Why are Fintechs Migrating to IFEs in Puerto Rico?

Fintech's IFE Shopping Spree: The Tax Benefits and New Regulations ?Driving Deals in Puerto Rico

As you look to expand your fintech operations, you may be considering the alluring tax incentives offered in Puerto Rico. The island IFE’s provide enticing benefits like a 4% corporate tax rate and 0% tax on passive income that have led many fintech and crypto companies to establish International Financial Entities (IFEs) here. The recent shopping spree of IFE acquisitions reveals a strategic play to capitalize on these savings by buying an existing IFE.

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Puerto Rico IFE's for Sale

What Are International Financial Entities (IFEs)?

IFEs, also known as international banking entities, are financial institutions licensed in Puerto Rico that provide banking and financial services to non-resident clients. To qualify as an IFE, a company must derive at least 60% of its gross income from international banking transactions and have at least 60% of its total loans and deposits be from non-resident individuals.

Tax Incentives Drive Interest in IFEs

·?????? 4% flat income tax rate

·?????? 100% exempt from all property taxes

·?????? 15-year tax decree that is renewable for two additional 15-year periods

·?????? For shareholders that are Puerto Rico residents, distributions from earnings are taxed at 6%

Why Buy an Existing IFE?

New IFE-Minimum $10m paid in Capital

??? ? As a requirement to obtain the respective license, the entities, in addition to the $10 million in initial paid-in capital, must maintain unencumbered assets with local banks in Puerto Rico.

Existing IFEs: $5m paid in Capital

?(Must increase their paid-in capital in a staggered manner until they reach the required $10 million)

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IFEs Must Meet Strict Requirements

Despite the tax benefits, operating an IFE is not simple. They must adhere to anti-money laundering laws and know-your-customer regulations. IFEs are subject to regulation and examination by Puerto Rico's Office of the Commissioner of Financial Institutions. They must maintain a physical office in Puerto Rico, employ local staff, and conduct board meetings on the island.

Fintech Sees Opportunity in IFEs

For fintech companies, the opportunity to run a regulated bank at a low tax cost is appealing. By acquiring an existing IFE, fintechs can fast track their entry into banking and leverage the IFE’s license to provide digital banking and payment services globally. The potential for high margins and new revenue streams is driving fintech interest in these unique Puerto Rican entities.

Overall, IFEs present an interesting opportunity for fintech companies looking to expand into banking and payments. With the right compliance procedures in place, fintechs can capitalize on the tax benefits of these entities to build a profitable global digital banking business.

Tax Incentives Driving Fintech and Crypto to Puerto Rico

Puerto Rico's tax incentives for international financial entities (IFEs) and businesses are attracting major fintech and crypto companies. Under Act 60, also known as the International Financial Center Regulatory Act, firms can take advantage of a 4% corporate tax rate and 0% tax on dividends or interest

For companies and investors, the capital gains tax rate is 0% on IFE-related transactions. Interest income also qualifies for a 0% tax rate. These incentives have led companies like eToro, Circle Internet Financial, and FTX to establish operations in Puerto Rico. By comparison, the US federal government levies up to 37% on corporate profits and up to 20% on capital gains and interest.

Tax Exemptions Through 2035

The tax incentives under Act 60 are locked in through 2035. Companies that qualify as an IFE before December 31, 2035 can take advantage of the 0% tax on dividends, interest, and capital gains for decades. While states often change tax rates and incentives, Puerto Rico's lengthy tax lock-in provides certainty for companies making long-term plans.

No US Federal Income Taxes

By establishing the IFE in Puerto Rico instead of the US mainland, companies can avoid US federal income taxes on Puerto Rico-sourced income. The Internal Revenue Code Section 933 exempts Puerto Rico-sourced income from federal income taxes. Companies still need to pay federal payroll taxes, but can escape the US's 21% corporate income tax and higher capital gains rates.

The unparalleled tax benefits offered in Puerto Rico explain the recent surge in fintech and crypto companies buying or establishing IFEs on the island. For dealmakers and investors, these valuable tax incentives also present an opportunity to buy or invest in Puerto Rican IFEs. With low taxes guaranteed for years to come, the IFE market in Puerto Rico is poised for growth.

The Competitive Advantage for Fintechs Operating IFEs

For fintech companies looking to gain a foothold in new markets, Puerto Rico’s industrial facilities present an opportunity to establish operations at a lower cost. By acquiring an International Financial Entity (IFE) license, fintechs can operate at preferential tax rates and gain access to US markets.

Reduced Tax Burden

IFEs in Puerto Rico are exempt from local and federal income taxes, instead paying a 4% corporate tax. Compared to the US corporate tax rate of 21%, fintechs operating IFEs stand to gain a significant cost advantage. The tax savings allow companies to re-invest more capital into growing their business. For early-stage fintechs still establishing their position, lower taxes translate into a longer runway for success.

Access to US Markets

Despite its status as a US territory, Puerto Rico is considered a foreign country for tax purposes. However, IFEs retain access to US markets and infrastructure. Fintechs can serve US customers and partners while still claiming foreign tax benefits. For fintechs looking to scale in the large US market, establishing operations in Puerto Rico offers the best of both worlds.

Reduced Regulatory Burden

IFEs are subject to more relaxed regulation compared to traditional US financial institutions. Reporting requirements are less stringent, and companies have more flexibility in their operations. For innovative fintechs building new products and services, reduced red tape allows for faster development cycles and the freedom to experiment.

The unique tax and regulatory environment in Puerto Rico provides fintechs a competitive advantage when accessing US markets. By acquiring an IFE license and establishing operations on the island, fintechs can lower costs, gain flexibility, and focus resources on growth. For companies looking to scale quickly, the benefits of an IFE far outweigh the costs of setting up an office in San Juan. With fintech dealmaking accelerating, expect more companies to take advantage of Puerto Rico’s incentives in the coming years.

IFE FAQs: Your Top Questions Answered

As an investor exploring opportunities in Puerto Rico’s International Financial Entities (IFEs), you likely have several questions about these unique investment vehicles. This section aims to provide an overview of the most frequently asked questions regarding IFEs.

What is an IFE?

An IFE is an entity registered in Puerto Rico that conducts international financial transactions. It benefits from Puerto Rico’s special tax regime for financial firms, including a 4% corporate tax rate. To qualify as an IFE, an entity must derive at least 80% of its income from international banking transactions, international financial transactions, or transactions in commodities.

What are the tax benefits of an IFE?

IFEs enjoy significant tax incentives in Puerto Rico. Most notably, they are subject to a fixed corporate income tax rate of just 4%. Capital gains realized by IFEs are 100% exempt from Puerto Rican income taxes. IFEs are also exempt from Puerto Rican withholding taxes on dividend and interest payments. These tax benefits make IFEs an appealing investment vehicle for many financial firms.

What types of activities can an IFE conduct?

IFEs can engage in a range of international financial activities, including:

?????????? Banking and lending

?????????? Insurance and reinsurance

?????????? Hedge fund and private equity management

?????????? Broker-dealer services

?????????? Commodities trading

IFEs provide a platform for firms to efficiently access global markets and move capital internationally. However, IFEs cannot do business with Puerto Rican residents or earn income from sources within Puerto Rico.

How are IFEs regulated?

IFEs are regulated by the Office of the Commissioner of Financial Institutions of Puerto Rico (OCIF). The OCFI supervises IFEs for compliance with Puerto Rico’s international banking laws and ensures they meet strict standards around governance, risk management, and Know Your Customer (KYC) / Anti-Money Laundering (AML) policies. IFEs are also subject to reporting requirements around transactions, ownership, and financial condition.

With attractive tax incentives and a robust regulatory regime, IFEs have become an appealing investment structure for many financial firms looking to establish a presence in Puerto Rico. Please let me know if you have any other questions!

Conclusion

As we've seen, fintech companies are flocking to Puerto Rico to purchase International Financial Entities or IFEs. The territory's Act 22 and Act 20 provide generous tax incentives that make owning an IFE highly advantageous. By relocating select operations to Puerto Rico and housing them within an IFE, fintechs can substantially lower their tax burdens. While regulatory uncertainty swirls around crypto and blockchain in the States, Puerto Rico offers a haven. The territory encourages digital asset endeavors through crypto-friendly mandates. While detractors decry Puerto Rico's tax laws as loopholes, proponents tout them as progress. Regardless, the tax benefits are compelling fintechs and propelling this Caribbean shopping spree. The influx reinvigorates Puerto Rico's economy while allowing fintechs to thrive.

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