Under the framework of ACT 60, Puerto Rico has made efforts to attract and encourage the establishment of International Financial Institutions (IFIs) in its territory. Chapter 4 of this legislation provides a favorable tax environment designed specifically for those companies engaged in eligible financial activities. The following are the tax incentives and eligibility requirements that make Puerto Rico an attractive destination for the investment and operation of IFEs.
Tax Benefits for International Financial Entities
IFEs in Puerto Rico enjoy a number of significant tax advantages, including:
- Reduced Tax Rate: Income earned by IFEs is subject to a flat income tax rate of 4%, which represents a great competitive advantage globally.
- Gross Income Exemptions: Interest, financing charges, dividends or profits distributed by the IFS are not considered gross income from Puerto Rican sources and, therefore, are exempt from taxes or withholdings applicable to non-residents.
- Special Tax Rate for Dividends: A fixed income tax rate of 6% is applied on dividends and other profit distributions received by Puerto Rico residents who are shareholders or partners of the IFS.
- Property Tax Exemption: EFIs enjoy a 75% exemption on property tax for real and personal property.
- Municipal Tax Reduction: A 50% municipal tax exemption is offered to the EFI.
Eligibility Requirements for EFIs
In order for an international financial entity to benefit from these incentives in Puerto Rico, it must meet a series of requirements:
- Incorporation and Organization: The entity may be incorporated under the laws of Puerto Rico, the United States, or any foreign country.
- Local Employment: The entity is required to employ a minimum of four full-time employees in its commercial office in Puerto Rico.
- License and Permit: It is necessary to apply for a permit and license at the Office of the Commissioner of Financial Institutions and obtain a tax exemption decree from the Business Incentives Office, with an initial term of 15 years, potentially renewable for another equal period.
- License Fee: An initial license fee of $5,000 must be paid, renewable annually at the same amount.
- Legal Compliance: The entity must adhere to federal anti-money laundering laws and regulations and OFAC sanctions programs.
- Capital Requirements: Authorized capital stock must be at least $5 million ($500,000 for certain financial activities), with at least $250,000 paid in prior to issuance of the license, in addition to having at least $300,000 in restricted assets.
Conclusion
Chapter 4 of ACT 60 offers an attractive set of tax incentives and operating conditions for International Financial Institutions, positioning Puerto Rico as a competitive destination for investment and expansion of financial activities in the international arena. With these incentives, the island seeks not only to attract capital and talent, but also to foster a dynamic and diversified economic environment. EFIs interested in establishing operations in Puerto Rico will find a welcoming environment conducive to their growth and success.
