Puerto Rico International Financial Entity

Puerto Rico International Financial Entities

International Financial Entities (IFEs) operating in Puerto Rico are subject to licensing and regulation by the Office of the Commissioner of Financial Institutions. This regulatory framework is established under the IFE Act (Act No. 273) of September 25, 2012, which replaced the previous International Banking Regulatory Act. The IFE Act offers tax incentives to IFEs that establish operations in Puerto Rico, provided they fulfill the licensing requirements and adhere to the regulatory powers of the Commissioner.

Purpose and Corporate Structure

Under the IFE Act, any legal entity incorporated or organized under the laws of Puerto Rico, the United States, or any other country, including its units, can apply for an IFE license. The primary objective of IFEs is to attract both U.S. and foreign investors to Puerto Rico. The IFE Act grants authorization for specific banking and financial activities (known as Authorized IFE Activities) in Puerto Rico, primarily focusing on non-residents of the region. While there are limited activities allowed with Puerto Rico residents, they are considered exceptions. You can find the list of Authorized IFE Activities below

To operate as an IFE under Puerto Rican law, the entity must first be organized as a corporation, partnership, limited liability company, or other legal entity – but most often a Puerto Rico corporation. This requires drafting articles of incorporation, a partnership agreement, an operating agreement, or any applicable organizational documents that establish the IFE. These documents must contain (i) the name of the IFE, which must include the words “International,” “Foreign,” or “Overseas,” or other similar words connoting the international character of the IFE; (ii) the address of the principal place of business in Puerto Rico of the IFE; (iii) the authorized or proposed capital of the IFE (as described above); (iv) the term of existence of the IFE; and (v) the purposes for which it is organized, including a specific limitation of its operations to carry out only those services authorized by the IFE Act.

Application Process

The process of establishing an IFE involves two stages. The first stage begins with the organization of the IFE, where the applicant prepares the organizational documents and submits an application for a permit to organize to the Commissioner. The application must be in writing, notarized, and include drafts of the proposed organizational documents, a business plan, a nonrefundable application fee of US$5,000, historical and financial information of the proposed owners and directors of the IFE, and the number of proposed employees. The Commissioner then proceeds to analyze and investigate the application and accompanying documents.

The second stage commences after the permit to organize the IFE is issued. At this point, the applicant must file the organizational documents and a copy of the permit with the Puerto Rico State Department (PRSD). The permit remains valid for six months from the date of issuance. Once the entity is organized, offices are leased or acquired, and capital is contributed, the applicant can apply for the IFE license.

The third stage commences with the submission of the application to the OCIF. The Commissioner reviews the final license application, considering various documents, including certifications, license fees, evidence of compliance with regulations, and a resolution indicating the IFE’s readiness to commence operations. Major components of the application include:

  1. a certification issued by the Department of State of Puerto Rico, under its official seal, specifying that the organizational documents and the copy of the Permit to Organize have been duly filed
  2. the payment of a license fee in the amount of US$5,000, in the form of a money order, official check or certified check payable to the order of the Secretary of the Treasury of Puerto Rico
  3. certified copy of all documents filed at the Department of State of Puerto Rico
  4. copy of the regulations or by-laws adopted by the Board of Directors or ruling body of the IFE, certified by the secretary or authorized person, before notary public
  5. evidence showing the principal place of business
  6. evidence that the authorized capital of the IFE has been subscribed, issued and paid, and that the IFE complies with the requirement regarding maintaining unencumbered assets (as discussed above) and
  7. a statement or certificate of corporate resolution, certified by the secretary or authorized person, before notary public, indicating that the IFE has complied with all the provisions of the Act and Regulation 5653 and that it is ready to commence operations.

The Commissioner will review the documents and often request for clarification or supplementation from the applicant. The length of this review is approximately 3-4 months. If the application is approved and the license granted, a copy of it must be filed with the Department of State of Puerto Rico within ten days.

Tax Treatment of IFEs

Subsequently, the IFE can request a tax exemption grant from the Puerto Rico Department of Economic Development and Commerce (DDEC). Unlike International Banking Entities (IBEs), IFEs obtain their tax benefits through a tax grant or a contract with the government, rather than automatically through legislation. The tax grant, protected by a contract under the IFE Act, guarantees tax benefits for 15 years, with the possibility of two additional 15-year renewals, totaling 45 years. Requests for extensions must be made 6 to 24 months before expiration.

Under the provisions of the IFE Act, both the International Financial Entities (IFEs) and their shareholders are entitled to advantageous tax treatment. The IFEs enjoy the following tax benefits: (i) a fixed 4 percent income tax rate on the net income derived from Authorized IFE Activities; (ii) complete exemptions from property and municipal license taxes on said activities; and (iii) the exclusion of interest, financing charges, or partnership benefits from being considered as gross income from Puerto Rico sources, thereby exempting them from taxation or withholding provisions for nonresidents of Puerto Rico. Shareholders, on the other hand, benefit from: (i) a 6 percent income tax rate on distributions of earnings and profits from Authorized IFE Activities to Puerto Rico resident shareholders; and (ii) full exemption from Puerto Rico income tax on such distributions for non-resident shareholders.

Central to these incentives is the potential interplay between the IFE Act and Act 22, amended on January 17, 2012, as outlined in “Puerto Rico’s Act 20 and Act 22 – Key Tax Benefits”. With the aim of attracting more investors and further stimulating the Puerto Rico economy, the IFE Act can interact with Act 22 to ensure that dividends received by bona fide Puerto Rico residents from Authorized IFE Activities, which constitute Puerto Rico source income, are fully exempt from Puerto Rico income tax under Act 22. Furthermore, such dividends are also exempt from U.S. income tax in accordance with the amended U.S. Internal Revenue Code of 1986.

Important Considerations

Those seeking to become licensed IFEs should take note of the following:

  1. Application of US Anti-Money Laundering Statutes: The IFE Act mandates that US anti-money laundering statutes, including the Bank Secrecy Act, the USA PATRIOT Act, and OFAC pronouncements, are applicable to International Financial Entities (IFEs).
  2. Restrictions on Interest Rates and Reserves: The Commissioner is prohibited from establishing interest rates to be paid or payable to IFEs, as well as from requiring IFEs to maintain reserves over their deposits.
  3. Absence of Lending Limits: The IFE Act does not establish any specific lending limits for IFEs.
  4. Confidentiality of Information: All information submitted to the Commissioner concerning IFEs is treated as confidential and cannot be disclosed by the Commissioner, except under certain circumstances, such as through a written court order from a competent jurisdiction or a formal order from a government agency exercising supervisory powers over the IFE, and when the Commissioner deems such action to be in the best public interest.
  5. Banking Relationship with the Federal Reserve Bank of New York: The Federal Reserve Bank of New York has opened banking accounts for IFEs. This establishes a client relationship between the IFE and the Federal Reserve Bank of New York but does not confer membership in the Federal Reserve System or subject the IFE to regulation by the Fed. Unless the IFE functions as a banking subsidiary of a bank holding company under the US Bank Holding Company Act of 1956, as amended, there is no requirement for the IFE to have its deposits insured by the Federal Deposit Insurance Corporation (FDIC).

IFE Cost Estimates

ExpenseYear 1Year 2
Application Fee$5,000$0
Corporate Formation$500$0
Corporate Renewal$0$350
Correspondent Bank (1)$30,000$0
License Fee$15,000$15,000
Physical Presence (2)$18,000$18,000
Salaries (3)$14,000$14,000
SWIFT Fees$20,000$8,000
Auditor $4,000$5,000
Legal (4)$36,000$4,000
Local Director$3,500$3,500
Total Expense:$146,000$67,850
OCIF Capital Requirement (5)$550,000$300,000
Total Capital Outlay:$696,000$367,850

IFE Authorized Activities

Under the IFE Act, licensed entities are specifically allowed to engage in the following:

  1. Accept deposits from foreign persons in checking accounts, demand or fixed term deposits, including interbank demand deposits and fund deposits, or borrow money from international financial institutions and foreign persons in accordance with the Commissioner’s regulations. Note that borrowing money must not be equivalent to accepting deposits.
  2. Accept properly collateralized deposits or borrow secured funds from the Government Development Bank for Puerto Rico and the Economic Development Bank for Puerto Rico with authorization from the Commissioner.
  3. Make deposits, provide loans, and engage in banking transactions with the Government Development Bank for Puerto Rico, the Economic Development Bank for Puerto Rico, international financial institutions, banks (including banks organized under Puerto Rico laws and foreign banks with branches in Puerto Rico).
  4. Originate, procure, place, guarantee, or service loans, subject to the approval of the Commissioner, with certain exceptions for domestic persons.
  5. (a) Issue, confirm, provide notice, negotiate, or refinance letters of credit for clients and beneficiaries who are not domestic persons, or (b) issue, confirm, provide notice, negotiate, or refinance letters of credit for transactions financing exports, even if the beneficiary is a domestic person.
  6. Discount, rediscount, trade, or otherwise deal in money orders, bills of exchange, and similar instruments, provided that the drawer and original debtor are not domestic persons.
  7. Invest in tax-exempt securities, stocks, notes, and bonds issued by the Government of Puerto Rico.
  8. Conduct banking transactions allowed by the IFE Act in any currency, including foreign currencies, gold, or silver, and participate in foreign currency trading.
  9. Underwrite, distribute, and trade in securities, notes, debt instruments, drafts, and bills of exchange issued by foreign persons for final purchase outside of Puerto Rico.
  10. Engage in trade financing activities involving import, export, barter, and exchange of raw materials and finished products with domestic persons when the Commissioner has determined that the international aspects of the transaction override local financial and business community involvement, and it aligns with the purposes of the international financial institution.
  11. Engage in financial activities outside of Puerto Rico that would be permissible for a bank holding company or a foreign office or subsidiary of a United States bank under applicable US law.
  12. Act as a fiduciary, executor, administrator, registrar of stocks and bonds, property custodian, assignee, trustee, attorney-in-fact, agent, or in any other fiduciary capacity upon obtaining a special permit from the Commissioner. However, such fiduciary services shall not be offered to or benefit domestic persons.
  13. Acquire and lease personal property under financial lease agreements for foreign lessees in compliance with the Commissioner’s regulations.
  14. Buy and sell securities outside of Puerto Rico on behalf of foreign persons, provide investment advice related to such transactions, or provide separate investment advice to foreign persons.
  15. Serve as a clearinghouse for financial contracts or instruments of foreign persons as authorized by regulations adopted by the Commissioner.
  16. Organize, manage, and provide management services to international financial institutions and other financial entities located outside of Puerto Rico, including investment companies and mutual funds, provided that the distribution of stock or participation in the capital of such companies is not directly offered to domestic persons.
  17. Engage in other activities expressly authorized by the Commissioner’s regulations or orders, or activities incidental to the execution of services authorized by the IFE Act and the Commissioner’s regulations, except those expressly prohibited by the IFE Act.
  18. Participate in granting and securing loans originated and/or secured by the Government Development Bank for Puerto Rico and the Economic Development Bank for Puerto Rico.
  19. Upon approval of the Commissioner, participate in granting and securing loans originated.

IFEs and Cryptocurrency

Recognizing the potential economic benefits and growth opportunities associated with cryptocurrencies, the IFE Act allows IFEs to participate in cryptocurrency-related activities, subject to certain regulatory provisions.

Under the IFE Act, IFEs are permitted to:

  1. Offer custodial services for cryptocurrencies: IFEs can act as custodians for cryptocurrencies on behalf of their clients, providing secure storage and management of digital assets.
  2. Facilitate cryptocurrency exchanges: IFEs can operate as platforms or intermediaries for the buying, selling, and trading of cryptocurrencies, enabling individuals and businesses to exchange digital assets.
  3. Provide cryptocurrency investment services: IFEs can offer investment advisory and management services related to cryptocurrencies, assisting clients in making informed investment decisions and managing their cryptocurrency portfolios.
  4. Engage in cryptocurrency lending: IFEs can provide lending services where cryptocurrencies are used as collateral, allowing individuals and businesses to access capital by leveraging their digital assets.
  5. Conduct initial coin offerings (ICOs): IFEs can assist in the organization and execution of ICOs, which involve the issuance and sale of tokens or digital assets to fund cryptocurrency projects.


In my humble opinion, the Puerto Rico IFE remains the permanent offshore banking structure. While licensees will face a modest 4% tax on net income, it is a relatively small price to pay for the scope of services that you an IFE can offer and be able to do so in a business friendly environment closely aligned with U.S. rule of law.

About Adam Tracy

Adam Tracy is a payments expert and entrepreneur who specializes in payment systems, blockchain technology, digital currencies, and other emerging technologies. He is the founder of Blockrunner, LLC that provides consulting services to clients in the blockchain, payments and cryptocurrency arenas.

Tracy has been involved in the payments industry as an attorney, consultant and entrepreneur since 2005, while he was become an expert in blockchain and cryptocurrency since its advent in 2013. Tracy has worked with a wide range of clients, including startups, established businesses, and investor – both in the United States and worldwide. He has advised clients on a wide range of compliance, legal and operational issues related to payment transfer systems, crypto token generation and architecture, cryptocurrency exchanges, regulatory licensing, smart contracts, and other blockchain applications.

In addition to his consulting work, Tracy has founded several companies in the payments, blockchain and cryptocurrency space, including a digital asset hedge fund, licensed electronic money institution and a blockchain-based tokenization platform. He is also a proponent of decentralized finance (DeFi) and has been involved in various DeFi projects.

Tracy is also a frequent speaker and writer on blockchain and cryptocurrency topics. He has been featured in a wide range of publications, including Forbes, Hollywood Reporters, CNBC, Reuters, CoinDesk, and Bitcoin.com.

Find Adam: https://linktr.ee/adamtracy