Puerto Rico’s Act 273 international bank license is the most popular offshore bank license in 2018. Act 273 is a unique law that allows international financial entities (IFEs) to operate from Puerto Rico, become a part of the US banking system, and pay only 4% in tax.
In this article on Puerto Rico’s international bank license, I’ll review the tax and business benefits of incorporating in Puerto Rico and explain why it’s the most efficient bank license for 2018. You’ll find that Act 273 is truly a unique banking and financial services license that can’t be matched by any other jurisdiction.
First, let’s consider the the tax incentives only available in Puerto Rico: a 4% tax rate on corporate net profits. Plus, no tax on dividends to persons living in Puerto Rico and non-US persons and foreign corporations.
For example, if an Act 273 bank is owned by a corporation in Cayman Islands, dividends from the bank to the Cayman company are tax free. This is most common when non-US persons own the bank. US citizens and green card holders need to be living in Puerto Rico, and not in the US, to receive dividends free of US tax.
No matter where you live or your citizenship, an Act 273 corporation will only pay tax on Puerto Rico sourced income at 4%. Net profits to the offshore bank are taxed at 4% and can then be retained within the corporation tax deferred.
Puerto Rico sourced income is earnings and profit for work done in Puerto Rico. For this reason, most Act 273 banks have most or all of their employees in the territory. Only income generated in Puerto Rico qualifies for the 4% rate. Income earned from work performed in the US will be taxed at standard US rates, which can reach 40% depending on your State.
- Act 273 requires 4 employees on the island and we recommend you start with at least 5. The largest IFE has over 400 employees.
And Puerto Rico’s Act 273 is the only US international banking license that can offer this 4% tax rate. When you form a bank in the US, you must pay Federal and State taxes on your corporate profits. When you form an international financial entity, you pay only Puerto Rico’s tax rate of 4%… you pay zero tax to the United States so long as you have no US source income.
Taxes are why offshore banks avoid incorporating in the United States. Puerto Rico’s unique status as a territory is why banks are moving to the island rather than setting up in the US. An international financial entity in Puerto Rico can join the US banking system and has a much easier time getting correspondent accounts than banks from a competing offshore jurisdictions like Cayman, Dominica and Belize.
Negotiating and keeping correspondent bank accounts are the bane of the offshore banker’s world. It’s become extremely difficult to maintain these relationships and the US has been doing it’s best to shut down offshore banks.
But FATCA and other US rules that apply to offshore banks do not apply to the territory of Puerto Rico. No FBAR or FATCA compliance is required in a US territory.
Operational efficiency is the primary reason banks are incorporating in Puerto Rico under Act 273. They can reduce costs and provide more reliable service by setting up in a US territory. Taxes keep them out of the US, even tax free states like Florida where the Federal rate is 35%. But, they need access to the US banking system, so Puerto Rico is where it’s at.
While other jurisdictions like Dominica are losing banks because it’s impossible to get correspondent banking, and Cayman is stagnant, Puerto Rico is growing at 24 banks a year. This is a staggering number and Act 273 licenses might surpass Cayman Islands in 2 or 3 years.
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How important is correspondent banking and Puerto Rico’s unique status as a US territory? Several countries are setting up Act 273 banks to support their local offshore banking industries. Central banks or governments will open an IFE to act as the central clearinghouse for offshore banks they license.
Another feature of Puerto Rico’s Act 273 offshore banking license is a low capital requirement. Most offshore banks require $1 million to $5 million. An IFE requires only $250,000 in paid-in capital and $300,000, for a total of $550,000. For more on the costs, see: Lowest Cost Offshore Bank License is Puerto Rico
An Act 273 IFE can accept deposits and handle any type of banking business. The only limitation is that you can’t do business with locals (companies or persons living in Puerto Rico). Most IFEs are focused on non-US business to minimize US regulation.
When you apply for your license, you choose from a menu of services you wish to provide. Your IFE will be regulated based on the services you wish to offer. For a list of these services, see: International Financial Entities Licenses in Puerto Rico.
I hope you’ve found this article on Puerto Rico’s Act 273 offshore banking license to be helpful. For more on this topic, or for assistance in negotiating correspondent and other services, please contact us
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