The United States Virgin Islands, a U.S. territory located in the Caribbean Sea about 1500 miles southeast of New York City, has its own tax system which is administered separately from that of the rest of the United States. It is also the only U.S. jurisdiction which offers a tax-free offshore company.
Until recently, U.S. Virgin Islands exempt companies have primarily been used by non-U.S. persons as portfolio holding companies and for the ownership of aircraft that are registered with the U.S. Federal Aviation Administration. Exempt companies also benefit from coverage under U.S. treaties of friendship commerce and navigation, and bi-lateral investment treaties, although U.S. tax treaties do not apply to any U.S. territories.
Late in 1994, the U.S. Virgin Islands exempt company law was amended to broaden the appeal of these entities and encourage their use as exempt mutual funds and captive insurance companies. While it was possible to establish tax-exempt mutual funds and captive insurers under prior law, the new legislation adds specific definitions and clarifies that these types of businesses may be actively conducted in the U.S. Virgin Islands without becoming subject to tax.
The legislation enumerates ten types of activities typically undertaken by a mutual fund which, if performed in the United States, would subject the fund to tax by the United States, and specifically authorizes such activities to be conducted in the U.S. Virgin Islands without tax consequence. The legislation also allows a U.S. Virgin Islands exempt mutual fund to trade in U.S. securities. For many years U.S. Virgin Islands mutual funds have been exempt from the securities registration requirements under the Investment Company Act of 1940 so long as the securities which the fund issues are not offered for sale to U.S. persons.
U.S. Virgin Islands captive insurance companies also have several unique advantages when compared to other offshore captives, most notably that they can cover life and health insurance risks under the Employees Retirement Income Securities Act of 1974 (known as "ERISA").
U.S. Virgin Islands exempt companies have to be at least 90%-owned and controlled by persons other than U.S. or U.S. Virgin Islands citizens or companies. The new legislation provides an exception to this rule by allowing U.S. ownership of an exempt company which is licensed as a captive insurance company so long as its income is effectively connected to a U.S. Virgin Islands trade or business.
A U.S. Virgin Islands exempt company can be established as a separate corporation or as a branch of a company incorporated elsewhere. Except for captive insurers, banks, and mutual funds which conduct business in the Virgin Islands, exempt companies are not required to obtain a business license. They must file a simplified form of annual report which does not require financial information or the identification of shareholders. The companies are subject to a $1,000 annual franchise tax but they are free from all U.S. and U.S. Virgin Islands income taxes and all other local taxes.
The U.S. Virgin Islands corporate law generally applies to exempt companies. It is based on the Delaware model and contains modern indemnification and corporate redomiciliation provisions. In addition to treaty and income tax benefits, U.S. Virgin Islands exempt companies also offer unquestioned political stability, a U.S. mailing address, access to the U.S. court system for dispute resolution, and exemption from all federal and local estate and inheritance taxes. The U.S. Virgin Islands has a sophisticated financial services infrastructure including a choice of well-known management companies, experienced attorneys, major U.S. and foreign banks, as well as modern communications and transportation facilities..