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BUSINESS OPPORTUNITIES, CORPORATIONS, TAXES, TAX INCENTIVES, AND TAX PLANNING IN THE U.S. VIRGIN ISLANDS

There are a multitude of business and tax planning opportunities in the USVI or through use of USVI companies:

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Business Opportunities in the USVI[1]

 The USVI is a great place to establish a business! In addition to a full range of businesses to serve and supply the local population, opportunities also exist to service the tourist trade in such areas as retail stores and gift shops, hotels, restaurants, and attractions such as dive operations and the like. Better yet, if you establish a qualifying business and hire local employees, your business can be eligible for generous government tax incentives[2] which will eliminate almost all income taxes[5],and local taxes[6] for ten years or more. Table of contents

Virgin Islands Industrial Development Program Investment Incentives[2]

 The USVI Industrial Development Program provides exemptions from nearly all local taxes[6] and a 90% income tax[5] exemption. In order to qualify, a business must invest $50,000 or more in a USVI business and employ ten persons. Initial tax benefits are granted by the USVI Industrial Development Commission[13] for either ten or fifteen years and may be renewed for five year periods. The Industrial Development Program is typically used by hotels, light manufacturing enterprises, and service businesses. Benefits are usually not granted for businesses which primarily serve the local market. USVI resident shareholders of companies which have benefits are also entitled to 90% income tax exemptions.

Manufacturers which plan to import products into the United States can combine the benefits of the Industrial Development Program with those of a federal law (called the "Headnote 3A" program) to eliminate U.S. customs duties if there is a sufficient amount of value added to the product in the USVI. Table of contents

Establishing a USVI Corporation or Qualifying a Foreign Corporation[3]

 Any three individuals may incorporate a USVI corporation by executing (before a notary public) and filing articles of incorporation with the office of the Lieutenant Governor of the Virgin Islands. The corporation is formed as soon as the articles are filed and the filing fee is paid. The incorporators or the directors adopt by-laws to govern the corporation's affairs. The method of incorporation is the same whether a company is being formed as a domestic corporation, an exempt company[7], or a foreign sales corporation[8].

The stock of a USVI 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 USVI 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 USVI may qualify to do business in the USVI 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 and must file an annual report by June 30 of each year. The franchise tax is a minimum of $150 per year. Table of contents

Moving an Existing Corporation to the USVI[4]

 The USVI permits both the inbound and outbound redomiciliation of companies and it is the only jurisdiction under the U.S. flag to allow for both of these options. An inbound redomiciliation is when a company formed outside the USVI wants to move to the USVI and be treated as if it had been formed there. When the company moves into the USVI it can also elect to be treated as an exempt company[7] if it otherwise qualifies.

An outbound redomiciliation, by which a USVI corporation moves its domicile to another jurisdiction, is allowed, provided that the laws of the jurisdiction to which the company wishes to move permits it. The company must first prepare and file whatever documents are required by the other jurisdiction; then an affidavit is filed with the USVI as evidence that the company has continued its existence elsewhere. Then the government issues a certificate of discontinuance. A corporation which has removed its domicile from the USVI is not liable for future franchise or other taxes but it does not avoid liabilities incurred prior to its redomiciliation. Table of contents

USVI Income Taxes[5]

 Generally, instead of filing returns and paying taxes to the IRS, residents of the USVI, and corporations[3] formed in the USVI, file returns and pay income taxes directly the Virgin Islands Bureau of Internal Revenue[13]. The taxes are at the same rates and use the same forms and rules as the federal income tax under what is called the "mirror system" of taxation.

The mirror system applies differently to corporations than to individuals. One of the differences is that in addition to the regular corporate tax rate, corporations are also subject to a 10% corporate tax surcharge which brings the maximum corporate graduated rate to 38.5%. There are no local income taxes or surcharges imposed on individuals over and above the mirror system rates so that the overall rate of income tax for individuals is equivalent to the rate that a resident of a state without a state income tax would pay.

One of the results of the mirror system is that a corporation incorporated in the United States, along with a corporation incorporated elsewhere outside of the USVI, is considered foreign for USVI tax purposes.

U.S. citizens and permanent residents with income from the USVI, but who are not resident there, pay the same total amount of tax as they would if all their income were from U.S. sources, but the tax is apportioned between the United States and the USVI. This is done on IRS form 8689. These individuals file their form 1040 returns, along with the form 8689, with the IRS and they file a copy with the Virgin Islands Bureau of Internal Revenue[13]. Table of contents

Other USVI Taxes[6]

 There are no sales taxes in the USVI. There are several other taxes that do apply, however, including the following:
While all of the taxes described here generally apply to USVI businesses, there are exemptions from all of them for exempt companies [7] and foreign sales corporations[8]. In addition, beneficiaries of the Industrial Development Program[2] are exempt from all of these taxes except for customs duties, where a special one percent rate applies.

Real Property Taxes.

USVI 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.

Gross Receipts Taxes.

The USVI imposes a tax of 4% on the gross receipts of USVI 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.

Excise Taxes and Customs Duties

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 USVI 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. Table of contents

Tax Free Entities in the USVI - USVI Exempt Companies[7]

 There are three types of entities that can be established in the USVI which are either fully or partially exempt from USVI taxes and U.S. federal income taxes. One type of entity is a USVI corporation which obtains the benefits of the Virgin Islands Industrial Development Program[2] for its business activities in the USVI. These companies are fully exempt from most local taxes and receive a 90% exemption from USVI income taxes. They also enjoy a special customs duty rate of one percent. These companies are generally not subject to U.S. federal income taxes on their USVI operations.

Another tax free entity is a USVI foreign sales corporation[8] (FSC) which pays no local taxes except for a nominal annual fee. Thousands of USVI FSCs have been set up by U.S. exporters as a means to reduce U.S. federal income taxes on their export sales by about 15%.

For foreign persons, even more generous exemptions are available through the use of the third type of tax-free entity: a USVI exempt company. The USVI is the only jurisdiction in the world where a non-U.S. person can establish a tax-free entity under the U.S. flag. USVI exempt companies are often used as holding companies for portfolio investments, for the ownership of aircraft[11] that are registered with the U.S. Federal Aviation Administration, or as captive insurance companies[10]. There are a number of other offshore tax planning[9] structures that can take advantage of USVI exempt companies.

Except in the case of certain captive insurance companies, U.S. and USVI citizens, residents, and companies are prohibited from owning, directly or indirectly, ten percent or more of the stock of a USVI exempt company. With respect to income from all sources except those in the United States or the USVI, an exempt company is entirely free of all U.S. and USVI income taxes. Furthermore, except for a nominal annual franchise fee ($1,000), an exempt company is free from all local taxes as well. These tax benefits are guaranteed for 20 years by contract with the USVI government. The identity of the owner of a USVI exempt companies is not public information but it is subject to disclosure to the Virgin Islands Bureau of Internal Revenue[13] or the IRS upon proper request. Table of contents

U.S. Export Incentives Using USVI Foreign Sales Corporations [8]

 The U.S. Internal Revenue Code authorizes the establishment of foreign sales corporations (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. They have come to take advantage of the professional infrastructure and the excellent communications and transportation links between the USVI and the U.S. mainland, as well as for the tax benefits. Local benefits for FSCs include complete exemption from all local taxes[6] and Virgin Islands income taxes[5], except for a nominal annual franchise tax and license fee. Benefits are guaranteed by a contract with the government for up to thirty years.

FSCs are usually established with the assistance of a licensed USVI FSC management company, many of which have offices in the United States mainland as well.

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. A small FSC (one with export sales of $5 million or less annually) does not have to hold such meetings.

Small FSCs must pay a flat annual franchise tax to the USVI government of either $400 or $900 depending on the volume of sales. The annual franchise tax for regular FSCs starts at $1,000. Table of contents

Offshore Tax Planning[9]

 As a result of the generous tax exemptions available to foreign sales corporations[8] and USVI exempt companies[7], the USVI has become an offshore tax planning center. While foreign sales corporations are formed for the specific and limited purpose of saving taxes on export profits, USVI exempt companies are formed for numerous different purposes.

A USVI exempt company ought to be utilized rather than an offshore entity formed in another jurisdiction in any situation where U.S. flag protection is either desirable or essential to the purposes of the company.

For example, USVI exempt companies 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. Holding assets through a USVI exempt company covered by such treaties helps protect them from expropriation by an unfriendly government.

Another use for a USVI exempt company is where there is a desire to have access to United States courts for dispute resolution. By incorporating an exempt company in the USVI, the United States courts located in the Virgin Islands would generally have jurisdiction over disputes involving the company notwithstanding the fact that its business activities take place elsewhere.

USVI exempt companies are also useful as financing entities for foreign persons who are required by banks to keep accounts in U.S dollars in order to borrow money. This would be particularly appropriate if the country where the investment is to be made requires local entities to keep accounts in local currencies.

The USVI redomiciliation [4] statute can be used to move a tax-free company from another jurisdiction into the USVI.

USVI exempt companies can also be used by foreign persons who wish to register their aircraft[11] with the Federal Aviation Administration or to establish captive insurance companies[10]. Table of contents

Captive Insurance in the USVI[10]

 The USVI permits the establishment of insurance companies which are exempt from most local regulation so long as coverages do not involve USVI risks. 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 USVI 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 USVI trade or business.

The USVI 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. Table of contents

FAA Aircraft Registration by Foreign Owners Using USVI Exempt Companies[11]

 A USVI exempt company[7] may be used by foreign persons to own an aircraft registered with the U.S. Federal Aviation Administration. In order to meet the FAA requirements, the stock of the exempt company must be owned by a voting trustee who is a U.S. citizen. Using a USVI exempt company for this purpose is preferable to using a Delaware company (which is the traditional corporate vehicle) because, unlike a Delaware company, a USVI exempt company is free of federal income taxes. Table of contents

Obtaining U.S. Citizenship in the USVI While Avoiding U.S. Estate and Gift Taxes[12]

 In many cases the U.S. federal estate and gift tax apply in the USVI to U.S. citizens and permanent residents domiciled there at death or at the time of the gift. There is an important exception, however: the federal estate tax does not apply to property located outside the United States which would otherwise be part of the estate of an individual who acquired his or her U.S. citizenship as a result of birth or naturalization in the U.S. Virgin Islands or another U.S. possession, so long as the individual resides in the USVI at the date of death. There is a similar exception for the gift tax. For persons considering becoming naturalized U.S. citizens, this provides an attractive planning opportunity.

Property located in the USVI, or stock of a USVI corporation (including a USVI exempt company[7]) is not considered U.S.-situs property under the U.S. federal estate tax. Therefore it is not included in the estate of a non-resident alien of the United States. Table of contents

More Information and Assitance[13]

 The information on USVI business, taxes, tax incentives, and tax-free entities appearing on these pages was prepared by William L. Blum, Esq., a leading USVI tax and business attorney and a former counsel to the Governor of the USVI. He is also the author of several articles[14] on USVI taxes and tax planning which appear in leading tax publications. On request, Mr. Blum will provide additional free information on these subjects, including copies of articles and USVI laws and regulations. He is also available to provide assistance in business, tax, and tax planning matters involving the U.S. Virgin Islands. Mr. Blum can be reached by E-Mail at BillBNY@aol.com or as follows:

 

William L. Blum, 
Esq. Of
Counsel Grunert Stout Bruch & Moore 
P.O. Box 1030 
St. Thomas, V.I. 00804

Phone:	(809) 774-1320 (in St. Thomas)
	(718) 802-1273 (in New York City)
Fax:	(809) 774-7839 (in St. Thomas) 
	(718) 802-1760 (in New York City)
Additional information on the USVI Industrial Development Program can also be obtained directly from the USVI government as follows:

Industrial Development Commission
36C Strand Street - 2nd Floor Suite 2AB
P.O. Box 3499, Christiansted
St. Croix, V.I. 00822

Phone:	(809) 773-6499
Fax:	(809) 773-7701
Additional information on USVI taxes can also be obtained directly from the Virgin Islands Bureau of Internal Revenue as follows:

V.I.	Bureau of Internal Revenue
9601 Estate Thomas
Charlotte Amalie
St. Thomas, V.I. 00802
	
Phone:	(809) 774-5865
Fax:	(809) 776-4037

References to Published Articles[14]

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