U.S. Virgin Islands: An Offshore Tax Planning Jurisdiction
.142.01 - U.S. Virgin Islands: Introduction
The U.S. Virgin Islands is unique among offshore tax planning jurisdictions: it is the only jurisdiction which can offer a tax-free entity under the U.S. flag. Furthermore, because it is a U.S. territory but it is not a state, it has a familiar legal system and excellent infrastructure and accessibility -- but at the same time it is treated as foreign for numerous purposes. For example, the U.S. Internal Revenue Code applies as the tax law of the U.S. Virgin Islands, but there are several important exceptions which authorize tax exemption and incentive programs. Combining this unusual tax arrangement with other federal statutes makes for a unique mix, including tax free aircraft holding companies, federal estate tax exemptions, captive insurance companies which can write U.S. domestic health insurance plans, and tax free U.S.-flag mutual funds which are not subject to U.S. federal securities registration requirements.
.142.02 - U.S. Virgin Islands: Location and Accessibility
The U.S. Virgin Islands are a group of approximately 60 islands and cays located 1,600 miles southeast of New York City and 1,100 miles east-southeast of Miami. The three main islands are St. Thomas, St. Croix, and St. John. St. Thomas and St. Croix have modern international airports with daily service to New York, Miami, Atlanta, and other mainland cities, as well as to San Juan, Puerto Rico. Most of the seats from St. Thomas are via non-stop jet direct to the mainland or to San Juan, which is only 20 minutes away; most service from St. Croix is by frequent commuter flights to San Juan (a 40 minute trip) where connections are made to mainland and European destinations. St. John has no airport but is only a 20 minute ferry ride from St. Thomas.
Long distance telephone service is provided by AT & T and other long distance carriers. Long distance telephone rates are the same, on a per mile basis, as those within the United States. Rates to other Caribbean islands are generally lower than those in effect from the United States and other international rates are about the same. Calls from one U.S. Virgin Island to another are treated as local calls. Internet access services are available in the U.S. Virgin Islands, typically at rates which are slightly higher than those applicable in the mainland.
The U.S. Virgin Islands is served by the U.S. Postal Service as well as by the major international courier services such as Federal Express. While the Postal Service treats the U.S. Virgin Islands as a domestic destination, Federal Express and other courier services usually consider the territory to be an international destination, thus making Postal Service rates a relative bargain.
.142.03 - U.S. Virgin Islands: People
The population of the U.S. Virgin Islands is approximately 120,000, divided approximately evenly between St. Thomas and St. Croix with St. John having only about 5,000 residents. The vast majority of the population (about 75% to 85%) is of African origin, having descended from slaves who were brought to the region in the 17th and 18th centuries. Most of the rest moved to the Virgin Islands from the U.S. mainland or, particularly in the case of St. Croix, from Puerto Rico. A little less than half of those of African descent were not born in the U.S. Virgin Islands but immigrated from neighboring Caribbean islands, particularly the British Virgin Islands, St. Kitts, Anguilla, and Antigua.
.142.04 - U.S. Virgin Islands: Government and Stability
The U.S. Virgin Islands is one of only four or five "U.S. flag territories," the others being Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, and (under some definitions) Puerto Rico. As a territory, it has no separate sovereignty from that of the United States and there is no independence movement of any size; as a result, the U.S. Virgin Islands has unquestioned political stability, probably greater than that of any other Caribbean jurisdiction.
Technically, the U.S. Virgin Islands is an unincorporated territory of the United States, which means that the U.S. Constitution applies to the jurisdiction only to the extent that the U.S. Congress has so legislated. In fact, Congress has made nearly all of the Constitutional provisions apply, including the Bill of Rights and the Commerce Clause; however, because the territory is not a state, its residents can not vote for president, it has no U.S. Senators, and its one Delegate to the House of Representatives may not vote on the floor, although he can vote in House committees.
The territory is governed by a Governor and Lieutenant Governor who are elected every four years (in even-numbered non- presidential years). The Governor appoints a cabinet to administer the approximately twenty departments and agencies of the executive branch.
The Legislature is a 15-member unicameral body elected every two years. Seven of the members of the Legislature, known as Senators, are elected at large from each of two districts: St. Croix and St. Thomas/St. John. The fifteenth Senator is elected at large by voters in both districts but must be a resident of St. John.
The judicial branch consists of two separate courts, the local Territorial Court, and the federal District Court. Subsequent to the expansion of its jurisdiction in 1994, the Territorial Court is now a court of general jurisdiction for both civil and criminal matters. It has a Presiding Judge and eight other judges, with a majority sitting on St. Thomas. The federal District Court has two permanent judges, one in St. Thomas and one in St. Croix, who are occasionally supplemented by visiting federal judges from the mainland. On the trial level, the jurisdiction of the District Court is similar to that of U.S. District Courts in the United States (i.e., it hears matters concerning questions of federal law as well as cases where there is "diversity of citizenship"), except that it also has jurisdiction over all matters concerning the territorial income tax. The District Court also has an appellate division which hears all appeals from decisions of the Territorial Court. Appeals from the District Court go the United States Court of Appeals for the Third Circuit, based in Philadelphia, and from there to the U.S. Supreme Court.
.142.05 - U.S. Virgin Islands: Relationship with European Union
As a territory of the United States, the U.S. Virgin Islands may not conduct its own foreign policy; rather, with the important exception of tax treaties, it is included under most other international treaties and agreements to which the United States is a party. Importantly, this includes all of the United States' bi-lateral investment treaties and treaties of friendship, commerce, and navigation, which are in force with nearly all Western European countries. In total, the United States has nearly one hundred such treaties in effect with countries around the world. The applicability of these treaties to U.S. Virgin Islands companies adds to their attractiveness, especially to non-U.S. persons who seek an enhanced degree of political stability for their enterprises.
.142.06 - U.S. Virgin Islands: Language and Law.
English is the native tongue of nearly everyone in the U.S. Virgin Islands. Many speak Spanish as well.
The U.S. Virgin Islands has no Constitution; rather, its authority to enact its own laws stems from the Revised Organic Act, an Act of the U.S. Congress approved in 1954, as amended. In addition to authorizing the territory's legislature to enact laws covering most subjects about which American states can typically legislate, the Revised Organic Act reserves the right to Congress to change those laws, a power which has been exercised rarely, if at all.
The legal system in the U.S. Virgin Islands is based on the English common law as practiced in the United States. The only significant exception is the customs law which stems from the Danish customs law in force when the territory was purchased from Denmark in 1917. By statute, unless there is specific local law (including case law) to the contrary, the Restatements of the Law as approved by the American Law Institute, are to be followed by U.S. Virgin Islands courts. The U.S. Virgin Islands has also enacted many of the uniform laws suggested by the American Law Institute and adopted by many states, such as the Uniform Commercial Code and the Uniform Partnership Law. As explained further in . 142.51 below, Congress has provided that the income tax law in force in the U.S. Virgin Islands is the U.S. Internal Revenue Code, applied as a local tax statute and subject to some important exceptions.
.142.07 - U.S. Virgin Islands: Professional Facilities
The U.S. Virgin Islands has a very well-developed professional infrastructure consisting of numerous law firms, several major U.S. and international banks, and at least a dozen trust companies which provide incorporation and other company services. Major banks include Chase Manhattan, Citibank, The Bank of Nova Scotia, and Banco Popular de Puerto Rico. Several of the big six accounting firms either have offices in the U.S. Virgin Islands or service the Territory from nearby Puerto Rico. Office space, hotel rooms, meeting facilities, and good restaurants are plentiful.
.142.08 - U.S. Virgin Islands: Incentive Laws
U.S. Virgin Islands corporations and resident individuals can benefit from several tax incentive programs. The most important of these are the Industrial Development Program ("IDC Program") which is explained in this section, the foreign sales corporation ("FSC") law which is explained in . 142.34, and the exempt company law which is explained in . 142.33.
The IDC Program provides exemptions from nearly all local taxes and a 90% income tax exemption. In order to qualify, a company must invest $50,000 in a U.S. Virgin Islands business and employ ten persons. Initial tax benefit grants are for either ten or fifteen years and may be renewed for five year periods. The IDC Program is typically used by new hotels and light manufacturing enterprises, although in recent years more service businesses are taking advantage of its provisions. Benefits are usually not granted for businesses which primarily serve the local market. U.S. Virgin Islands resident shareholders of companies which have benefits are also entitled to 90% income tax exemptions. Companies incorporated in the United States are also eligible for benefits under the IDC Program and can thereby qualify for the federal tax benefits available under section 936 of the U.S. Internal Revenue Code, a provision primarily designed to encourage investment in Puerto Rico; however, with the reduction of section 936 benefits by the U.S. Congress, this structure is now less popular.
Manufacturers which plan to import products into the United States can combine the benefits of the IDC Program with those of the "Headnote 3A" program, described in . 142.65 below, to eliminate U.S. customs duties.
.142.09 - U.S. Virgin Islands: Currency and Exchange Controls
The U.S. Dollar is the currency used in the U.S. Virgin Islands and there are no exchange controls.
.142.10 - U.S. Virgin Islands: Secrecy and Disclosure
All U.S. Virgin Islands companies are required to file an annual franchise tax report with the office of the Lieutenant Governor. The contents of the report varies depending on the type of company. All companies must report the identity of their officers and directors, as well as their local resident agent, and this information is available to the public. Regular domestic companies, other than FSCs and exempt companies, must also file an annual financial statement which is not made available to the general public; FSCs and exempt companies are not required to file any financial information or statements.
Domestic companies, other than FSCs and exempt companies, must file an annual income tax return with the Virgin Islands Bureau of Internal Revenue. A FSC must file a return with the U.S. Internal Revenue Service and a copy with the Bureau of Internal Revenue. Exempt companies are not required to file a tax return unless they have income from U.S. or U.S. Virgin Islands sources or income effectively connected to a U.S. Virgin Islands trade or business. Tax return information is not available to the public.
Bearer share companies are not permitted in the U.S. Virgin Islands; however, the identity of the shareholders of U.S. Virgin Islands companies need not be revealed, even to the government, except in response to a proper request from the U.S. or U.S. Virgin Islands tax authorities.
.142.11 - U.S. Virgin Islands: Money Laundering Controls
U.S. federal laws and U.S. Treasury Department regulations designed to prevent money laundering in the United States are applicable in the U.S. Virgin Islands.
.142.12 - U.S. Virgin Islands: Mutual Legal Assistance Treaties
As discussed in . 142.05 above, the U.S. Virgin does not have authority to enter into treaties with foreign countries; however, the U.S. Virgin Islands is included with the coverage of most treaties, except tax treaties, entered into by the United States. This generally includes the mutual legal assistance treaties to which the United States is a party.
.142.13 - U.S. Virgin Islands: Legalizing Documents
Documents requiring recording at the office of the Recorder of Deeds of the U.S. Virgin Islands, or other documents requiring an acknowledgement, must be executed before a judge, clerk of court, or notary public of the U.S. Virgin Islands, or a judge, clerk of court, notary public or a U.S. consular officer authorized by the law of another jurisdiction to take oaths or acknowledge instruments. If the authority of the officer taking the acknowledgement derives from a jurisdiction outside the United States or the U.S. Virgin Islands, then authentication of the officer's authority is required as well.
.142.21 - U.S. Virgin Islands: Restrictions on Aliens .142.22 - U.S. Virgin Islands: Work Permits .142.23 - U.S. Virgin Islands: Acquiring Residency .142.24 - U.S. Virgin Islands: Establishing Domicile .142.25 - U.S. Virgin Islands: Acquiring Citizenship
The U.S. Virgin Islands is considered a part of the United States in respect of all matters concerning immigration and citizenship. The laws restricting aliens from entering or working in the U.S. Virgin Islands, and those for acquiring permanent residency in the United States and U.S. citizenship, are the same federal statutes as apply in the mainland United States. There are no restrictions on persons who are U.S. citizens or permanent residents from travelling to the U.S. Virgin Islands, or becoming a resident or obtaining work in the U.S. Virgin Islands. In order to be permitted to register to vote in U.S. Virgin Islands elections, a person must be a U.S. citizen who has been resident in the U.S. Virgin Islands for at least thirty days.
.142.31 - U.S. Virgin Islands: Corporations
Any three individuals, whether resident in the U.S. Virgin Islands or elsewhere, may incorporate a U.S. Virgin Islands corporation by executing (before a notary public) and filing articles of incorporation with the office of the Lieutenant Governor of the Virgin Islands. A corporation must have a name which is not so similar to that of another U.S. Virgin Islands corporation as to cause confusion. The corporation is formed as soon as the articles are filed. The incorporators or the directors adopt by-laws to govern the corporation's affairs.
The stock of a U.S. Virgin Islands corporation must be registered and there is a $1,000 minimum capital requirement. Stock may or may not have a par value. The "standard" corporation has 1,000 shares without par value.
A corporation must have three directors (all of whom must be individuals) who manage its affairs. It is also required to have at least three officers: a president (who must be a director), a secretary, and a treasurer. Other officers are allowed as well. A corporation must appoint a local resident agent for service of process.
Corporations organized outside the U.S. Virgin Islands may qualify to do business in the U.S. Virgin Islands by filing a copy of their articles of incorporation (or equivalent document), appointing a resident agent, providing some financial information, and paying a fee.
Domestic corporations, and foreign corporations authorized to do business in the U.S. Virgin Islands, are subject to an annual franchise tax. For regular domestic corporations and qualified foreign corporations the tax is a minimum of $150 per year, but may be higher depending on the amount of capital devoted to U.S. Virgin Islands business. For FSCs the annual franchise tax is $400 to $25,000 depending on the level of exports for which the FSC is eligible for federal tax benefits. For exempt companies, the annual tax is a flat $1,000. The annual reporting requirements for U.S. Virgin Islands corporations are described in . 142.10 above.
.142.32 - U.S. Virgin Islands: Limited Liability Companies
The U.S. Virgin Islands has not yet adopted a limited liability company statute but proposals are being considered.
.142.33 - U.S. Virgin Islands: Exempt Companies
The U.S. Virgin Islands is the only jurisdiction in the world where a non-U.S. person can establish a tax-free entity under the U.S. flag. The entity, known as a U.S. Virgin Islands exempt company, is often used as a portfolio holding company or for the ownership of aircraft that are registered with the U.S. Federal Aviation Administration. Exempt companies also benefit from coverage under U.S. bi-lateral investment treaties and treaties of friendship commerce and navigation and are therefore ideal for persons who seek political stability and the protection of U.S. laws and treaties (except tax treaties). The U.S. Virgin Islands exempt company law also encourages the use of these entities as exempt mutual funds (see . 142.64) and captive insurance companies (see . 142.62) as well.
Except in the case of certain captive insurance companies, U.S. and U.S. Virgin Islands citizens, residents, and companies are prohibited from owning, directly or indirectly, ten percent or more of the stock of a U.S. Virgin Islands exempt company. With respect to income from all sources except those in the United states or the U.S. Virgin Islands, an exempt company is entirely free of all U.S. and U.S. Virgin Islands income taxes. Furthermore, except for a nominal annual franchise fee, an exempt company is free from all local taxes as well. These tax benefits are guaranteed for 20 years by contract with the government.
The exempt company law also allows a corporation formed elsewhere to establish a branch in the U.S. Virgin Islands which will be treated for all U.S. Virgin Islands tax purposes as if it were an exempt company. Another provision permits an exempt company to elect to pay income tax at the rate of one percent.
For reporting requirements and secrecy issues applicable to exempt companies see .149.10 above.
.142.34 - U.S. Virgin Islands: Other Special Companies - Foreign Sales Corporations
The U.S. Internal Revenue Code authorizes the establishment of FSCs in the U.S. Virgin Islands. FSCs are established by U.S. exporters in order to reduce their income tax on profits from export sales by approximately 15%. Since the FSC program was established by Congress in 1984, more FSCs have been established in the U.S. Virgin Islands than in any other jurisdiction in the world. Local benefits for FSCs include complete exemption from all local taxes except for a nominal annual franchise tax and license fee. The local tax exemption includes an exemption from the income tax. Benefits are guaranteed by a contract with the government for up to thirty years. A regular FSC (one with export sales in excess of $5 million annually) is required to hold its annual meetings in the U.S. Virgin Islands, although this can be handled by a management company if desired.
The U.S. Virgin Islands FSC law permits FSCs that are established in other jurisdictions, as well as domestic FSCs, to perform certain economic processing activities required by the U.S. Internal Revenue Code in the U.S. Virgin Islands without tax effect.
.142.35 - U.S. Virgin Islands: General Partnerships
The Uniform Partnership Act, as drafted by the American Law Institute, was adopted as the partnership law of the U.S. Virgin Islands.
.142.36 - U.S. Virgin Islands: Limited Partnerships
The Uniform Limited Partnership Act governs the formation and operation of Limited Partnerships in the U.S. Virgin Islands.
.142.37 - U.S. Virgin Islands: Redomiciliation of Companies
The U.S. Virgin Islands has statutes governing both the inbound and outbound redomiciliation of companies and it is apparently the only jurisdiction under the U.S. flag to allow for both of these options. The inbound redomiciliation statute is based on Delaware law. It provides for both immediate and standby redomiciliation. The cost for an immediate inbound redomiciliation is $100 plus the fee for filing articles of incorporation ($150 for a regular corporation or $400 for a FSC or exempt company). The cost for a standby redomiciliation is $1,100 to register and $1,000 annually.
An outbound redomiciliation is allowed, provided that the laws of the jurisdiction to which the company wishes to move permits it as well. The company must first prepare and file whatever documents are required by the other jurisdiction; then an affidavit is filed with the U.S. Virgin Islands as evidence that the company has continued its existence elsewhere. Then the government issues a certificate of discontinuance. The cost of filing the affidavit is $400. A corporation which has removed its domicile from the U.S. Virgin Islands is not liable for future franchise or other taxes but it does not avoid liabilities incurred prior to its redomiciliation.
.142.41 - U.S. Virgin Islands: Recognition of Trusts
The American/British common law of trusts, as restated in the Restatement of Trusts, applies in the U.S. Virgin Islands. Except for laws regarding the duties of fiduciaries, including trustees, there are no statutes governing the establishment or administration of trusts.
.142.42 - U.S. Virgin Islands: Treatment of Forced Heirship Rules
The probate law of the U.S. Virgin Islands permits a surviving spouse to elect against the will and receive a statutory share equal to what she would have received in the absence of a will. Under applicable general conflicts of laws and "full faith and credit" principles, U.S. Virgin Islands courts would be expected to enforce the forced heirship provisions of other jurisdictions.
.142.43 - U.S. Virgin Islands: Asset Protection Trusts
There is no special legislation on this subject in the U.S. Virgin Islands.
.142.51 - U.S. Virgin Islands: Corporate Income Taxes
The U.S. Internal Revenue Code applies in the U.S. Virgin Islands as a local tax code through use of a word substitution scheme known as the mirror system. With certain exceptions, under the mirror system the words "Virgin Islands" are substituted for the words "United States" wherever they appear in the Internal Revenue Code. One of the results of the mirror system is that the corporate income tax rates and rules applicable to domestic corporations in the United States are applicable to U.S. Virgin Islands corporations in the U.S. Virgin Islands. Such corporations are taxed on their worldwide income at graduated rates, the highest of which is 35%; however, most income below $10 million is taxed at a rate of 34%. The tax is payable to the Virgin Islands Bureau of Internal Revenue rather than the U.S. Internal Revenue Service. In addition to this mirrored rate of tax, all corporations are also subject to a 10% corporate tax surcharge. This brings the maximum graduated rate to 38.5%.
Notwithstanding the mirror system, exempt companies are exempt from the U.S. Virgin Islands income tax except with respect to any U.S. or U.S. Virgin Islands source income that they may earn. Likewise, FSCs are exempt from the income tax with respect to income earned from exports. As discussed in . 142.08 above, corporations with Industrial Development benefits are exempt from 90% of their tax liability. The maximum graduated rate for such corporations is therefore less than 4%.
Another result of the mirror system is that a corporation incorporated in the United States, along with a corporation incorporated elsewhere outside of the U.S. Virgin Islands, is considered foreign for U.S. Virgin Islands tax purposes. The taxation of such a corporation depends on whether it is engaged in a U.S. Virgin Islands trade or business. If so, then it is taxed on its income which is effectively connected with its U.S. Virgin Islands trade or business at the same rates, and under the same rules, as that of a U.S. Virgin Islands domestic corporation. For corporations not engaged in a U.S. Virgin Islands trade or business, passive income from U.S. Virgin Islands sources, such as interest, dividends, and rents, is taxed at a flat rate of 10% on the gross amount of the income. (This is an exception from the mirror system rate of 30% that would otherwise be applicable). With the 10% corporate tax surcharge, the effective tax rate on such income is 11%. Exemptions or reductions of this rate on passive income are applicable in certain circumstances.
The branch profits tax imposed under the U.S. Internal Revenue Code is also mirrored in the U.S. Virgin Islands except in the case of U.S. corporations with U.S. Virgin Islands branches. Foreign corporations incorporated outside the United States, which have U.S. Virgin Islands branches, are subject to this tax on their U.S. Virgin Islands branch profits but at a 10% rate rather than a 30% rate.
.142.52 - U.S. Virgin Islands: Individual Income Taxes
The mirror system also determines the taxation of individuals in the U.S. Virgin Islands; however, under a special provision of the U.S. Internal Revenue Code, section 932, the mirror system applies in a different manner for individuals than for corporations. Individual U.S. citizens and permanent residents who are bona fide residents of the Virgin Islands are subject to the same tax rates as are applicable to individuals under the U.S. Internal Revenue Code but they pay their tax on worldwide income to the U.S. Virgin Islands Bureau of Internal Revenue rather than to the U.S. Internal Revenue Service and they file their return only with the U.S. Virgin Islands. For purposes of determining the tax liability of such persons, section 932 provides that the U.S. Virgin Islands shall be deemed to include the United States. The maximum graduated income rate applicable to individuals is 39.6%. There are no local income taxes or surcharges imposed on individuals over and above the mirror system rates.
U.S. citizens and permanent residents with U.S. Virgin Islands source income who are not resident in the U.S. Virgin Islands pay the same total amount of tax as they would if such income were from U.S. sources, but the tax is apportioned between the United States and the U.S. Virgin Islands. The apportionment of tax is based on that percentage of that percentage of the adjusted gross income of such persons which is from U.S. Virgin Islands sources. These individuals file their return, showing the apportionment, with the U.S. Internal Revenue Service, and they file a copy with the U.S. Virgin Islands Bureau of Internal Revenue.
Individuals who are non-resident aliens of the United States and who have U.S. Virgin Islands source income are subject to the same rules with respect to such income as would be applicable if such income were from U.S. sources except that the tax on their U.S. Virgin Islands source income is payable to the U.S. Virgin Islands. There is one exception, however: passive income is taxed at 10% of the gross amount of the income and not at either the 30% rate set forth in the U.S. Internal Revenue Code or the lower rates that are applicable under U.S. tax treaties.
.142.53 - U.S. Virgin Islands: Transfer Taxes at Death
The mirror system is not applicable to the U.S. federal estate tax. Rather, that tax applies directly to U.S. citizens and permanent residents domiciled in the U.S. Virgin Islands at death but with an important exception: the federal estate tax does not apply at all to individuals who acquired their U.S. citizenship as a result of birth or naturalization in the U.S. Virgin Islands or another U.S. possession. For persons considering becoming naturalized U.S. citizens (or reacquiring U.S. citizenship after having expatriated), this provides an attractive planning opportunity.
Property located in the U.S. Virgin Islands, or stock of U.S. Virgin Islands corporations (including U.S. Virgin Islands exempt companies) is not considered U.S.-situs property under the U.S. federal estate tax. Therefore it is not included in the gross estate of a non-resident alien of the United States.
While there is a U.S. Virgin Islands local inheritance tax, the exemptions from that tax are so broad that it rarely has any application. The tax only applies to U.S. Virgin Islands residents who inherit property located outside the U.S. Virgin Islands from decedents who were not residents of the U.S. Virgin Islands at the time of death.
.142.54 - U.S. Virgin Islands: Transfer Taxes on Gifts
The U.S. federal gift tax also applies in the U.S. Virgin Islands but subject to the same limitations as the federal estate tax, namely, it does not apply to U.S. citizens who acquired their citizenship as a result of birth or naturalization in the U.S. Virgin Islands or another U.S. possession. Property located in the U.S. Virgin Islands is not subject to the federal gift tax imposed on nonresidents who are not citizens of the United States.
There is a local gift tax on U.S. Virgin Islands situs property but the tax is not applicable to persons who are U.S. Virgin Islands residents at the time the gift was made or to persons who are exempt from the federal gift tax because of their birth or naturalization in the U.S. Virgin Islands or another U.S. possession.
.142.55 - U.S. Virgin Islands: Other Taxes
The U.S. Virgin Islands imposes a tax of 4% on the gross receipts of U.S. Virgin Islands businesses. There are exemptions from the tax for exempt companies, FSCs, IDC Program beneficiaries, and certain other businesses. Businesses with annual gross receipts of less than $150,000 are exempt from tax on their first $5,000 per month of gross receipts.
Articles imported into the U.S. Virgin Islands for use or resale in a trade or business are subject to an excise tax. Because the territory is outside the U.S. customs zone, foreign (non-U.S.) made goods are also subject to a customs duty which is separate from the U.S. customs duty. The rate of excise tax on most goods is 4%, while the rate on certain products, such as cigarettes, is higher. Alcoholic beverages are subject to a flat rate based on volume. Certain other goods are subject to a lower rate of excise tax, and most tourist items, such as jewelry, watches, crystal, artwork, electronic goods, and leather goods, are exempt entirely. Tourist items are also exempt from the 6% U.S. Virgin Islands customs duty. The rate of customs duty is also lowered where an item imported to the U.S. Virgin Islands has already been subject to a duty upon import to the United States. In that case the duty is equal to the difference between 6% and the duty paid to the United States; where the U.S. duty paid was greater than or equal to 6%, the item enters the U.S. Virgin Islands free of further duty. A few items are subject to a rate of duty that is less than 6%.
U.S. Virgin Islands real property is subject to an annual tax at a rate of 1.25% of assessed value. Assessed value is defined by statute to be 60% of actual value. The U.S. Virgin Islands also imposes stamp taxes on real property transfers at the rate of 2%.
.142.56 - U.S. Virgin Islands: Tax Treaties
The U.S. Virgin Islands is not included within any tax treaties to which the United States is a party. The U.S. Virgin Islands government does not have the legal authority to enter into tax treaties with foreign countries on its own behalf.
.142.57 - U.S. Virgin Islands: Transportation Agreements
The U.S. Internal Revenue Code imposes a gross transportation income tax of 4% on U.S. source transportation income of foreign corporations. Fifty percent of income from flights between a foreign country and the United States is treated as from U.S. sources and 100% of income from flights within the United States is so treated. This tax is not imposed, however, where the foreign country grants an equivalent exemption to U.S. carriers. Under the mirror system, this tax would apply to flights between the U.S. Virgin Islands and foreign countries unless an exemption applies. The U.S. Virgin Islands is generally included in agreements between the United States and foreign countries which grant equivalent exemptions. Therefore, the tax is rarely imposed under the mirror system.
In addition, by authority of a special statutory provision and an exchange of letters between U.S. and U.S. Virgin Islands taxing authorities, no gross transportation income tax is imposed on flights between the United States and the U.S. Virgin Islands on carriers incorporated in either of those jurisdictions.
.142.58 - U.S. Virgin Islands: Tax Information Exchange Agreements
Unlike tax treaties, the U.S. Virgin Islands is treated as part of the United States for the purposes of defining the geographical area within which most U.S. Tax Exchange of Information Agreements apply. A notable exception is the agreement between the United States and Bermuda which specifically excludes the U.S. Virgin Islands from the geographic definition of the United States. Even though the U.S. Virgin Islands is generally a part of the United States for the purpose of geographic coverage, the U.S. Virgin Islands mirror system tax may or may not be one of the taxes covered by the agreements. This depends on whether that tax is considered to be "imposed" by the U.S. Virgin Islands, in which case the tax would not be covered, or by the United States, in which case it would be covered.
The United States and the U.S. Virgin Islands have entered into an agreement, known as the Tax Implementation Agreement, by which the two jurisdictions agree to exchange information and to assist each other with respect to tax matters, including enforcement and collection. The two jurisdictions also cooperate in "competent authority" types of proceedings. The Implementation Agreement contains many of the same types of provisions that are contained in U.S. Tax Exchange of Information Agreements with foreign countries.
.142.59 - U.S. Virgin Islands: Mutual Assistance in Tax Matters
See .. 142.12 and 142.58 above.
.142.61 - U.S. Virgin Islands: Banks and Trust Companies
Banking is regulated in the U.S. Virgin Islands by the Commissioner of Banking and Insurance and the Virgin Islands Banking Board in a manner similar to banking regulation in a state. In order to engage in local banking business a license is required. The annual license fee is either $50,000 or $100,000. The higher fee applies except for locally chartered banks with paid in capital of less than $500,000. Several of the major banks doing business in the U.S. Virgin Islands are listed in . 142.07.
A bank licensed in another jurisdiction may establish an exempt international banking facility ("EIBF") in the U.S. Virgin Islands. An EIBF may perform virtually any banking activity, except accepting local deposits and making local loans, and it may do so without being subject to any local taxes except for an annual license fee of $4,000. To the extent that an EIBF is eligible for treatment as a U.S. Virgin Islands exempt company, it will be exempt from income taxes as well.
The U.S. Virgin Islands has several large well-known trust companies associated with major banks, as well as a number of smaller trust companies. These trust companies provide representation and management services for FSCs, exempt companies, and other offshore entities.
.142.62 - U.S. Virgin Islands: Insurance
Insurance is regulated in the U.S. Virgin Islands by the Commissioner of Banking and Insurance in a manner similar to insurance regulation in a state. Carriers, brokers, agents, and adjusters must obtain licenses in order to service local business.
The U.S. Virgin Islands also has an exempt insurers statute which permits the establishment of insurance companies which are exempt from most local regulation. The exempt insurers statute permits the licensing of "International Insurance Companies" also known as captive insurers. An International Insurance Company may also qualify as a U.S. Virgin Islands exempt company and thus be eligible for exemption from income and other local taxes. Unlike other types of exempt companies, an International Insurance Company may be owned by U.S. persons and still be eligible for these benefits so long as its income is effectively connected to a U.S. Virgin Islands trade or business. The annual license fee for an International Insurance Company is $6,000.
The U.S. Virgin Islands is unique among offshore insurance domiciles in that it is considered a state for the purposes of the Employee Retirement Income Security Act of 1974 ("ERISA"). As a result, it is possible to establish a captive insurance company, or branch, in the U.S. Virgin Islands which may write employee health and retirement plan coverage in the United States. Captives established in foreign jurisdictions are not allowed to write this type of coverage in the United States.
.142.63 - U.S. Virgin Islands: Shipping/Aircraft
A U.S. Virgin Islands exempt company may be used by foreign persons, through a voting trust structure, to own an aircraft registered with the U.S. Federal Aviation Administration. This structure is preferable to the similar Delaware structure for aircraft ownership because, unlike a Delaware company, a U.S. Virgin Islands exempt company is free of income taxes.
.142.64 - U.S. Virgin Islands: Mutual Funds
Special provisions of the U.S. Virgin Islands exempt company legislation permit exempt companies to function as exempt mutual funds. Such entities are permitted to perform a broad variety of activities in the U.S. Virgin Islands without being subject to income taxes. The activities allowed to be conducted are the same as those which are utilized under the federal income tax regulations to determine whether a mutual fund has its principal office in the United States and is therefore subject to U.S. tax on its trading activities in the United States. Thus, a U.S. Virgin Islands exempt mutual fund can conduct the listed activities in the U.S. Virgin Islands (or elsewhere outside the United States) and will not be subject to tax in the U.S. Virgin Islands, nor will its U.S. trading activities be subject to tax in the United States. The listed activities are: (1) communicating with its shareholders (including the furnishing of financial reports); (2) communicating with the general public; (3) soliciting sales of its own stock; (4) accepting the subscriptions of new stockholders; (5) maintaining its principal corporate records and books of accounts; (6) auditing its books of accounts; (7) disbursing payments of dividends, legal fees, accounting fees, and officers' and directors' salaries; (8) publishing or furnishing the offering and redemption price of the shares of stock issued by it; (9) conducting meetings of its shareholders and board of directors; and (10) making redemptions of its own stock.
Importantly, the U.S. Virgin Islands is not considered a part of the United States for certain purposes under the Investment Company Act of 1940. This federal statute generally requires investment companies, such as mutual funds, to register with the U.S. Securities and Exchange Commission; however, investment companies established and operating outside the United States are not required to register provided their shares are not sold or offered for sale to U.S. persons. Of course, avoidance of the registration requirement substantially reduces the costs associated with a mutual fund. Furthermore, there are no regulatory requirements under local U.S. Virgin Islands law for U.S. Virgin Islands exempt mutual funds operating in the territory except for obtaining an annual business license (for a nominal fee) and filing the same form of annual report that is required of other exempt companies.
.142.65 - U.S. Virgin Islands: Other - U.S. Customs Duty Benefits under "Headnote 3A"
The U.S. Virgin Islands offers companies the opportunity to eliminate U.S. customs duties on items manufactured in the U.S. Virgin Islands but which utilize foreign materials. This incentive is based on a section in the U.S. Tariff Schedules formerly called "Headnote 3A." (It continues to be known by this name). To qualify, no more than 70% of the total value of an item may be from foreign materials. The U.S. Customs service determines whether this requirement is met for a particular product and manufacturing process. For watches, a different standard, relating to labor input, must be met instead.
.142.71 - U.S. Virgin Islands: Costs
Costs of incorporating and maintaining domestic and offshore U.S. Virgin Islands companies are reasonable. The following table provides a summary of costs for various types of U.S. Virgin Islands entities, licenses, and services:.
Type of Entity or Service One Time Fee Annual Fee
Domestic Corporation $150 $150 minimum
Exempt Company $400 $1,000
Foreign Sales Corporation $400 $400 to $25,000 franchise tax & $100 license
International (Captive) Insurance Company License $1,000 $6,000
Exempt International Banking Facility License $4,000 $4,000
Local Business License -- $100 and up
Trade Name Registration $25 $50 (bi-annual)
Limited Partnership Agreement - Recording Fee $5/first page & $1/add'l pages
Domestic Bank License -- $50,000 or $100,000
Inbound Redomiciliation (Permanent) $100 plus incorporation --
Inbound Redomiciliation (Standby) $1,100 $1,000
Outbound Redomiciliation $400 --
.142.72 - U.S. Virgin Islands: Future Outlook
The U.S. Virgin Islands has been developing its offshore sector since 1984 when it became established as the premier location in the world for the establishment of foreign sales corporations. Later, after federal authorizing legislation was approved in 1986, statutes were added to accommodate exempt companies and exempt international banking facilities. More recently, legislation was adopted to modernize the captive insurance law and to accommodate the establishment of offshore mutual funds.
With its strong legal and financial infrastructure, and its unique position as the only tax haven under the U.S. flag, the U.S. Virgin Islands is well-positioned to broaden its market share of offshore business, particularly for those who seek U.S.- flag protection and access to U.S. treaty network and the U.S. court system, but who are not concerned with secrecy.
New legislation may soon be considered regarding the following subjects: . Authorizing Limited Liability Companies . Reducing franchise tax fees for FSCs . Reducing the required number of incorporators . Reducing the number of directors required for an exempt company . Permitting corporate directors of exempt companies . Allowing names for corporations in other than the English language
.142.81 - U.S. Virgin Islands: Additional Reading
. Income Taxation Generally: "Taxation of Individuals and Corporations in the U.S. Virgin Islands," by William L. Blum, CCH Federal Tax Service, .M:15.60 et seq., Commerce Clearing House (1995).
. Exempt Companies: "The Tax Free Entity Under the U.S. Flag: A U.S. Virgin Islands Exempt Company," by William L. Blum, The Journal of Corporate Taxation, Autumn 1993, Warren Gorham Lamont.
. Aircraft Structure: "The American Paradise -- U.S. Virgin Islands: FAA Registration of Foreign-Owned Aircraft," by William L. Blum and Marjorie Rawls Roberts, The Air and Space Lawyer, Fall 1994, American Bar Association.
. Mutual Funds and Captive Insurance: "Company Law Focus - U.S. Virgin Islands Exempt Companies Law Encourages Mutual Funds and Captive Insurers," by William L. Blum, Offshore Investment, July/August 1995, European Magazine Services, Ltd.
. History and Comparison with British Virgin Islands: "Caribbean Tax Planning Opportunities for the Pacific Rim," by Lloyd De Vos, William L. Blum, and Anthony Kent Scoon, Asia Law, December, 1993.
.142.82 - U.S. Virgin Islands: Important Local Contacts
For further information regarding any of the subjects discussed in this chapter, please contact the author:
William L. Blum, Esq. Of Counselor, in New York City: Grunert Stout Bruch & Moore P.O. Box 103039 Third Street St. Thomas, V.I. 00804Brooklyn, N.Y. 11231 Phone: (809) 774-1320Phone: (718) 802-1273 Fax: (809) 774-7839Fax: (718) 802-1760 Internet: firstname.lastname@example.org
For further information on U.S. Virgin Islands taxation, including tax exemptions and tax incentives, contact:
Marjorie Rawls Roberts, Esq. Chief Counsel Virgin Islands Bureau of Internal Revenue Charlotte Amalie St. Thomas, V.I. 00802 Phone: (809) 774-7526 Fax: (809) 776-4037
For further information on tax incentives available under the Virgin Islands Industrial Development Program, contact:
Mr. Anthony Olive Assistant Director Virgin Islands Industrial Development Commission P.O. Box 6400 St. Thomas, V.I. 00801 Phone: (809) 774-8784 Fax: (809) 774-4390
For further information on banking and insurance regulation and licensing, contact:
Ms. Margery Resnick Director of Banking and Insurance Kongens Gade No. 18 Charlotte Amalie St. Thomas, V.I. 00802 Phone: (809) 774-7166 Fax: (809) 774-9458
For further information on incorporation of U.S. Virgin Islands entities, franchise taxes, and trade names, contact:
Ms. Lorna Webster Director, Corporate Division Office of the Lieutenant Governor Kongens Gade No. 18 Charlotte Amalie St. Thomas, V.I. 00802 Phone: (809) 774-2991 Fax: (809) 774-6953