IFE Tax Rates Under Act 60: What Business Owners Need to Know
An International Financial Entity, or IFE, is a licensed financial institution organized in Puerto Rico under the International Financial Center Regulatory Act, Act 273 of 2012, as amended by Act 44 of 2024. The Office of the Commissioner of Financial Institutions (OCIF) licenses and supervises it, and it serves clients who are not residents of Puerto Rico. Its tax treatment comes from a separate grant: a tax decree issued under Act 60, the Puerto Rico Incentives Code. The decree is the source of the rates described in this article.
This article explains the IFE tax rates, what income they cover, the conditions attached to them, and how they compare with the export services decree that many business owners consider at the same time. For the licensing process itself, see our full guide to the Puerto Rico International Financial Entity.
What Qualifies as an IFE
An IFE is a bank or financial institution. Its license permits activities such as deposit taking, lending, trade finance, treasury services, asset management, trust services, and digital asset custody, so long as those services are provided to persons who are not residents of Puerto Rico. Because it is a regulated financial institution, an IFE requires paid-in capital of $10,000,000, an additional $1,000,000 in unencumbered assets pledged to the Commissioner, at least eight full-time employees in Puerto Rico, a physical office on the island, and a board that includes at least one independent director. Act 44 of 2024, effective May 16, 2024, raised these requirements significantly.
For that reason the IFE is a poor fit for a consulting practice, an operating company that sells to Puerto Rico customers, or a vehicle for personal investments. A sole proprietorship, a partnership, or a personal investment fund cannot become an IFE by electing a tax status. Business owners in those situations usually look at the export services decree or the individual resident investor decree under Act 60 instead.
The IFE Tax Rates Under the Act 60 Decree
The IFE license and the tax decree are two separate approvals from two separate agencies. OCIF issues the license. The Department of Economic Development and Commerce (DDEC) issues the decree, which is a contract with the Government of Puerto Rico. The decree provides the following treatment:
- A fixed income tax rate of 4 percent on IFE income.
- A 100 percent exemption on distributions to owners who are not residents of Puerto Rico.
- A 6 percent tax on distributions to owners who are residents of Puerto Rico.
- A 75 percent exemption from property taxes.
- A 50 percent exemption from municipal license taxes.
The decree runs for a 15 year term and can be renewed for a further 15 years. Because the decree is a contract, its rates generally remain in place for the term even if the general tax law changes, provided the IFE keeps meeting its conditions.
What Income the 4 Percent Rate Covers
The fixed rate applies to income from the activities the IFE is licensed to conduct and the decree covers, which are financial services to persons who are not residents of Puerto Rico. Income from activities outside the license and the decree does not receive the 4 percent rate and is taxed under the general rules of the Puerto Rico Internal Revenue Code. An activity that falls outside the business plan approved by OCIF can therefore create a regulatory problem and a tax problem at the same time.
The decree does not change federal law. A Puerto Rico corporation is generally treated as a foreign corporation for federal income tax purposes. Owners who are United States taxpayers and who are not bona fide residents of Puerto Rico need to analyze the federal rules that apply to owners of foreign corporations, including the controlled foreign corporation rules, before relying on the Puerto Rico rate to estimate their total tax cost.
How the IFE Rates Compare With the Export Services Decree
Both decrees carry a 4 percent fixed income tax rate, and the comparison comes up often for owners of trading, fintech, and advisory businesses. The difference lies in what each structure is allowed to do and what it costs to maintain.
An export services decree, under the chapter of Act 60 that replaced Act 20 of 2012, is available to a Puerto Rico entity that provides eligible services to clients outside Puerto Rico, such as consulting, software development, investment management, and research. It requires real operations on the island but no financial license, no minimum capital, and no regulatory examination, and dividends paid from export services earnings are exempt. An IFE carries the same 4 percent rate but requires $11,000,000 in total funds, eight employees, an independent director, and ongoing OCIF supervision. In exchange, it can take deposits, lend, provide custody, and operate as a regulated financial institution.
A business that needs banking, custody, or lending powers for non-resident clients needs a license, and the IFE is the Puerto Rico license built for that purpose. A business that only provides services to clients off the island rarely needs one. Read more about Act 60 tax incentives.
Conditions That Keep the Rates in Place
The 4 percent rate depends on two things staying true: the license and the decree. On the licensing side, the IFE must maintain its paid-in capital and unencumbered assets, keep its staffing, compliance officer, and office in Puerto Rico, pay the annual renewal fee of $25,000, and submit to OCIF examinations. Capital cannot be reduced without the approval of the Commissioner, and a change of control requires prior OCIF authorization. A transfer of control without that authorization is void.
On the decree side, the IFE must comply with the terms of its Act 60 decree, file the reports DDEC requires, and keep conducting the activities the decree covers. Federal anti-money laundering obligations apply in full, because Puerto Rico is a United States jurisdiction. A lapse in any of these areas can lead to fines, loss of the license, or revocation of the decree.
Common Mistakes About IFE Taxation
The first mistake is treating the IFE as a tax election available to any business. The 4 percent rate is attached to a regulated financial institution with an $11,000,000 funding requirement, and it is out of reach for an operating company that does not need a financial license.
The second mistake is planning with figures from before 2024. Act 44 of 2024 raised the capital and staffing requirements significantly, and business plans, budgets, and acquisition models built on the older numbers are out of date.
The third mistake is placing a virtual currency exchange inside the IFE. Section 11(8) of Act 273 prohibits an IFE from operating a virtual currency exchange. An IFE may provide custody of digital assets with a no-objection letter from the Commissioner under Section 10(10), and exchange activity belongs in a separately licensed money transmitter.
The fourth mistake is assuming the Puerto Rico rate settles the total tax cost of the owners. Distributions to non-resident owners are exempt in Puerto Rico, but the federal and home country treatment of those owners still has to be analyzed.
Next Steps
If you are evaluating an IFE, start with the readiness questions: whether the capital is held and documented to its origin, whether every owner is prepared for a full OCIF investigation, and whether the client base is outside Puerto Rico. Our free IFE guide sets out the full process, timeline, and costs. To discuss a specific matter, request a free initial evaluation at lawyerinpr.com/start.
Christian M. Frank Fas, Esq. is a Puerto Rico licensed attorney with over 25 years of commercial and business law experience.