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International banking entities: A lifeline for Puerto Rico’s financial sector

IBEs continue to flourish and provide global standing to the local financial sector


May 27, 2005
Copyright © 2005 CARIBBEAN BUSINESS. All Rights Reserved.

The latest report by the Office of the Commissioner of Financial Institutions shows that as of March 31, total assets of international banking entities (IBE) in Puerto Rico were $71.3 billion, up from $66.8 billion as of Dec. 31, 2004. This represents an increase of more than $4.5 billion in just three months. Total consolidated assets of the banking sector as of the same date were $105 billion, an increase of $2 billion in the three-month period.

IBEs are tax-exempt financial institutions, chartered under federal and local laws, that are limited in the range of banking activities they may conduct locally. Since the International Banking Center Regulatory Act was passed, the existence of IBEs has become increasingly popular and profitable. In 2004, total consolidated net income reached $661 million, up from $586 million in 2003.

The International Banking Center Regulatory Act gave IBEs tax exemption for income earned under their international operations. Moreover, dividends, profit participation, and other distributions made to shareholders, partners, or owners are also tax-exempt. IBEs for their part continue to reshape the composition of the financial sector. Between 1999 and 2001, there was heavy activity in the creation of new IBEs in Puerto Rico. Currently, there are 30 IBEs on the island, and though most of them are associated with banks, several of them are part of pharmaceutical and private companies. Many of the banks have established multiple IBEs, some as subsidiary corporations, others as units.

On Jan. 8, 2004, the IBE Act was amended to impose income tax on IBEs that operate as units of banks, to the extent that the IBEs net income exceeds 40% of the bank’s total net taxable income (including net income generated by the IBE unit) for a taxable year commencing between July 1, 2003 and July 1, 2004. That changed to 30% of total net taxable income between July 1, 2004 and July 1, 2005, and will change again to 20% for taxable years commencing thereafter. These amendments apply only to IBEs that operate as units of banks. In the first quarter of 2005, $19 billion of the $71 billion total assets accumulated by IBEs came from IBE units, the other $52 billion was derived from IBE subsidiaries, which are tax exempt.

Industry sources tell CARIBBEAN BUSINESS that if the proposed tax for the financial sector were approved, which would impose an additional $360 million in taxes for the financial sector during two years, it is foreseeable that the IBE sector will be much more active for the temporary period that the tax would be in place, as banks seek ways to relocate their profits or make up for the additional taxes they would have to pay.

IBEs now operating in Puerto Rico include those from Latin American countries as well as Spain. For foreign banks, it is very attractive to have IBEs in Puerto Rico to gain access to the U.S. mainland as well as to the Latin American market. The island’s IBE regime also allows local banks to be more competitive and has helped to drive the expansion of Puerto Rico banks outside the island.

For example, in 1999, the Office of the Commissioner of Financial Institutions authorized Popular Inc. to acquire through Popular International Bank Inc. and Popular North America Inc., 100% of the stocks of Banco Popular N.A. in Florida. It also allowed Popular International Inc., along with Popular North America and Banco Popular N.A., to purchase 100% of the capital assets of an insurance agency in Puerto Rico.

Puerto Rico’s extensive roster of highly qualified financial specialists adds further value to the island as an international banking hub. By law, IBEs are required to open a local office with at least four employees, but their value is they support a series of specialized indirect support jobs such as law and accounting firms. However, some opponents of the tax exemption afforded to the IBEs point out that the job creation hasn’t been as extensive as initially expected when the act was passed.

The IBEs have been an important part of establishing and promoting Puerto Rico as a leading regional financial center. As proposals of new taxes for the financial sector are still being debated, industry sources tell CARIBBEAN BUSINESS they anticipate IBE tax exemption will be questioned once again. The standing that IBEs grant to Puerto Rico in the global financial market could also be compromised in the process.

International Banking Entities

Bancaracas International Bank

Banco Corfinsura International Inc.

Banco Popular International Bank

Banco Popular International Branch

Banesco Banco International

BBV International Investment

BBVA Overseas

Caribe GE International Electric Meters

CitiBank N.A.-Puerto Rico International

Citicorp Financial Services Corp.

Doral International Inc.

EBS Overseas Inc.

Eurobank International

First Bancorp

First Bank Overseas


Occidente International Corp.

Omega Overseas Investment

Oriental Bank & Trust International

Oriental International

RG International

R-G Premier International Branch

Santander International

SB Pharmco P.R. Inc.

SCH Overseas

Scotia Bank P.R. International Branch

The Bank of Nova Scotia International Branch

VS International Banking Entity

Westernbank International

Wyeth-Whitehall Pharmaceutical

Source: Office of the Commissioner of Financial Institutions, 2005

This Caribbean Business article appears courtesy of Casiano Communications.
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