Finance & Insurance

United States legal framework and highly skilled workforce are two of the main components of Puerto Rico’s Business Star Proposition for the Finance & Insurance sector. Add to that a package of attractive incentives specifically tailored for financial activities and you’ll know why bringing your business to Puerto Rico is the smartest move.

International Banking Entities (IBEs)

The Puerto Rico International Banking Center Act, Act 52-1989, allows for the creation of international banking entities (IBEs), which are essentially banks located in Puerto Rico that provide financial services to clients outside of Puerto Rico.

Puerto Rico is considered a foreign jurisdiction under the U.S. International Banking Act of 1978; therefore, all IBEs in Puerto Rico are exempt from International Banking Association requirements for domestic financial institutions. International Banking Entities incentives include:

Tax & Rate
  • Income Tax - 0%
  • Branch Profit Tax - 0%
  • Dividends/Other Profit Distributions - 0%
  • Distributions in liquidation - 0%
  • Municipal License Tax - 0%
  • Property Tax - 0%

In addition, they are not required to file tax returns, and the revenues to non-residents are also tax exempt. Applicants for new IBEs would have to file their application under Act 273-2012, described on Section 2.1.3.B

For more information on International Banking Entities, please contact the Commissioner of Financial Institutions of Puerto Rico.

International Financial Entities (IFEs)

The recently enacted Puerto Rico International Financial Center Act, Act 273-2012, provides for certain benefits to apply to Puerto Rico entities engaged in traditional banking or financial services for non-Puerto Rico clients. Similar to an IBE, IFEs are under the supervision of the Office of the Commissioner of Financial Institutions.

IFEs are also exempt from the IBA’s requirements for domestic financial institutions and the U.S. Bank Holding Company Act (BHCA) and thus may be affiliated with commercial institutions. However, if the IFE accepts demand deposits and issues commercial loans, it will be considered a Bank under the BHCA. In addition, all IFEs must ensure that they comply with any applicable U.S. federal laws and regulations, such as the Bank Secrecy Act, the US Patriot Act, and the Office of Foreign Asset Control (OFAC) of the United States Department of the Treasury.

International Financial Entities incentives include:

Tax & Rate
  • Income Tax - 4% flat rate
  • Dividends/Other distributions of profits
    • 6% for Puerto Rico shareholders
    • 0% for non-Puerto Rico shareholders
  • Municipal License Tax - 0%
  • Property Tax - 0%

IFEs must have at least $5 million in capital, of which at least $250,000 must be completely paid-in. Commissioner of Financial Institutions may lower the capital requirements to as low as $500,000 for IFEs performing limited activities. IFEs must maintain at least 4 full-time employees working at its offices located in Puerto Rico.

IFEs are authorized to engage in traditional banking and financial transactions with clients outside of Puerto Rico, including transactions related to:

  • Accepting deposits
  • Borrowing money
  • Lending
  • Letters of credit
  • Refinancing
  • Foreign currency exchange
  • Underwriting
  • Trade financing
  • Trust services
  • Securities brokerage
  • Clearinghouse services
  • Asset management
  • Other financial services

IFEs are generally not permitted to do transactions with local Puerto Rico counterparties, except in certain cases such as these:

  • Certain transactions involving the Government Development Bank and the Economic Development Bank of Puerto Rico
  • Certain transactions and activities involving securities issued by the Government of Puerto Rico
  • Participation in local loan syndications originated by a local bank
  • Purchasing of substandard or non-performing loans from Puerto Rico entities

Any entity may apply for a permit with the Office of the Commissioner of Financial Institutions to organize an IFE. To enjoy the tax benefits under Act 273-2012, IFEs must request and obtain a tax exemption decree by submitting a copy of its IFE license to the Secretary of the Department of Economic Development and Commerce of Puerto Rico. The decree will have term of 15 years, renewable for two additional 15 year periods, subject to certain conditions.

For more information on International Financial Entities, please contact the Commissioner of Financial Institutions of Puerto Rico.

International Insurance Center (IIC)

Due to its many advantages, including direct access to the U.S. and other international markets, Puerto Rico is a sound gateway for insurers and reinsurers wishing to enter the Latin American insurance and financial market. The international insurers and reinsurers division of the Office of the Commissioner of Insurance of Puerto Rico (OCI) has sought to promote Puerto Rico as an important member of the international insurance arena.

Puerto Rico’s economy enjoys both fiscal and tax autonomy with respect to the US Tax Code, with special distinctions made in several areas. The companies already taking advantage of Puerto Rico’s favorable conditions can attest to this fact. According to Kenneth Kotch, a principal within Ryan LLC, and the national practice leader for Ryan’s captive insurance division: “I have had a favorable experience with respect to all of these elements. I would encourage any captive insurance participant to consider Puerto Rico as a domicile which consistently addresses the needs for creative and efficient regulatory solutions within the alternative risk solution market.”

Insurance arena

The OCI’s long history of regulatory expertise is further reason for Puerto Rico to be considered a viable alternative when considering where to transact insurance business. The OCI regulates 52 domestic insurers and 343 foreign re/insurers and reinsurers writing $11 billion of premium for 2011. Puerto Rico constitutes the third largest insurance market in Latin America.

In March 2012, Puerto Rico became an accredited member of the National Association of Insurance Commissioners (NAIC). The OCI is also a participating member of the Association of Insurance Superintendents of Latin America (ASSAL). The regulatory basis of the center calls for prudent but expedient regulation.

Legal background

Act No. 399 and Act No. 400 in Chapter 61 of the Puerto Rico Insurance Code were adopted in order to establish the basis for the International Insurance Center (IIC), which provides a competitive environment for reinsurers to cover risks in and out of Puerto Rico under a secure and flexible regulatory system, with attractive tax benefits. In June 2011, Act No. 98 was passed to provide long-term tax status that will guarantee the tax treatment for an initial period of 15 years, renewable for two additional 15-year periods. International insurance entities have various alternative ways to organize and operate within the IIC. These options include operating as an international insurance holding company, as an international insurer or a branch of an international insurer, and protected cell arrangements.

The recently enacted Act No. 98 of 2011 facilitates the establishment of entities that export insurance and reinsurance services, allowing Puerto Rico to compete with jurisdictions such as Bermuda, the Cayman Islands and Vermont, which for years have successfully engaged in promoting this type of activity.

International Insurance Holding Company

  • A holding company that must hold interests (shares and other securities) in an international insurer or international insurance holding company organized under Chapter 61 of the Insurance Code of Puerto Rico
  • May control International Insurers or other International Insurance holding companies, or businesses that are incidental and that provide services exclusively to International Insurers with which they maintain a relationship as subsidiaries or affiliates
  • Maintains its cash or equivalent investments in a proportion of no more of 1:1 with other assets, including its shares in the insurance companies

International Insurer

  • An entity organized to conduct insurance business outside Puerto Rico
  • Includes reinsurers, captives, and associated captive company structures

Branch of foreign insurer

  • Maintains a main office in Puerto Rico
  • Segregates assets under a trust constituted pursuant to the laws of the Government of Puerto Rico.
  • The deed of trust and all its amendment made according to the manner established by the Commissioner of Insurance
  • Has assets in trust in an amount at least equal to 150 percent of the capital and surplus required, or in the case of a Class 4 insurer, 110 percent

Protected Cell Companies

  • With prior approval from the Commissioner, an International Insurer may establish and operate one or more segregate assets plans
  • Assets of a Segregated Assets Plan approved by the Commissioner are available solely for the payment of obligations specifically identified in the corresponding operation plan and not available for the payment of the obligations of other segregated assets plans or of the general obligations of the insurer
  • No Segregated Assets Plan shall be considered as an entity with a jurisdictional personality separate from that of the international insurer

Tax treatment

Insurers, Branches, and International Insurer Holding Companies receive attractive tax treatment.

Tax exemptions conferred under the International Insurers and Reinsurers Act of Puerto Rico includes:

  • Exemption from premium taxes
  • Exemption on dividends and other profit distributions made by the International Insurer and International Insurance Holding Company
  • Exemption on municipal franchise, real and personal property taxes
  • Exemption to the International Insurer and qualifying International Insurance Holding Company from withholding taxes on payments of dividends and other profit distributions made to third parties, and from filing tax returns with the Puerto Rico Internal Revenue Service
  • Isolation of the proceeds and benefits paid by international insurers from state and donation taxation procedures
  • $1.2 million tax exemption on net income. Exemption applicable at the individual cell level for protected cell company arrangements and at the company level. Preferred 4% tax rate on net income, guaranteed by a decree effective over a renewable period of 15 years

International Insurers are also subject to an annual contribution based on premium level.