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International Banks in Puerto Rico Exempt from Reporting Certain Transactions

Posted by: Christian Reeves
Category: Puerto Rico

International banks in Puerto Rico are no longer required to report foreign transactions over $5,000 to regulators. The logic is simple: international banks in Puerto Rico handle mostly foreign transactions and it would be unreasonable for them to report nearly all of these transactions. 

Keeping in mind that international banks in Puerto Rico are prohibited from doing business with companies and persons in Puerto Rico, and many don’t have a significant percentage of US-based clients, requiring them to report all transactions over $5,000 would be very cumbersome.

To give you some context, there are two types of international banking licenses in Puerto Rico plus the standard domestic license. Domestic banks serve the local community while international banks may open accounts for persons and companies outside of Puerto Rico.

The older international banking license in Puerto Rico is known as an International Banking Entity or IBE. This license was available from about 1989 (see Act 52-1989) and allows international banks to operate in Puerto Rico tax-free (zero percent tax).

Then, in 2012, Puerto Rico replaced the IBE law with the International Financial Entity Law or IFE (see Act 273-2012). There are a few differences, but the primary change was to impose a 4% tax rate on IFEs. For this reason, IBEs tend to sell for a premium over IFEs.

When we say, “International banks in Puerto Rico,” we’re referring to both IBEs and IFEs. Both licenses are prohibited from doing business on the island and are focused on international transactions. 

International banks in Puerto Rico are exempted from many different types of reporting. For example, IFEs and IBEs are not required to report under FATCA, as they are not considered “foreign” banks under this law. 

International banks in Puerto Rico are also exempted from global reporting under the Common Reporting Standards promulgated by Europe and which have spread around the globe. Click here for more on CRS. But, suffice it to say, these reporting requirements do not apply to IBEs and IFEs.

This is not to say that banks in Puerto Rico have no reporting requirements. IFEs and IBEs are the most and best regulated offshore banks on the planet. They report to their regulator, OCIF, and those with a Fedwire account report to the Federal Reserve in New York. IFEs and IBEs must also be in compliance with different federal laws, such as the Bank Secrecy Act, US PATRIOT Act, and are regulated by the Office of Foreign Assets Control of the US Department of Treasury. 

What’s new for 2021 is that IBEs and IFEs do not need to report under Puerto Rico’s Act 131-1974. This law, known as the Foreign Fund Transaction Act, requires banks on the island to report all transactions over $5,000 performed outside of Puerto Rico to the Puerto Rico Department of Treasury.

Because all transactions of IFEs and IBEs are performed outside of Puerto Rico, and because international banks in Puerto Rico have other reporting and compliance requirements in place to fight money laundering, it was determined that Act 131-1974 was not meant to apply to these international banks. 

For these and other reasons, the most desired offshore banking license is the international bank license from the US territory of Puerto Rico. There is currently a sizable queue of new applications and banks that come on the market in 2021 and 2022 have seen a significant premium over book value.

To summarize the primary reasons international banks in Puerto Rico are so hot, here is a list: 

  1. Tax rate of 4%. This is the only tax the bank will pay and there is no US Federal Income Tax on Puerto Rican sourced income. 
  2. The ability to hold income tax-deferred in the bank for US shareholders and pull it out tax-free for non-US shareholders. Dividends paid to an offshore company are tax-free with no withholding tax. US shareholders will pay US tax on dividends received.
  3. International banks in Puerto Rico may be owned by qualified foreign persons. US bank holding company rules do not apply and you may have as many foreign shareholders as you wish. 
  4. IFEs and IBEs may open accounts for people and companies anywhere in the world except for Puerto Rico. Of course, you may not do business with sanctioned persons or countries. You must follow US rules in this regard.
  5. The relative ease of opening correspondent bank accounts for an international bank in Puerto Rico compared to other jurisdictions such as the Cayman Islands. 
  6. The ability to open accounts at the Federal Reserve Bank of New York is referred to as FedWire accounts
  7. The ability to be both offshore and onshore within the US banking system. This is a structure that is unique to the US territory of Puerto Rico and available because of Puerto Rico’s territorial status.

I hope you’ve found this article on how international banks in Puerto Rico are no longer required to report foreign transactions over $5,000 to regulators to be helpful. For more information on setting up a new bank in Puerto Rico, or purchasing an existing IFE or IBE, please contact me at info@banklicense.pro