Puerto Rico’s Governor Pedro Pierluisi and Financial Institutions Commissioner Natalia Zequeira have announced a proposal to amend the International Financial Center Regulatory Act (Act 273-2012) and the International Banking Center Regulatory Act (Act 52-1989). These changes aim to modernize and strengthen both laws, making them more effective and better prepared to face market changes. The ultimate goal is to ensure that international banking and financial entities operate in a solvent, competitive, and responsible manner, contributing to the island’s economic growth.

The proposed amendments include increasing compliance with anti-money laundering laws, empowering the Office of the Commissioner of Financial Institutions (OCIF) to deny permits or licenses based on investigations, and expanding the research scope to include shareholders’ and owners’ economic capacity. The legislation also mandates hiring independent directors, increases line of credit requirements, and doubles the minimum employee requirement.

Among the most significant changes are the increases in minimum capital requirements and higher application fees for organizing or operating an international financial institution. Minimum capital requirements will increase from $250,000 to $10 million, with a five-year transition period. Application charges will rise from $5,000 to $25,000, and investigation charges will increase from $5,000 to $25,000. Licensing charges for international financial entities (IFEs) will consist of a $1 million one-time fee and an annual $100,000 renewal fee. The banking guarantee will also increase from $300,000 to $2.5 million, with a five-year transition period.

These amendments are designed to facilitate more robust investigations of institutions’ proponents and their financial capacity, as well as to determine the source of funds for the bank’s capital. The increased licensing charges will also serve as a deterrent for institutions that operate as shell banks, which have their licenses but have never operated.

The International Financial Center Regulatory Act provides tax exemptions to businesses engaged in eligible activities in Puerto Rico. To benefit from these exemptions, a business needs to become an IFE by applying for a permit and license and obtaining a tax decree. The proposed changes are expected to enhance the OCIF’s oversight capacity, ensuring that entities entering the market are financially and economically robust, solvent, and competitive.

Current Law as of 2022 (Puerto Rico’s Act 273)

The International Financial Center Regulatory Act (Act 273-2012) in Puerto Rico governs the international banking industry on the island, providing a legal framework for international financial entities (IFEs) to operate under a favorable tax and regulatory environment. The act aims to attract foreign investment and promote the island’s economic growth by offering incentives for international banks and financial institutions to establish their operations in Puerto Rico.

Under Act 273, businesses engaged in eligible activities in Puerto Rico can apply for a permit and license to become an IFE and obtain a tax decree. These IFEs are granted significant tax exemptions, which include a reduced income tax rate of 4% on their net income, 100% exemption on dividends or profit distributions, and 100% exemption on property taxes for certain assets.

These incentives have led to the growth of the international banking industry in Puerto Rico, with many international banks and financial institutions setting up operations on the island to take advantage of the favorable tax and regulatory environment. The act has played a crucial role in fostering the island’s economic development and attracting foreign investment.

However, as evidenced by the proposed changes, concerns have arisen regarding the need to strengthen the regulatory and oversight framework to ensure compliance with international standards, such as anti-money laundering laws. The proposed amendments to Act 273 aim to address these concerns by introducing more stringent requirements for IFEs, including higher minimum capital requirements, increased application, and investigation fees, and the hiring of independent directors. These changes are expected to further enhance the industry’s resilience, competitiveness, and responsibility, contributing to Puerto Rico’s economic growth and financial stability.

Applying for an International Bank License in Puerto Rico

The process of applying for an international bank license under Act 273, the International Financial Center Regulatory Act, in Puerto Rico involves several steps, including obtaining a permit, a license, and a tax decree. Below is a general outline of the process:

1. Application for Permit: The first step in the process is to submit an application for a permit to the Office of the Commissioner of Financial Institutions (OCIF). The application should include information about the proposed international financial entity (IFE), its proponents, shareholders, directors, and officers. It should also provide details about the proposed IFE’s business plan, financial projections, and internal controls. This stage is typically referred to as the Permit to Organize.
2. Background Investigation: Upon receiving the application, the OCIF will conduct a thorough background investigation of the proponents, shareholders, directors, and officers of the proposed IFE. This investigation aims to assess their financial responsibility, experience, character, and general aptitude to operate the IFE in an honest, fair, and efficient manner.
3. Permit Approval: If the OCIF determines that the proposed IFE meets the necessary requirements, it will grant a permit, allowing the entity to proceed with the organization and capitalization process.
4. Application for License: Once the proposed IFE has been organized and capitalized, it must submit an application for a license to the OCIF. This application should include additional documentation, such as evidence of the paid-in capital, the location of the IFE’s principal office in Puerto Rico, and any other information required by the OCIF. This stage is typically referred to as the Permit to Operate. 
5. License Approval: If the OCIF is satisfied with the proposed IFE’s compliance with the necessary requirements, it will issue a license, allowing the IFE to commence operations in Puerto Rico. You can open your bank for business once you have this license in hand.
6. Application for Tax Decree: After obtaining a license, the IFE must apply for a tax decree from the Puerto Rico Department of Economic Development and Commerce. This tax decree will grant the IFE the tax benefits provided under Act 273, including reduced income tax rates and exemptions on dividends, profit distributions, and property taxes.
7. Ongoing Compliance: Once licensed and operational, the IFE must maintain ongoing compliance with the requirements of Act 273 and any other applicable laws and regulations. This includes regular reporting to the OCIF, maintaining adequate capitalization and liquidity, and implementing robust internal controls and risk management practices.

It is important to note that the proposed amendments to Act 273 above aim to introduce more stringent requirements for IFEs, such as higher minimum capital requirements, increased application, and investigation fees, and the hiring of independent directors. 

If you are interested in applying for an international banking license in Puerto Rico or purchasing an existing bank on the island, please contact us at info@banklicense.pro. We can assist you through all stages of the process.