Tax Savings in the United States Virgin Islands – the Basics

by Garvey Schubert Barer
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When many people think of the United States Virgin Islands (“USVI”), they think of beautiful beaches on secluded islands. This is certainly correct, but many people do not know that the USVI is also home to some of the most lucrative tax incentives available to American citizens and permanent residents. For decades, Congress has allowed the USVI the ability to grant tax incentives to individuals and businesses located in the USVI. The United States Department of the Interior, which administers territories such as the USVI, touts these incentive programs as providing for economic stability of the territory.

Below are the basics to understanding USVI’s taxation laws and its tax incentive programs:

  • "Mirror system" taxation. The USVI uses what is called a “mirror system” of taxation. Under this system, all of the tax laws in effect in the United States are “mirrored” to the USVI. Bona fide residents of the USVI do not pay income tax to the United States, rather, they file and pay their income taxes to the USVI. Congress granted the authority to the USVI to allow a lowered tax rate to bona fide residents of the USVI on income sourced to the USVI or effectively connected with a USVI trade or business.
  • Tax incentive programs. Currently, there are two agencies in the USVI that grant tax incentives: the Economic Development Commission and the Research and Technology Park, which is part of the University of the Virgin Islands.
    • These programs target different types of businesses, but the tax incentives are largely the same; both programs offer 90% income tax credits. This means that participants within the programs pay an effective 4% rate of income tax on eligible income. This is not an “offshore” program, so there is no subsequent repatriation of the funds into the United States. Rather, this program is a creature of United States tax law, and the money earned within these programs is considered fully taxed for United States purposes.
  • Requirements to be a participant of the tax incentive programs. Tax incentives are only available to bona fide residents of the USVI.
    • To be a bona fide resident of the USVI, an individual must: be physically present in the USVI (generally this means spending 183 days per year in the USVI, but there are other methods of fulfilling this requirement), have a primary office in the USVI, and have a closer connection to the USVI than any other jurisdiction.
    • Additionally, the tax credits are only available for income that is sourced to the USVI or effectively connected with a USVI trade or business and not sourced to the United States. Many of the most successful businesses in these programs are export services businesses – businesses that provide services to persons or entities, including related entities, outside of the USVI.

Because of the complex rules surrounding these incentives, it is inadvisable to attempt to take advantage of these programs without the assistance of an attorney knowledgeable in the federal and local laws that create the incentives. The most important factor in deciding to take advantage of the program is lifestyle; if you enjoy living in the Caribbean and you have a business that can, in whole or in part, be conducted from the USVI, you may want to consider these programs.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Garvey Schubert Barer | Attorney Advertising

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