It is important to understand that the authorized activities of the IFE must only be performed to entities outside of Puerto Rico (with very few exceptions). Also, OCIF will request a very clear business plan with the specific services & products that the IFE will offer, demonstrating not only expertise but that the proper tools (policies, procedures, technology) are available. A summary of the main authorized IFE activities is here:
- To provide financial services and accept deposits from foreign entities
- To participate in foreign currency trade
- To accept properly collateralize deposits
- To establish branches outside of Puerto Rico (with OFICs prior approval) and to engage in any financial activity outside of Puerto Rico
- To trade securities
- To act as a clearinghouse in relation to financial contracts or instruments
- To carry out any permitted transaction in the currency of any country, or in gold or silver
Note: Current list of Approved EFIs is here
- To make, procure, place, guarantee or provide loan servicing to foreign persons (with some exceptions)
- To issue, confirm, give notice, negotiate or refinance letters of credit
- To discount, rediscount, deal or otherwise trade in money orders, bills of exchange and similar instruments
- To invest in securities, stocks, notes and bonds of the Government of Puerto Rico;
- To underwrite, distribute, and otherwise trade in securities, notes, debt instruments, drafts and bills of exchange
- To act as fiduciary (executor, administrator, etc.) after obtaining a special permit from OFIC
- To acquire and lease personal property at the request of a lessee who is a foreign person
- To organize, manage and provide management services to financial entities such as investment companies and mutual funds,
- To provide asset management, management of investment alternatives, of activities related to private capital investment, of coverage funds or high-risk funds, of pools of capital, trust management that serves to convert different groups of assets into securities, and escrow accounts management services.
Note: Current list of Approved EFIs is here
There are major tax exemptions for IFEs such as:
- A 4% fixed income tax rate;
- A 100% exclusion of interest, financing charges or participation in partnerships benefits
- A 6% fixed income tax rate on dividends and pro-rate share of benefits for shareholders or partners of an IFE that are residents of Puerto Rico;
- A 100% tax exemption on all real and personal property belonging to the IFE
- A 100% tax exemption on the payment of municipal license taxes.
It is important to note that 7.5% of the funds collected from an IFE’s income tax will be deposited in the Special Fund for the Development of Export and Promoter Services of the Department of Economic Development and Commerce.
When approved, we will submit a copy of the license to the Secretary of the Department of Economic Development and Commerce of Puerto Rico, and request issuance of a tax decree that provides full detail of tax rates and conditions mandated by the Act. The decree is effective for a period of 15 years but two extensions of 15 years each may be available.
The possibility for the ACT to attract fintechs in Puerto Rico is very real, especially if the island wants to foster the young entrepreneurs in the island to bring investment and develop the start-ups that can transform the island in an innovation hub. None of this is easy but a fintech choosing to become an International Financial Entity is a real possibility and I was told that there are some already in the works. Of course, the possibility of an online connection to the Fed and fast payments is one major attraction for fintechs.
Jason Martell, an entrepreneurial leader in the tech industry writes in his blog entitled “The Role FinTech Can Play in Recovery Efforts in Puerto Rico“ makes a clear case for the island: “It was clear long before the hurricanes struck that Puerto Rico needed a fresh economic outlet, and financial technology (FinTech) could provide a key solution to the island’s pressing issues.”
He continues: “Puerto Rico’s Act 20 and 22 tax incentives also strengthen its case for FinTech investment. Investors who reside in Puerto Rico enjoy lower tax rates, an incentive which has already paid dividends. Since implementing Acts 20 and 22, San Juan has garnered burgeoning technology and banking sectors, and FinTech startups that relocate to Puerto Rico also stand to reap the benefits of decreased business tax rates.[…] If Puerto Rico is to ensure its long-term prosperity, Puerto Rican entrepreneurs shouldn’t ignore the value of FinTech’s innovations and unconventionality.”
The question here is why is this not happening? Lack of communication? Lack of understanding? A better effort by Puerto Rico’s Development Agencies to grasp the potential of IFEs & Fintech? The difficulties IFEs are experiencing getting online connections to the Fed? There are probably more questions than answers at this point.
Read Jason’s article here: http://jasonmartell.info/the-role-fintech-can-play-in-recovery-efforts-in-puerto-rico/
Check also: Why Entrepreneurs Should Move to Puerto Rico – Inc. Magazine: https://www.inc.com/james-paine/why-entrepreneurs-should-move-to-puerto-rico.html