data security solutions, such as encryption tools, firewalls, and intrusion detection systems, can help protect sensitive customer and transaction data, ensuring compliance with data privacy and security regulations like the Payment Card Industry Data Security Standard (PCI DSS).
  9. Training and Learning Management Systems (LMS): An LMS can help manage and track employee training related to compliance, including course content, attendance, assessment, and reporting. This can be especially useful for organizations that must regularly train employees on AML, KYC, and other compliance topics.
  10. Regulatory Reporting Tools: Reporting tools can help streamline the process of generating, submitting, and tracking regulatory reports, such as SARs or periodic financial statements. These tools may include templates, automated data aggregation, and tracking capabilities.

While these tools can help support a comprehensive compliance program for a credit card issuer, it is important to remember that the specific tools needed will depend on the organization’s size, risk profile, and regulatory environment. Tools will also depend on the jurisdiction of your customers, of which I was uncertainly reviewing your website. 

Building a Program – Bank Secrecy Act

The Bank Secrecy Act (BSA) does apply to credit card issuers. The BSA, also known as the Currency and Foreign Transactions Reporting Act, was enacted to combat money laundering and other financial crimes. It requires financial institutions, including credit card issuers, to maintain certain records, file reports, and implement anti-money laundering (AML) programs.

Credit card issuers and fintech companies are considered financial institutions under the BSA, as they offer various types of financial products and services. Therefore, they are subject to the same AML rules and regulations as banks and other financial institutions. These rules and regulations include Know Your Customer (KYC) policies, Currency Transaction Reports (CTRs), Suspicious Activity Reports (SARs), and other due diligence requirements.

Compliance with the BSA helps credit card issuers mitigate risks associated with money laundering, terrorism financing, and other financial crimes. Non-compliance can lead to substantial fines and penalties, as well as reputational damage.

Building a Program – US Sanctions for Card Issuers

U.S. sanctions are relevant to U.S. credit card issuers and fintech companies because they impose restrictions on transactions and dealings with specific individuals, entities, or countries. They are required to comply with these sanctions to prevent financial crimes, such as money laundering and terrorism financing. Non-compliance can lead to significant penalties and reputational damage.

Here’s how U.S. sanctions are relevant to U.S. credit card issuers and fintech companies:

  1. Restricted transactions: Sanctions prohibit U.S. credit card issuers from engaging in transactions with individuals, entities, or countries designated by the Office of Foreign Assets Control (OFAC), a division of the U.S. Department of the Treasury. This includes processing payments, providing services, or extending credit to sanctioned parties.
  2. Compliance programs: Credit card issuers must implement comprehensive compliance programs to identify and block transactions involving sanctioned parties. These programs should include policies and procedures, employee training, and transaction monitoring systems to ensure compliance with OFAC regulations.
  3. Due diligence: Credit card issuers are required to conduct due diligence on their customers, merchants, and business partners to ensure they are not engaging in transactions with sanctioned parties. This involves screening customers against OFAC’s Specially Designated Nationals (SDN) list and other restricted party lists.
  4. Reporting requirements: U.S. credit card issuers must report any blocked or rejected transactions involving sanctioned parties to OFAC within a specified timeframe. Failure to report such transactions can lead to penalties and enforcement actions.
  5. Penalties for non-compliance: Non-compliance with U.S. sanctions can result in substantial fines, penalties, and reputational damage for credit card issuers. In some cases, individuals involved in non-compliance may also face criminal prosecution.

U.S. credit card issuers and fintech companies must stay informed of updates and changes to U.S. sanctions programs and ensure their compliance programs are up-to-date and effective. This helps protect the issuer from potential financial and reputational risks associated with non-compliance.

Building a Program – AML & BSA Risk Assessment 

An Anti-Money Laundering (AML) and Bank Secrecy Act (BSA) risk assessment is a comprehensive evaluation of an organization’s exposure to money laundering, terrorism financing, and other financial crime risks. A risk assessment typically includes factors such as geographical risk, market risk, product risk, customer risk, and distribution channel risk. By assigning scores to these factors, an organization can better understand its risk exposure and implement appropriate controls to mitigate those risks.

Here is a description of an AML/BSA risk assessment that incorporates a scoring system based on various risk factors:

  1. Geographical risk: Assess the countries and regions where the organization operates or conducts business with customers. Assign a score based on the level of risk associated with each location, considering factors such as political stability, corruption levels, the presence of organized crime or terrorist groups, and AML/CTF regulatory framework effectiveness.
  2. Market risk: Evaluate the organization’s exposure to market risks, such as fluctuations in interest rates, currency exchange rates, or stock market prices. Assign scores based on the level of market volatility and the organization’s susceptibility to these risks.
  3. Product risk: Assess the organization’s products and services, focusing on their vulnerability to money laundering and terrorism financing. Assign a score to each product or service based on factors such as the level of anonymity, transaction size, ease of transferability, and complexity of the product or service.
  4. Customer risk: Evaluate the organization’s customer base, considering factors such as customer type (individual, corporate, or government), occupation, source of funds, and expected transaction patterns. Assign a score based on the level of risk associated with each customer segment.
  5. Distribution channel risk: Assess the organization’s distribution channels, such as branches, agents, digital platforms, or correspondent banking relationships. Assign a score based on factors such as the level of oversight, transparency, and the risk of money laundering or terrorism financing associated with each channel.
  6. Internal controls and compliance risk: Evaluate the effectiveness of the organization’s internal controls and compliance program, including policies, procedures, employee training, and monitoring systems. Assign a score based on the level of risk mitigation provided by these controls.

Once the scores are assigned, the organization can aggregate the scores to create an overall risk score for each category. This process helps identify areas of higher risk that require enhanced due diligence and monitoring.

The results of the risk assessment should be used to develop and enhance the organization’s AML/BSA compliance program, ensuring that resources are allocated effectively to mitigate identified risks. Regularly reviewing and updating the risk assessment is essential to maintain its effectiveness and ensure the organization’s compliance with evolving regulatory requirements.

Building a Program – Miscellaneous Policies 

Here’s an overview of a few key policies and their relevance to credit card issuers which I haven’t covered above:

  1. Suspicious Activity Reports (SARs) Policy: Under the Bank Secrecy Act (BSA), credit card issuers are required to file SARs for any transaction that may involve money laundering, terrorist financing, or other suspicious activities. This policy should establish guidelines for identifying, investigating, and reporting suspicious transactions, as well as maintaining proper documentation.
  2. USA PATRIOT Act Policy (Section 314 reporting): Section 314(a) of the USA PATRIOT Act allows financial institutions, including credit card issuers, to share information with law enforcement agencies to identify and report potential money laundering or terrorist financing activities. The policy should outline procedures for responding to 314(a) requests, safeguarding customer information, and maintaining records of information sharing.
  3. FinCEN Policy: The Financial Crimes Enforcement Network (FinCEN) is responsible for implementing and enforcing the BSA and AML regulations. A credit card issuer’s FinCEN policy should detail the company’s compliance with FinCEN’s regulations, including Customer Identification Program (CIP), Customer Due Diligence (CDD), Enhanced Due Diligence (EDD), and recordkeeping requirements.
  4. OFAC Policy: The Office of Foreign Assets Control (OFAC) enforces economic and trade sanctions against certain individuals, entities, and countries. Credit card issuers must have a policy in place to ensure compliance with OFAC regulations, including screening customers, transactions, and business partners against OFAC’s Specially Designated Nationals (SDN) list and other restricted parties lists, as well as blocking or rejecting prohibited transactions.
  5. FBAR Policy: The Report of Foreign Bank and Financial Accounts (FBAR) is a reporting requirement for U.S. persons with foreign financial accounts. While this requirement may not directly apply to credit card issuers, they should have policies in place to ensure compliance with FBAR regulations if they hold or have signature authority over foreign financial accounts.
  6. Identity Theft Policy: The Fair and Accurate Credit Transactions Act (FACTA) requires financial institutions, including credit card issuers, to establish an Identity Theft Prevention Program (ITPP) to detect, prevent, and mitigate identity theft. The policy should include procedures for identifying and addressing red flags, verifying customer identity, maintaining customer information security, and responding to identity theft incidents.

By developing and implementing these policies, credit card issuers or fintech companies in the United States can demonstrate compliance with relevant regulations, mitigate risks associated with financial crimes, and protect their customers and business from potential harm. Regularly reviewing and updating these policies is essential to ensure ongoing compliance and effectiveness.

Building Program – Why is this Relevant 

Credit cards and fintech systems can be used in various ways to facilitate money laundering. Money laundering is the process of making illegally-gained proceeds appear legitimate by disguising their origins. Here are some ways that credit cards can be used in money laundering schemes:

  1. Overpayment and refunds: A criminal may make a large overpayment on their credit card account using illicit funds and then request a refund. This creates the appearance of a legitimate transaction and allows the launderer to receive “clean” money from the credit card issuer.
  2. “Credit card factoring” or “credit card laundering”: This involves a criminal using a shell or front company to process fraudulent credit card transactions. They use stolen or fake credit card information to create transactions, which are then processed through the merchant account of the shell company. The company receives the funds from the credit card processor, less any fees, and transfers the laundered money to the criminal’s account.
  3. Collusion with merchants: Criminals may collude with complicit merchants who allow them to use their credit cards to make purchases or pay for services with illegal funds. The merchant then refunds the transaction, providing the criminal with laundered money from the merchant’s account.
  4. Buying and selling goods: Criminals may use illicit funds to purchase high-value goods or services using credit cards, and then sell those goods or services to convert them back into cash. This process can help disguise the origins of the illegal funds.
  5. Multiple small transactions: Criminals can use credit cards to make multiple small transactions (structuring) to avoid detection or reporting thresholds. These transactions may be spread across several accounts, cards, or merchants to further reduce the risk of detection.
  6. Prepaid credit cards: Prepaid credit cards can be used to launder money, as they can be bought and reloaded with cash. Criminals can use these cards for purchases, ATM withdrawals, or online transactions without revealing their true identity. In some cases, they may also use prepaid cards to transfer money between different countries.

Financial institutions, including credit card issuers and Fintech companies, are required to implement robust anti-money laundering (AML) programs to detect and prevent such activities. This includes Know Your Customer (KYC) policies, transaction monitoring systems, and Suspicious Activity Reports (SARs) to identify and report any suspicious activities.

Building a Program – Transaction Flow for a Credit Card Provider

The typical transaction flow for a credit card issuer involves multiple parties and several steps. This section is specific to card issuers as fintech companies have structures that are to diverse to cover in an article, Here is an overview of the process when a cardholder makes a purchase using a credit card:

  1. Cardholder initiates a purchase: The cardholder presents their credit card to the merchant for payment.
  2. Merchant processes the transaction: The merchant uses a point-of-sale (POS) terminal, payment gateway, or other payment processing system to capture the card details and submit the transaction for authorization.
  3. Transaction is sent to the acquiring bank: The merchant’s acquiring bank (or payment processor) receives the transaction details and forwards the information to the card network (e.g., Visa or MasterCard).
  4. Card network routes the transaction: The card network routes the transaction to the issuing bank (the bank that issued the credit card to the cardholder) for authorization.
  5. Issuing bank authorizes the transaction: The issuing bank checks the cardholder’s account for available credit, verifies that the card is valid and not flagged for fraudulent activity, and either approves or declines the transaction. The response is sent back through the card network and the acquiring bank to the merchant.
  6. Merchant receives authorization response: The merchant receives the response and completes the sale if the transaction is approved. The approved transaction is then stored in a batch for later settlement.
  7. Merchant submits the batch for settlement: At the end of the business day or another predetermined time, the merchant submits the batch of approved transactions to the acquiring bank for settlement.
  8. Acquiring bank requests funds: The acquiring bank sends the batched transaction details to the card network, which then forwards the information to the respective issuing banks.
  9. Issuing banks transfer funds: The issuing banks transfer the funds for the settled transactions, minus interchange fees, to the card network.
  10. Card network transfers funds to the acquiring bank: The card network consolidates the funds from the issuing banks and transfers the net amount, minus network fees, to the acquiring bank.
  11. Acquiring bank deposits funds to the merchant’s account: The acquiring bank deposits the funds, minus any applicable fees, into the merchant’s account.
  12. Cardholder is billed: The issuing bank adds the transaction amount to the cardholder’s account balance. The cardholder will be responsible for paying the balance according to their credit card agreement.

This transaction flow represents a simplified version of the process. In practice, there may be variations depending on the specific payment infrastructure, card network, and additional services or features offered by the involved parties.

SOP for a Credit Card Processor and Fintech Company

Creating a comprehensive compliance Standard Operating Procedure (SOP) for a credit card issuer and a fintech company requires addressing multiple areas of regulatory and operational compliance. While the exact SOP will depend on your specific circumstances, the following components should generally be included:

  1. Compliance Management System (CMS): Develop a formalized system for managing compliance within the organization, including the appointment of a dedicated compliance officer, clear reporting lines, and regular communication with senior management.
  2. Regulatory Compliance: Ensure adherence to all applicable federal, state, and local regulations, as well as payment network rules (e.g., MasterCard and Visa). This may include consumer protection laws, fair lending practices, data privacy, and security requirements.
  3. Know Your Customer (KYC): Establish a robust KYC program that includes customer identification, risk-based due diligence, and ongoing monitoring of customer transactions. Ensure that the program complies with all applicable KYC regulations.
  4. Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF): Implement a comprehensive AML/CTF program, including risk-based customer due diligence, transaction monitoring, suspicious activity reporting, record-keeping, and employee training.
  5. Third-Party Risk Management: Develop a process for assessing, monitoring, and managing risks associated with third-party service providers, such as payment processors, technology vendors, and collection agencies.
  6. Fraud Prevention and Detection: Implement a fraud management program that includes transaction monitoring, fraud detection tools, chargeback management, and customer education on fraud prevention.
  7. Data Security and Privacy: Establish a data security program that complies with the Payment Card Industry Data Security Standard (PCI DSS) and any applicable data privacy regulations, such as the General Data Protection Regulation (GDPR) or the California Consumer Privacy Act (CCPA).
  8. Internal Policies and Procedures: Develop and maintain comprehensive internal policies and procedures that cover all aspects of the credit card issuer’s operations, including card issuance, underwriting, account management, billing, dispute resolution, and fraud management.
  9. Employee Training and Awareness: Provide regular training to employees on compliance requirements, internal policies, and procedures. Ensure that training materials are updated to reflect regulatory changes and industry best practices.
  10. Monitoring, Auditing, and Reporting: Establish a process for regularly monitoring and auditing the credit card issuer’s compliance program to identify gaps, areas for improvement, and potential violations. Implement corrective actions as needed and report any significant compliance issues to senior management and, if required, to regulatory authorities.
  11. Record-Keeping: Maintain accurate and complete records of all compliance-related activities, including risk assessments, audits, training, and reporting, as required by applicable regulations.

The million-dollar issue: Do all credit card issuers and Fintech companies take possession of client funds? As a result, do all credit card issuers require a money services license?

Credit card issuers and Fintechs generally do not take possession of client funds in the same way as banks, which hold deposits in customer accounts. Credit card issuers extend a line of credit to cardholders, allowing them to make purchases or obtain cash advances up to a specified limit. Cardholders are then required to repay the borrowed amount, typically with interest, according to their credit card agreement.

As a result, credit card issuers usually do not fall under the category of money services businesses (MSBs) and may not require a money services license. MSBs typically include entities involved in money transmission, currency exchange, check cashing, and other financial services that involve the handling of client funds.

For more on this topic, you might also read through Structuring a Fintech or Card Issuer without an MSB License

Process to Apply for a Money Service Business License

In the United States, money transmission licensing is regulated at the state level. Each state has its own requirements and procedures for obtaining a money transmission license, which means that if you plan to operate in multiple states, you may need to obtain a license in each state where you conduct business. Here is a general outline of the process:

  1. Research state-specific requirements: Begin by researching the specific licensing requirements for each state in which you plan to operate. You can usually find this information on the state’s financial regulatory agency website or by consulting with a legal professional.
  2. Prepare your application: Each state has its own application form and supporting documentation requirements. Commonly required documents may include a business plan, financial statements, policies and procedures, AML program documentation, background checks, and fingerprints for key personnel, as well as information about the company’s organizational structure and management.
  3. Obtain a surety bond: Most states require money transmitters to obtain a surety bond as part of the licensing process. The bond amount varies by state and is designed to protect consumers in case the licensee fails to meet its obligations.
  4. Pay application fees: Each state typically requires payment of a non-refundable application fee and, if applicable, a licensing fee upon approval.
  5. Submit your application: Once you have prepared all the required documents, submit your application to the appropriate state agency for review. The review process can take several weeks to several months, depending on the state and the complexity of your application.
  6. Respond to any inquiries or requests for additional information: During the review process, the state agency may request additional information or clarification. Respond promptly to these requests to avoid delays in the licensing process.
  7. Obtain your license: If your application is approved, the state agency will issue your money transmission license. You may need to pay an initial licensing fee or meet additional requirements, such as providing proof of a surety bond, before your license becomes active.
  8. Maintain compliance: Once licensed, you must maintain compliance with state-specific regulations, including periodic reporting, financial statement submissions, and maintaining a surety bond. You may also be subject to periodic examinations by the state agency to ensure ongoing compliance.
  9. Renew your license: Money transmission licenses typically have expiration dates and must be renewed periodically. Each state has its own renewal process and fees, so be sure to stay aware of the requirements and timelines to avoid any lapses in your license.

Bond Requirements (CA and TX as examples)

Money Services Businesses (MSBs) are required to obtain surety bonds as part of the licensing process. These bonds help protect consumers from potential financial loss resulting from the MSB’s failure to comply with state regulations or unethical business practices.

Here are the bond requirements for MSBs in California and Texas:

  1. California: Money transmitters in California are required to obtain a surety bond under the California Money Transmission Act. The bond amount varies based on the volume of the money transmitter’s business. The minimum bond amount is $250,000, and the maximum bond amount is $7,000,000. However, if the money transmitter also conducts business in receiving money for obligations, the maximum bond amount may be increased to $10,000,000.
  2. Texas: In Texas, MSBs that are engaged in money transmission or currency exchange must obtain a surety bond under the Texas Finance Code. The bond amount is determined by the Texas Department of Banking based on the MSB’s business activity and volume. The minimum bond amount is $300,000, and the maximum bond amount is $2,000,000. In addition to the state-level bond requirement, certain cities in Texas, such as Austin and Houston, may also require MSBs to obtain a separate bond at the local level.

Note that bond requirements may vary based on the specific type of MSB (e.g., money transmitter, check casher, currency exchanger) and other factors, such as the volume of transactions processed. The above is just an example.

Given the complexity and state-specific nature of money transmission licensing, this is a very complex matter. We are capable of applying for licenses in multiple states if that is what’s required. My quotation below does NOT include the cost of applying for an MSB license(s).

Consulting Services

We can create a compliance program that covers all essential aspects, including regulatory compliance, risk assessment, transaction monitoring, fraud detection, data security, and employee training as described above. Our team of experienced compliance professionals will work closely with you to ensure the program is tailored to your organization’s unique needs and requirements.

We can assist in all aspects of a fintech, crypto, or credit card issuing business compliance program. For more information and pricing, please contact us at info@premieroffshore.com. For information on this topic for banks, see my other website www.banklicense.pro 

FBO Account MSB License

Structuring a Fintech or Card Issuer without an MSB License

One of the biggest issues facing fintech and card issuers in the United States is how to structure the business to avoid the need for an MSB license. An MSB license can tie up many millions of dollars in capital and cost a fortune to acquire on a national level. Thus, there is how to structure a fintech or card issuer without an MBS license. 

First, allow me to describe an MSB license. An MSB or Money Services Business license is a regulatory approval that is mandatory for any company operating in the money transfer industry or providing financial services. MSB is a broad term that encompasses various types of financial service providers such as currency exchanges, money transmitters, and stored value card issuers. The goal of this license is to prevent money laundering, terrorist financing, and illegal activities from being conducted through these companies.

For fintech or card issuer companies, obtaining an MSB license is critical because it enables them to legally operate in the financial industry. Fintech companies who engage in activities such as international transactions or online payments must have this license to conduct business. Card issuers, on the other hand, may need an MSB license when offering prepaid cards or other stored-value products. In addition to compliance with regulations, holding an MSB license can also help improve customer confidence and trust as it provides a level of legitimacy and credibility to a business.

Basically, any time you take control of customer funds, you need an MSB license. Thus, the way to eliminate the need for an  MBS license as a fintech or card issuer is to not take control of customer funds. One way to accomplish this is to use an FBO account at your local bank. 

An FBO (For Benefit Of) account is a type of bank account used to hold funds on behalf of a third party. It is different from a typical corporate bank account in that the funds in an FBO account do not belong to the account holder but rather to the named beneficiary or beneficiaries.

FBO accounts are commonly used in various scenarios, such as when a company collects funds on behalf of its clients, in trust accounts managed by lawyers, or by non-profit organizations to hold donations.

The primary difference between an FBO account and a regular corporate bank account lies in the ownership and control of the funds. In an FBO account, the account holder (usually a business) acts as a custodian, merely holding the funds in a fiduciary capacity for the benefit of the named beneficiary or beneficiaries. The account holder does not have the authority to use the funds for its own purposes.

In contrast, a typical corporate bank account is owned and controlled by the company, which can use the funds as needed for its business operations.

Regarding the need for an MSB (Money Services Business) license, FBO accounts can help reduce or eliminate the requirement for such a license because the account holder does not take possession of client funds. MSB licenses are typically required for businesses that transmit or convert money, such as money transmitters, currency exchangers, or check cashers.

By using an FBO account, a business can avoid being classified as an MSB because it does not take possession of client funds, nor does it engage in money transmission or currency exchange activities. Instead, it merely holds the funds in a fiduciary capacity on behalf of the client. However, it’s essential to consult with a legal or compliance expert to ensure the specific arrangement does not trigger any regulatory requirements, as regulations may vary depending on jurisdiction and the nature of the business.

I hope you find this information helpful. For more information on banking licenses, see our website on this topic, www.banklicense.pro. We are here to assist you structure a fintech or MSB or credit card issuing business in the United States or in Mexico. For more information, please send me a message to info@premieroffshore.com

Changes to the Mexican SOFOM in 2020

Changes to the Mexican SOFOM in 2020

Mexican reform is in full stride as the new president implements his programs. Some of these changes affect the Mexican SOFOM. Here’s what you need to know about setting up a SOFOM in 2020. 

Reform regarding SOFOMs in Mexico is likely to pass as most banks and financial institutions have already felt the wave of change coming their way. Whether it is good or bad is for you to decide about changes to the SOFOM in 2020. 

The agency in charge of creating new reforms in the country is called CONDUSEF. The CONDUSEF has in its power the ability to review and to make modifications to contracts involving SOFOMs. 

This is not limited to the way SOFOMs works as a whole, the modifications this government institutions make can even alter the way SOFOMs deal with clients and realize their service among other things. 

Think of CONDUSEF as the constitution of how SOFOMs operate in the country. These 2020 reforms, rules, and regulations only apply to regulated SOFOMs. If your SOFOM is not regulated then you won’t have to worry about this. 

In order for a regulated SOFOM to remain in business in 2020 and beyond, 70% or more of its assets must come from the allowed activities that it is authorized to perform as stated in the bylaws. Such authorized activities will usually include mortgages, financing, factoring, and the approval and issuance of credit. 

If your SOFOM does not generate 70% of its assets from this manner, then the same percentage needs to come from the administration of its portfolio as a way to be considered part of the financial system. That is to say, 70% of its income should come from the management of its assets (such as is the case with an investment advisor or fund. 

When a regulated SOFOM is considered part of the financial system, it can receive tax advantages. An important tax advantage that comes with the SOFOM being part of the financial system is that its credit portfolio will not be included in the calculation of the tax on its assets. 

Another tax advantage that you and your clients can take advantage of if you form a SOFOM is that the interest that you charge to your clients shall not be subject to a value-added tax. VAT is 16% in Mexico, so this is a big deal. 

SOFOMs are one of the preferred ways for foreign investors to begin capitalizing in the Mexican and Latin American markets. These structures have fewer restrictions on how they can operate compared to the US and Europe and are very powerful financial entities within Mexico.

All of the previous restrictions on investments by foreign investors associated with the capital stock of the SOFOMs have been eliminated. One of the many benefits of the reforms whose one of its main goals is to promote foreign investment. 

This is great news as before, foreign investors needed to do a ton of due diligence before they could invest in Mexico, and even when everything was in order their investment was limited. The red tape on SOFOMs was intense and intended to keep foreigners out. 

As of today, a SOFOM can be formed entirely with foreign investments as long as they follow the same protocol a Mexican entity needs to follow to be structured and that they register with the proper government institutions. 

This presents a great opportunity for foreign investors to take advantage of the situation and set up a SOFOM to operate within Mexico. This structure might provide financial services or investment management throughout Latin America. The SOFOM might also operate as a cryptocurrency exchange or money transmission business.

When you establish a SOFOM, you are given the opportunity to register it as a regulated or nonregulated entity. As a foreign investor, you have the advantage of using the nonregulated version as a low-cost financial services entity. The setup costs and operational costs for this entity in Mexico are a fraction of those associated with an international bank in Puerto Rico, for example. 

For the same reason, financial institutions who own a SOFOM or individual foreign investors have the opportunity to offer their clients a lower interest rate on credit and loans. Also, the costs of labor and other expenses will be significantly lower than in competing jurisdictions. For example, see Sample Operating Expenses for an Offshore Bank in Puerto Rico.

SOFOMs are becoming extremely popular in Mexico and I expect this popularity to continue in 2020 as the regime of the new president continues to implement his reforms The CONDUSEF is already preparing for an influx of foreign investment associated with the registry of SOFOMs. 

I hope you’ve found this article on what is a SOFOM to be helpful. For more information, or for assistance in establishing a SOFOM on Mexico, contact us at info@premieroffshore.com or call us at (619) 483-1708

What is a Mexican SOFOM

What is a Mexican SOFOM?

In this post, I’ll consider the question, “What is a Mexican SOFOM?” A Mexican SOFOM is a complex entity used for many purposes and the most powerful financial entity or structure in Mexico after a full banking license. In fact, a SOFOM is often the most efficient path to a banking license in Mexico

Mexico is a prime destination for American investors looking to grow their portfolios. Its proximity to the United States, secure banking laws, English speaking professionals, and the strength of the dollar of the country are all factors why American investors are doing business south of the border. 

One of the most powerful entities that you can use for your advantage is called a Sociedad Financiera de Objeto Multiple or SOFOM. There are a number of activities that you can do with a SOFOM such as financing, factoring, making loans, issuing credit, etc. The Mexican SOFOM is also used for cryptocurrency exchanges and money transmission businesses. 

Mexico is currently in the beginning of a new era as its President has promised a wave of reforms that will change many laws, one of the many reforms that have gone through is the way SOFOMs operate in the country. 

You do not need any special authorization to start operating as a SOFOM. Any person with proper Mexican identification can open a SOFOM. That is to say, the director and person responsible for the SOFOM must be a Mexican person. 

The Mexican federal government does not have to be involved at all in the process, so long as you register your financial institution as a non-regulated SOFOM, no license or special permission is required.

Establishing a SOFOM in Mexico works just like opening any other business in the country. Your company must be formed and authorized by a Notario. Do not get confused, a Notario’s role in Mexico is very different from the United States. A notary in Mexico is a very important person, where anyone can be a notary in the US.

Your Notario will create the bylaws of the SOFOM which will feature how the principal purposes of the entity will take place. It is important for you to have a business plan that explains in detail how your financial entity will work under a SOFOM. 

As part of one of its functions a SOFOM has the ability to act as a fiduciary in a guaranty trust that is formed to guarantee the credits that it issues, it should also be noted that trusts in Mexico do not work the same way as in the United States. 

One activity that cannot be done with a SOFOM receives deposits from clients as those are reserved for banks and financial institutions in the country. A partnership with a bank in Mexico is required. 

Partnering with a bank as a SOFOM is a great way to operate as a financial entity without an international bank license. The SOFOM structure allows you to hold client funds in your corporate bank account and transact as described above. 

There are two types of SOFOMs available, the regulated SOFOM and the unregulated SOFOM. If you will set up a regulated entity, within the bylaws of a the SOFOM you must include the phrase “financial entity with multiple purposes, a regulated entity”. 

Meaning that in your bylaws your SOFOM needs to be identified by the abbreviation S.O.F.O.M, E.N.R. Regulated SOFOMs are those that have business activities involving financial holding companies and credit institutions. 

Most regulated SOFOMs are owned or controlled by financial institutions and have a number of shareholders. This is because the SOFOM structure is often the most efficient path to an international banking license in Mexico.  

Unregulated SOFOMs work a little different than regulated ones. Unregulated SOFOMs are not overseen or are subject to any relevant banking or tax laws in a country such as the CNBV and SHCP.

Capital in unregulated SOFOMs is independent and does not include the participation of third party credit institutions and holding companies. You cannot use the word “bank” in the bylaws of an unregulated SOFOM. Also, an unregulated SOFOM does not have any minimum capital requirements. 

If you are establishing your SOFOM as an unregulated entity you must disclose to clients and possible investors that you are not subject to the supervision of Mexican Banking Laws or institutions such as the CNBV. 

The only government institutions that have the power to regulate unregulated SOFOMs are the Secretaria de Hacienda y Crédito Público (SHCP), CONDUSEF, and any other applicable anti-terrorism and money laundering laws. 

The bottom line is that the Mexican SOFOM is the most powerful structure to start a financial services business, mortgage or payday lender, to raise capital, or to operate a cryptocurrency exchange in Latin America. 

The setup process to start an unregulated SOFOM is burdensome and takes 3 to 4 months depending on the time of year. We will be happy to assist you throughout the process, including local representation, banking, and operational support. 

I hope you’ve found this article on what is a SOFOM to be helpful. For more information, or for assistance in establishing a SOFOM on Mexico contact us at info@banklicense.pro or call us at (619) 483-1708

For more up to date information on offshore bank licenses and financial services structures, see www.banklicense.pro

How to Open a Maquiladora in Mexico

How to Open a Maquiladora in Mexico

My previous post was on how to start a general business in Mexico. In this section, I’ll focus on how to open a Maquiladora in Mexico. These Maquiladoras have huge economic importance for Mexico and the United States. Maquiladoras provide for hundreds of thousands of jobs for residents of border cities (on both sides of the border) and throughout Mexico. At one point in time, they helped to stabilize Mexico-USA relations.

Because of the massive deportations that occurred at the end of the Bracero Program in 1964 and Operation Wetback, a large number of factories were established along the US-Mexico border called maquiladoras to provide jobs for these newly relocated Mexicans.

The maquiladoras functioned as American assembly plants set up in Mexico’s border towns to provide jobs and a steady income for the deported. At the same time, they increased Mexico’s global exports and cemented the United States as its most important trading ally.

Maquiladoras made American companies competitive in global trade because Mexico’s wages were substantially lower than in the United States. The Maquiladora program strengthened the relationship between the United States and Mexico which at this point in time was quite strained.

Even though Maquiladoras have become ingrained in the lives of many Mexican and American citizens, many Americans fail to understand the economic advantage that opening an “offshore” assembly or repair plant in Mexico. 

  • Some refer to these plants as being offshore, as outside of the United States. The more modern definition is “near short” to leverage their proximity and ease of operation compared to more distant competitors like China and India. 

The IMMEX program allows US Companies to temporary import raw materials into Mexico for the preparation, repair, transformation of goods to be later exported to the United States as a final product. With this program, you make imports without paying the general import tax, value-added tax, and other compensatory payments. Then you export those finished products to the United States with no import duties or red tape.

To obtain the IMMEX program it is necessary to perform certain procedures fulfilling certain requirements, the applicant must have:

  • Advanced electronic signature certificate (SAT)
  • Federal taxpayer registration
  • Your tax domicile must be active and registered in the federal taxpayer registry.

In addition, the following documentation must be attached to the application for the procedure:

  1. Certified copy of the articles of incorporation of the company and, where appropriate, the modifications to it.
  2. Copy of the document that legally certifies the possession of the property where the operation of the IMMEX Program intends to take place, indicating the location of the property, attaching photographs of it. In the case of a lease or loan agreement, it must be proved that the contract establishes a minimum term of one year.
  3. Contract of maquila, orders of purchase that prove the existence of the project.
  4. Power of attorney (original or certified copy and simple copy); or exhibit a copy of the Unique Registry of Accredited Persons (RUPA).
  5. A written document by means of which the production process or the services which will fall under the guidelines of the program are detailed.
  6. A written document in which the detailed description of the production process or service is provided that includes the installed capacity of the plant to process the goods to be imported or to perform the objectives of the program. 
  7. Letter of conformity from the company or companies that will carry out the sub-manufacturing process where they express, under penalty of perjury and agree to joint and several liabilities for tax on temporarily imported goods (original).
  8. Additionally, for the IMMEX Business Controller Program modality, you must show:
  • Acts of Assembly stating the shareholding of the controlling company and the controlled companies (original and copy).
  • Certified entries in the shareholders’ registry book (copy)
  • The documentation referred to in points 1, 2 and 5 of this section, in addition to presenting a copy of the tax identification card. This documentation must be submitted to the controller and to each of the controlled companies.
  • The maquila contracts that each controlled company has with the controlling company or a maquila contract in which the obligations contracted must be established, both by the controlling company and by the controlled companies in relation to the objectives of the requested program, duly recorded before a Notary (original and copy)
  • Authorization as a certified company (copy), granted by the Ministry of Finance and Public Credit.
  1. Additionally for the modality of IMMEX Program for the use of a Third Party:
  • Letter of conformity from the company or companies that will carry out the process of tertiarization, where they manifest under protest, to tell the truth, the joint and several liability on temporarily imported goods (original).
  • The company or companies requesting the program under the Tertiarization modality must have the authorization as a certified company granted by the Ministry of Finance and Public Credit.
  1. If your maquiladora will operate in the textile sector other requests have to be met.
Setting up a business in Mexico

How to Open a Business in Mexico

After the Panama Papers, and because it became impossible to deal with banks in Panama, I moved Premier to Tijuana, Mexico in 2017. While the move was challenging, both from a quality of life and a business perspective, things are now running smoothly. 

Costs are down significantly compared in Panama, the availability of English speaking and well-educated workers is much better here, and our proximity to the United States and the ability to take meetings in Los Angeles and San Diego has improved sales. Our bottom line has grown significantly since the move and it was well worth the learning curve.

There are two groups that set up shop in Mexico. First, those who will open a physical office with employees in Mexico. Second, those that need a Mexican company and virtual office because they’re selling into Mexico. 

The second group is mostly US and Chinese companies selling through Amazon and other online platforms in Mexico. All of these websites now require a Mexican tax ID or RFC & SAT. To get these numbers you will need a Mexican corporation, a physical address (virtual office), and a local representative (local director / legal representative of the company). 

The first group covers a very wide range of clients. For example, entrepreneurs such as myself who moved to Mexico for lower costs and a better quality of life (to be on the fun side of the wall). Then there are the manufacturers or maquiladoras that move to Mexico for the trade benefits available when importing into the United States. Also, we get calls from all manner of business, such as tourism agencies, restaurants, clubs, service businesses, etc. 

So, without any more ado, here is how to set up a company or other business structure in Mexico. 

Opening a business is quite different in Mexico than it is in the United States. For instance, you rely entirely on a Notario to get the process started. A Notario in Mexico is not comparable to a Notary in the United States. The main difference being the importance and the power that a Notario held in Mexico. You will need to know this and other crucial details of you want to open a Corporation in Mexico. 

Opening a business in Mexico can be a complicated task. Even though in recent years Mexican Legislation has fastened the process, there is still a lot that needs to be done. Your company needs to have a stable planned structure before any of the governmental permits are requested. 

To register a business before the corresponding instances in Mexico it is necessary to carry out 7 or 8 procedures in different government institutions, which will take an approximate period of 8 days. The cost of making this record is 17.8% of the per capita income in Mexico, around 8,200 pesos.

In Mexico, as in many countries in Latin America, you will need the intervention of a Public Notary or Notario. The Notario is in charge of creating the Acta Constitutiva or Constitutive Act.
Basically, through this notarial act, the name and business of the new commercial entity is established, and at the same time, the business model is defined. There are a number of different business models in Mexico. 

The six types of companies or mercantile organizations in Mexico, to be analyzed are: Sociedad en nombre colectivo, Sociedad en Comandita Simple (S. en C.), Sociedad en Comandita por Acciones (S. en C. por A.), Sociedad de Limited Liability (S. de RL), Sociedad Anónima (SA), and Sociedad Cooperativa (SC). We will give a detailed description of each one in a different article. 

The steps you need to follow to open a business in Mexico are as follows: 

  1. Present a Request to the Ministry of Economicos (SE). The first step in creating a corporation is to submit a request to the Ministry of Economics where five possible corporate names in order of preference for the company. This is done to ensure that there is no company already established in the country or abroad with the same corporate name.
  2. Creation of the Acta Constitutiva (Constitutive Act). Once the Ministry of Economics gives the approval or delivers the proposals of available company names, the Constitutive Act must be drafted. This document is the one that gives life and which stipulates all the general and basic aspects of the company: company name, objective, type of company, administration, and control thereof, duration, etc. Once the company is created, the Constitutive Certificate must be notarized before a Notario.
  3. Registering the Business Address. You must register the address of your business. This can either be in the place where you are doing business and not just a registered agent for service of process. This address can be a full office or a virtual office. 
  4. Register before the Tax Administration Service (SAT). When the Constitutive Act is completely created and certified, the next step is a registration with the Tax Administration Service. The Tax Administration service is the equivalent of the IRS in the United States. From this register, the Tax Identification Number is obtained, which contains the Federal Taxpayer Identification Number (RFC).
  5. Register before the Public Registry of Property and Commerce. The next step is to appear before the Public Registry of Property and Commerce where the company and the location where the business will operate will be registered, as well as its purposes, objectives and commercial goals. For this process, the presentation of the Constitutive Act, the RFC, and the power of attorney that allows the legal representative to carry out the procedures of the company will be required. The power of attorney is also given by the Notario.
  6. Register before the Mexican Institute of Social Security (IMSS). When all of the above has been completed, the next step is to register before the Mexican Institute of Social Security. Even if it is a company in which only the employer exists as the only worker, it will be necessary for him to make his personal contributions to his Social Security accounts. Also, if you do not complete this process in time, you may be given a fine by the IMSS. 
  7. Only Applicable to Businesses that are Open to the Public. This step only applies to businesses that are going to be open to the public like a restaurant or a retail store, if you are opening an office, a call center, or a manufacturing business then you don’t have to worry about this step. Before you open your business to the public you are going to have to notify the government in order to obtain a municipal business license. At this step, you must also secure any other type of license that you might need in order to start operating. For example, if you are opening a business that is going to be making hazardous materials like chemicals you are going to have to apply for a number of distinct licenses. The same goes if you are opening a restaurant.
  8. Registering Employees. You must register all of your employees with the IMSS (Mexican Social Security Institute) and with INFONAVIT (Mexican Housing Fund). This is required by law. You must show in their paycheck the amount of money that is going to these two funds along with the local state taxes.
  9. Foreign Investment Registry if Applicable. This step only applies if one of the owners is a foreigner who does not have a permanent resident status. If this is the case then you must also register the business with the Registro Nacional de Inversión Extranjera. The government office that keeps track of all foreign investment coming into Mexico. This can be done by the Mexican national who you gave power of attorney to.
  10. Registration before any other applicable governmental institutions. Depending on the commercial activity that your corporation will be participating in, it may be required to register before different organisms, the most common being: Ministry of Health, Secretariat of Ecology and Environment, Mexican Institute of Intellectual Property, etc. 

It is highly advisable that when opening a corporation in Mexico you hire a group of experts. The process might seem long, but we can help you cut through the red tape and get up and running in the most efficient manner possible. 

tax free as an affiliate marketer

How to live tax free as an affiliate marketer in 5 steps

Here’s how to live and work as an affiliate marketer and pay zero in US taxes. If you market other people’s products online, you can easily structure your business to be tax free and fully compliant with US laws. If you’re living and working outside of the United States, this post on how to live tax free as an affiliate marketer in 5 steps is a must read.

This article is specifically tailored to affiliate marketers – those who market other people’s products or services online. You might use PPC, PPA, SEO, or whatever… the point is that you are marketing other people’s products and not selling a physical good into the United States.

If you’re white labeling products, or selling your own products online, the tax analysis is much more complex. If you’re selling other people’s products, the tax picture is simple. It’s easy to live tax free as an affiliate marketer if you know the rules.

And these same techniques can be used by anyone selling a service online. At the end of the day, affiliate marketing is categorized as a service by the IRS. You’re performing the service of marketing. And services are taxable wherever the work is performed. So, affiliate marketing performed outside of the United States is foreign source income.

The same goes for any other service business or business where labor / work is what generates the money. If you’re writing blog posts, selling subscriptions, putting on conferences outside of the US, or marketing other people’s products or services, you’re in the service business.

The difference with a physical product sold into the US market is that products create some level of US source income. Some value must be assigned to the product itself, and that value is taxable in the United States no matter where the work is done to create, pack, ship, support, and market the product.

I should also point out that I’m focused on internet businesses and affiliate marketing in this article. If you are providing a professional service, one that requires you to go to the client’s location to work, more complex rules apply. For more on professional service income, see How to Eliminate Subpart F Foreign Base Company Service Income.

With all of that backstory, here’s how to live tax free as an affiliate marketer in 5 steps.

  1. Setup an offshore corporation and run your business through that entity,
  2. Open an offshore bank account and have your clients pay into that account,
  3. If you must have a US corporation and account, move your income out of the US and over to the offshore company each month or quarter,
  4. Live outside of the United States and qualify for the Foreign Earned Income Exclusion, and
  5. Hold profits in excess of the FEIE in the offshore corporation as retained earnings.

The first step in living tax free as an affiliate marketer is to setup your offshore company. The most efficient structure is usually a corporation formed in a zero tax jurisdiction. We’ve found Belize, Nevis, Cook Islands and Panama are the best options for internet businesses.

If you want an added layer of asset protection, you can setup an offshore trust or Panama foundation as the holding company. This will provide maximum protection from future civil creditors. For more, see: Panama Foundation vs Cook Island Trust.

One word of caution on Panama. The officers and directors of Panama corporations are public record and listed in a searchable database. The same goes for founders (settlors) and council members (trustees) of a Panama foundation.

Affiliate marketers often want privacy to minimize the probability of a lawsuit. So, you might add an LLC from Belize or Nevis to the mix. You are the owner of the LLC and the LLC is the officer, director, or founder of your structure. In this way, only you and your banker know who the ultimate beneficial owner of the business is. For more information see: The Bearer Share Company Hack.

The second step is to open an offshore bank account (and possibly a merchant account) for your internet business. Your clients or affiliate networks should be paying by wire transfer into this account.

Clients often look to St. Vincent, Belize, Cook Islands or Panama for this account. The most popular offshore jurisdiction with affiliate networks are Panama and Hong Kong. The problem with this is that both of these jurisdictions now require you have legal residency before opening a business bank account.

If you can’t get paid into an offshore bank account, then you’ll need a US corporation. You want this company to bill the customer and then transfer the profit to your offshore account. The US company bills the client and you bill the US company such that it breaks even at the end of the year.

Note that this is only permitted if you’re living abroad, qualify for the Foreign Earned Income Exclusion, and have no employees or other business ties to the United States. Basically, all profits must be foreign sourced and not taxable to your US corporation.

That’s all pretty simple. The next part is the hard one… the one that takes real commitment if you want to keep Uncle Sam out of your pocket and live tax free as an affiliate marketer. You must live abroad and qualify for the Foreign Earned Income Exclusion (FEIE).

In order to qualify for the FEIE, you must be a legal resident of another country for a calendar year or out of the United States for 330 days during any 12 month period. The legal residency option is referred to as the residency test and the 330 days option is referred to as the physical presence test.

If you qualify for the FEIE, you can exclude up to $102,100 in salary from your internet business in 2017. That is to say, you can take a salary of up to this amount from your offshore corporation and pay zero Federal income tax on the amount. If both a husband and wife are working in the business, you can take out just over $200,000 tax free.

The physical presence test is easy enough to understand. Simply be out of the United States for 330 out of 365 days and you’re golden.

The problem with this test is that everyone tries to push the boundaries. They plan to spend exactly 36 days in the United States, but something always goes wrong. Maybe a delayed flight, extra business meeting, or family emergency. Many people who attempt to use the FEIE physical presence test get it wrong or incorrectly report their days, which is why the IRS loves to audit Americans who claim the FEIE using the 330 day rule.

If you do lose the Exclusion, you lose it entirely. If you spend 37 days in the US because a flight was delayed, you loose the entire exclusion for that tax year. This means that 100% of your income earned abroad will be taxable in the US. One missed flight could cost you $40,000… if it’s a husband and wife both living and working abroad, the bill might be $80,000.

The residency test is easier to qualify for but harder to setup. You first need to become a legal resident in the country you want to call your home base. Then you need to file taxes in that country, move there with the intention of making it your home for the foreseeable future, and break as many ties with the US as possible.

The physical presence test is fact based while the residency test looks to your intentions and your legal status in a country.  But, if you can jump through all these hoops, you can spend 3 or 4 months a year in the United States (never more than 183 days a year), and stop worrying about losing the exclusion.

In order to use the residency test, you must become a legal resident of your home base country. Finding a country that will grant you legal residency can be hard. Finding a tax haven that will give you residency is darned near impossible these days.

For example, Hong Kong requires an investment in a business of about $850,000. To become a resident of Singapore, you must invest $2.5 million in a business. BVI expects you to setup a business and issues only 25 residency visas a year.

The lowest cost tax haven is Panama. If you’re from a top 50 country, you can get residency in Panama by investing in their reforestation program. Invest $20,000 in a licensed teak plantation and you’ll become a resident of Panama. For more information, see: Best Panama Residency by Investment Program.

The final step is living tax free as an affiliate marketer is to plan for your success. If you earn more than $100,000 (single) to $200,000 (joint) in the business, you need to hold the excess in the corporation. If you take a salary in excess of the FEIE, you will pay US tax on the amount over the exclusion. If you leave that money in the corporation, you only pay US tax on it when you take it out as a distribution.

If you’re business will net $500,000+, and you can benefit from 5 employees, you might think about setting up in Puerto Rico. This island has a unique tax deal which is basically the inverse of the FEIE. For more see: Panama vs. Puerto Rico, which is right for my business.

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

I hope you’ve found this article on how to live tax free as an affiliate marketer to be helpful. For assistance in forming the offshore company and planning the business please contact us at info@premieroffshore.com or call (619) 483-1708. We’ll be happy to assist you to set up the structure business and keep it in compliance.

tax free income the legal way

Pay Zero Income Tax the Legal Way

The internet is filled with Idiots selling scam programs that will teach you how to pay zero income tax. They’re all full of BS and infuriate those of us who try to write about legal ways to protect your assets and minimize your income taxes. In this article I’ll talk about the only legal ways to pay zero income tax on your business and capital gains offshore.

This post is meant for US citizens or green card holders willing to do what it takes to reduce or eliminate their US taxes.

I’ll tell you upfront that paying zero income tax the legal way is VERY difficult. It takes a lot of work and commitment on your part. There are no tricks or easy solutions. To pay zero income tax requires moving you and your business out of your comfort zone… not necessarily out of the United States… but, I’ll get to that in a bit.

And I’m not talking about retirement accounts or other US methods for reducing or deferring US tax. I’ll assume you’re making too much money to benefit from those accounts or that you already have your IRA and 401-k plans setup.

As I said, the web is filled with scam artists pitching all kinds of ways avoid US taxes. Tax lawyers call these guys tax protestors (and morons) and they refer to themselves as sovereign citizens. They’re using straw man companies and sham trusts to claim they earn no “income.”

I won’t get into these bogus arguments because they’ve been debunked time and time again. At this point, tax protestors are just a sad commentary on how gullible some people are. These cases are so cut and dry that lawyers can be sanctioned for wasting the court’s time.

Another issue to watch out for when searching the web are claims that you can operate tax free in a foreign country. These are true statements by providers in the country where you will incorporate… but meaningless to US citizens.

For example, you call a lawyer in Panama to set up a corporation there. You ask them if your structure will pay any tax… and they say no, it does not. It’s totally tax free! They’re talking about the tax laws of Panama. That’s great but, as a US citizen, you’re focused on US tax laws because that’s your real risk.

The provider in Panama is not trying to mislead you. He’s simply telling you the law of his country. He’s an expert in Panamanian law, thus his comments are limited to that country. This is why you always need a quarterback in the US who can show you how US tax laws interact with those of the foreign jurisdictions you’re setting up in.

There are basically four legal ways to eliminate US tax by going offshore. They are:

  1. Offshore captive insurance,
  2. Offshore life insurance,
  3. Set up a division of your business offshore, and
  4. Move to Puerto Rico to eliminate capital gains tax.

Offshore Captive Insurance Company

An offshore captive insurance company allows you to provide insurance to your active business. You form an offshore captive insurance company in Bermuda, Cayman or Belize, and insure against risks not covered by your traditional policies.

As of 2017, the US IRS will allow you to deduct up to $2.2 million of insurance premiums paid to an offshore captive insurance company owned by you. For previous years, the amount was $1.2 million.

By insuring against risks with a low probability of occurring, you effectively move $2.2 million of pre-tax income off of your corporate books in the US and onto an offshore captive insurance company. These transfers then accumulate offshore tax deferred until you close down the structure.

For more, see: The Mini Offshore Captive Insurance Company. This article was written before the deductible amount was increased from $1.2 to $2.2 million.

Offshore Life Insurance

Offshore life insurance, typically offshore private placement life insurance basically allows you to create an “offshore ROTH” without any of the contribution limits or distribution requirements.

You can put as much after tax money into an offshore life policy as you like and it will remain in the plan tax deferred. That is to say, you will pay zero tax on capital gains inside the life policy so long as the plan is active.

If you decide to shut it down and take a distribution, you will pay US tax on the increase in value. If you leave the policy in place until your death, the value will pass to your heirs tax free. Neither you nor they will ever pay US tax on the gains because of the step-up in basis they receive.

You also have the choice of borrowing against the policy. If you need access to the cash, you can take out a loan.

The minimum investment for these offshore life policies is usually between $1.2 to $2.5 million depending on the provider and other factors. For more, see: Benefits of Private Placement Life Insurance.

Offshore Business

If you move you and your business offshore, you can earn up to $200,000 a year tax free. If you move a division of your business offshore, you can get tax deferral on any foreign sourced profits that business generates.

If you move abroad and qualify for the Foreign Earned Income Exclusion, you can earn $102,100 per year free of Federal income tax from your offshore business. If a husband and wife are both working in the business, and both qualify for the Exclusion, you can take out over $200,000 combined.

To qualify for the Exclusion, you need to 1) be a resident of a foreign country and out of the US for about 5 months a year, or 2) out of the US for 330 out of 365 days. It’s much easier to qualify for the FEIE as a resident, so I strongly recommend you consider one of the easy and low cost second residency programs.

For example, you can become a resident of Panama with an investment of $20,000 and Nicaragua for $35,000. Panama is the easiest because this one doesn’t have a physical presence requirement. For more, see: Best Panama Residency by Investment Program.

If you’re not ready to move you and your family offshore, but can setup a division of your business offshore, then you can defer US tax on income attributable to that division.

Assuming your offshore team can operate independently, income they generate should be eligible to be held in the offshore corporation tax deferred. When you take it out as a dividend, either personally or as a transfer to the parent company in the US, you will pay US tax. For more, see: Step by Step Guide to Taking Your Business Offshore

Move to Puerto Rico

Even if you go offshore, you’re still going to pay US tax on your capital gains. So long as you hold a US passport, the IRS wants it’s cut of your investment profits. The only exceptions are investments inside a US compliant life insurance policy (described above) and capital gains for residents of Puerto Rico.

When an American moves to a foreign country, they’re subject to US Federal Income Tax laws. All US citizens and green card holders must pay unto the IRS.

The only individuals exempted from this rule are residents of the US territory of Puerto Rico. US Tax Code Section 933 excludes residents of Puerto Rico from US Federal tax laws.  This means that Puerto Rico is free to create it’s own tax system, which it has done.

If you set up a service business in Puerto Rico, one with at least 5 employees on the island, you can qualify for a 4% tax rate on your Puerto Rico sourced income. To see how this compares to the FEIE, see: Panama vs Puerto Rico.

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

Even better, if you move to Puerto Rico, spend a minimum of 183 days a year on the island, and otherwise qualify for their Act 22, you’ll pay zero tax on your capital gains. That’s right, without any of the costs or limitations associated with a private placement life insurance policy, those willing to live in an island paradise can pay zero income tax on their capital gains.

For more on how to pay zero tax in Puerto Rico, see: How to stop paying capital gains tax.


I hope you’ve found this article on how to pay zero income tax legally to be helpful. For more information, and a consultation, please contact us at info@premieroffshore.com or call (619) 483-1708. We’ll be happy to assist you to structure your affairs offshore in a tax compliant manner.

Foreign Base Company Income

Foreign Base Company Income

When a foreign company is owned by a US person or persons, it’s a Controlled Foreign Corporation (CFC) for US tax purposes. Even if a CFC is operated abroad, some types of income will be taxable in the US as earned. The most common category of taxable income in a CFC is Foreign Base Company Income.

A company with Foreign Base Company Income is owned by “US persons” if residents, green card holders, or citizens of the United States own more than 50% of the company. US persons also includes domestic partnerships, domestic corporations, and certain estates and trusts (IRC § 951).

For purposes of determining who is a US shareholder and CFC status, stock owned directly, indirectly, and constructively is taken into account (IRC § 957). These are called the “look through” rules and prevent you from avoiding CFC status by giving shares to family or putting them in offshore structures and trusts.

Being a CFC means that your foreign company needs to consider Subpart F of the US tax code. As a result, certain types of income of this corporation may be taxable as earned in the United States. Conversely, most income that is not Subpart F income can be retained tax deferred in the corporation.

The most common type of Subpart F income is referred to as Foreign Base Company Income. This category includes 4 subcategories:

  1. Foreign personal holding company income;
  2. Foreign Base company sales income;
  3. Foreign base company service income;
  4. Foreign base company oil-related income.

Foreign base company taxable income consists of the sum of these 4 types of profits earned in a foreign corporation which is owned or controlled by US persons.

I will consider foreign personal holding company income and foreign base company services income here, as those are the categories relevant to my clients. For sales income, you might review IRC § 954(a)(2). For oil-related income, see IRC § 954(a)(5) or contact Secretary of State Rex Tillerson, ℅ US State Department.

Foreign Personal Holding Company Income

Foreign personal holding company income is basically your net passive income earned in a CFC. It’s “net” after foreign taxes paid (subject to treaties), your basis, and allowed expenses. Foreign personal holding company income typically includes the following:

  1. Dividends, interest, royalties, rents, and annuities;
  2. Net gains from certain property transactions;
  3. Net gains from certain commodities transactions;
  4. Certain foreign currency gains;
  5. Income equivalent to interest;
  6. Income from notional principal contracts;
  7. Certain payments in lieu of dividends; and
  8. Amounts received under certain personal service contracts.

The  purpose of the personal holding company income rules as to prevent US persons from deferring tax on passive income on portfolio type investments. An active business can defer foreign source income, but an individual can’t typically structure their passive investments offshore and receive the same benefit.

Foreign Base Company Service Income

Foreign base company service rules target service income earned abroad from related companies in the United States. This is usually income earned from the performance of technical, managerial, engineering, architectural, scientific, skilled, industrial, commercial, or other services.

Income earned by a CFC is considered foreign base company service income only if it meets all three of the following criteria:

  1. The income is earned in connection with the performance by the CFC of certain specified services;
  2. The services are performed by the CFC for, or on behalf of, a related person; and
  3. The services are performed outside of the country in which the CFC is incorporated.

This all means that, when a CFC performs services for a related party through a branch established outside of its country of incorporation, it may incur “foreign base company services income” that may be currently included in its US shareholder’s gross income under Section 951.

Services will be considered performed wherever the worker performs their duties. If you’re a consultant flying from country to country performing a technical task, you probably have foreign base company service income.

Likewise, if you’re a technical professional working in Mexico and operating your business through a Panama corporation to save on Mexican taxes, you probably have foreign base company service income issues.

The solution to this for those who do not travel is to incorporate in the country where you’re working. If you want the benefits of a low tax country such as Panama, you need to be living in and working from Panama.

If you do travel, or don’t wish to incorporate in your country of operation, then a foreign corporation owned by US persons may only provide services to unrelated persons. That is, the company should be performing services for customers on behalf of itself and enter into contracts with those customers directly, not through a related party.

As stated above, only services performed for related parties, and services performed outside of your country of incorporation, generates foreign base company service income. Services are performed for or on behalf of a related party in the following situations:

  1. The related person pays the controlled foreign corporation for the services;
  2. The related person is or was obligated to perform the services performed by the controlled foreign corporation,
  3. The performance of the services that were performed by the controlled foreign corporation was a condition or material term of a sale of property by a related person, or
  4. The related person contributed “substantial assistance” in the performance of the services by the controlled foreign corporation.

If you wish to retain earnings offshore, you must avoid Subpart F, the foreign base company service income and foreign personal holding company issues. The key to a successful offshore plan is to maximize tax deferral in a compliant manner.

I will end by pointing out that foreign base company service income issues are not a concern for small businesses, only those looking to hold retained income offshore. If you’re a small business owner, you live and work abroad, net $100,000 or less, and qualify for the Foreign Earned Income Exclusion, then you don’t need to worry about Base Company isuses.

This is because a small business owner can take out up to $102,100 as salary tax free using the Foreign Earned Income Exclusion. You never want to retain earnings when you can distribute them as earned tax free using the FEIE.

I hope this article on foreign base company income has been helpful. For more information on structuring an active business abroad, please contact us at info@premieroffshore.com or call us at (619) 483-1708. 

offshore bitcoin license

Low Cost Offshore Bitcoin License

The best low cost offshore Bitcoin license is from Panama. Specifically, the Panama Financial Services License is the best offshore Bitcoin license available. Here’s why Panama is the best.

When selecting an offshore Bitcoin license, you want to be in a country with a solid banking system which doesn’t regulate Bitcoin companies. You don’t want to be classified as a brokerage or a bank because of the high costs of compliance. Very few, if any, Bitcoin startups can withstand that level of overhead and scrutiny.

There are many countries that don’t regulate Bitcoin. For example, Costa Rica, Belize, Colombia, St. Kitts and Nevis, etc. Only the United States and Mexico (since 2015) in the region have called Bitcoin a “currency” and required licensing.

So, why does Panama offer the best low cost offshore Bitcoin license? Because you can operate a licensed but unregulated offshore Bitcoin brokerage in Panama. You can get a license from the government and not need to provide audited financials, compliance, or any of the other headaches associated with being regulated.

Bitcoin operators will find the right to say they are licensed as a plus in marketing campaigns. For example, the Panama Financial Services License allows you to make the following claim on your website: Bitcoin Capital Corp is a financial institution licensed by Ministerio de Comercio e Industrias – Republic of Panamá (MICI) in Panama as a Financial Institution and a member of the SWIFT/BIC Network Code: BTCAPAP1

  • Bitcoin Capital Corp is a fictional company for illustrative purposes only.

It’s important to note that you can’t say you’re regulated by MICI. You may only claim to be licensed by this agency.

So, you can’t use the word regulated in your marketing campaign. In addition, you can’t use the terms bank, brokerage, securities, savings and loan, trust (as in trust company, fiduciary or trustee), cash transfer, or money transfer. Each of these requires a different license… and are fully regulated.

That is to say, The  Panama financial services license does not allow the Panama company to engage regulated activities such as:

  • Securities trading or broker-dealer activities including investment funds, managed trading etc.
  • Any type of banking activity
  • Credit Union (cooperativas)
  • Savings and Loan (financiera)
  • Fiduciary (trust company) services
  • Cash transmittal services or currency exchange (e.g. bureau de change)

If you have a bank license from another jurisdiction, a Panama Financial Services Company can provide services to that bank. It may not offer services to the clients of the bank, only to the bank.

Above I said that an offshore bitcoin broker in Panama is not regulated, which is true. There is no audit requirement or government oversight. Of course, your banking and brokerage partners will impose rules. Also, the laws of Panama apply to you, just as they do to all businesses operating in the country.

This means your firm will need to follow the Anti Money Laundering, Know Your Client and Suspicious Activity laws. Also, your banking partner will demand you keep records to maintain a correspondent account.  

It also means that FinTech firms without correspondent bank accounts will have reduced compliance requirements compared to traditional brokerages. For example, a Bitcoin operator sending transfers across the network, outside of the banking system, will have lower compliance costs. Those who deploy an open, neutral protocol (Interledger Protocol or ILP) to send payments across different ledgers and networks will see added efficiency operating through a licensed but unregulated entity.

Another benefit of Panama is that an offshore Bitcoin licensed Financial Services Company has no minimum capital requirements. You can form your Bitcoin brokerage with any amount of capital you choose.

Of course, your transnational partners and correspondent banks will have account minimums. It would be a challenge for a company incorporated with $5,000 in capital to get the accounts and relationships it needs. The point here is that a Panama Financial Services Company operating as an offshore Bitcoin firm is free to set its capital as it feels appropriate without interference from a government regulator.

The average cost for a licensed offshore Bitcoin firm in Panama is $35,500. This includes opening a business account, assisting you to find office space or a virtual office, and 12 months of tax and business consulting to ensure the structure operates as intended. Annual fees are about $1,500 per year thereafter.

The time to form an offshore Bitcoin company is usually 7 days to setup the corporation and 15 days to receive the license after all of the documents are received by the governments and all of their questions are answered.

I hope you’ve found this article on the best offshore Bitcoin license to be helpful. For more information, please contact me at info@premieroffshore.com or call us at (619) 483-1708. 

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.

Panama financial services license

Panama Financial Services License

A Panama Financial Services Company is a licensed but unregulated financial entity which allows you to hold and manage client funds in Panama. The Panama financial services license is issued by the Panamanian Ministry of Commerce (Ministerio de Comercio and Industrias). It’s much easier to keep in compliance than a license issued by the banking authority (Superintendencia de Bancos de Panamá).

Here’s a summary of the benefits of a Panama financial services license:

  • These licensed Panama corporations are most commonly used by offshore financial services companies and international banks that handle third-party funds. For example, cash management and investment services for an offshore bank licensed in another jurisdiction or for providing electronic payments services, credit and debit cards, or other similar payment processing activities.
  • If you will manage client money, you must have a of license. The lowest cost and most efficient licensed but unregulated entity is the The Panama Financial Services Company.
  • These financial services companies can work effectively with other foreign structures – for example, to outsource services for tax efficiency (because Panama won’t tax foreign sourced profits) and/or to set up a trading desk in a more reputable jurisdiction than your country of licensure.

A Panama financial services license allows you to conduct the following types of transactions on behalf of your financial institution (in addition to the normal business functions of the company):

  • Open corporate bank accounts and accept client funds, usually on behalf of a licensed and regulated entity operating in another jurisdiction.
  • Operate as a basic correspondent account managing and transferring funds on behalf of clients of a bank licensed in a separate jurisdiction.
  • Act as a payment Intermediary.
  • Currency / FX and Bitcoin accounts.
  • Conduct precious metal trading (gold, silver, platinum, etc.).
  • Factoring.
  • Leasing.

Capital and Office Requirements

In most cases, a Panama Financial Services Company will not have a capital requirement (a minimum amount of paid in capital). The only major exception is leasing services, which requires special permission and capital of $100,000.

While it’s not required, I recommend clients contribute as much capital as possible if they’re  going to operate as a correspondent bank account. Starting with $100,000 to $250,000 paid-in shows prospective banks your commitment to your Panama Financial Services Company.

I also recommend correspondent banking desks open an office in Panama with one or more employees. Turn your offshore corporation into a domestic operating company. It’s not required under the law, but it will improve your chances of success.

A local presence will give you access to a wider range of banks in Panama. Many banks will only do business with local companies. Having an office and an employee will help you throughout the process and gives you someone on the ground to deal with issues as they arise.

You can get this done at a low cost by setting up a small executive suite and paying an employee for half of his or her time. For example, Regus has 6 office buildings in Panama City and provides excellent services. Click here to find a Regus office.

Remember what’s important here is what a local bank / correspondent partner wants to see, not the minimum requirements listed in the law.

Limitations of a Panama Financial Services Company

The  Panama financial services license does not allow the Panama company to engage regulated activities such as:

  • Securities trading or broker-dealer activities including investment funds, managed trading etc.
  • Credit Union (cooperativas)
  • Savings and Loan (financiera)
  • Fiduciary (trust company) services
  • Cash transmittal services or currency exchange (e.g. bureau de change)

These services are regulated differently by the Panamanian government and all require their own license with minimum capital and audit requirements.

It’s also prohibited for the Panama Financial Services Company to offer any banking services. To be clear regarding “correspondent banking,” a Panama Financial Services Company may offer services to a licensed and regulated bank in another jurisdiction. It may not offer services to the clients of the bank, only to the bank.


The setup costs for a Panama Financial Services Company are $35,500 and the annual fees are about $1,250 depending on nominee directors and other factors. This does not include a registered or virtual office.

In most cases, a Panama Financial Services Company can be completed in about 15 days once all of the documents are submitted.

I hope you’ve found this article on the Panama Financial Services Company company to be helpful. For more information, please contact me at info@premieroffshore.com or call us at (619) 483-1708.