The US Virgin Islands (USVI) is an unincorporated territory of the United States located approximately 1,100 miles southeast of Miami, Florida. Acquired from Denmark in 1917, the USVI is made up of the islands of St Croix, St John, St Thomas and Water Island, plus numerous uninhabited cays, with a total population of just over 100,000. The USVI uses US currency, and no exchange controls exist.
The USVI’s prime natural resources include pristine beaches, crystal-clear seas, a mild year-round climate, the natural harbour on St Thomas, the Virgin Islands National Park on St John, and the rainforest on St Croix. These assets, combined with the investment security of a US jurisdiction and a variety of federal and local incentives, have cemented tourism as the major local economic activity.
However, beyond tourism, the USVI is the location for a growing number of consulting businesses and technology businesses owned by US citizens who have moved to the USVI to take advantage of the USVI's specialised economic incentive programmes for entrepreneurs who want to move to, live and work in paradise. The USVI recently completed a long-term economic strategy and action plan (Vision 2040), with goals that include diversifying the territory’s economic base through growth in target industries including professional and technical services, research and development and health sciences.
The USVI also offers banks that are FDIC insured, and is covered by the United States’ extensive network of bilateral investment treaties (but not tax treaties). The USVI has two federal judges and is part of the Third Circuit Court of Appeals. It has direct flights to many mainland cities and is also attracting many yachts seeking a secure, well-located and attractive home base.
Tax System Overview
The Internal Revenue Code of 1986, as amended (the Code), applies in the USVI under a “mirror” system whereby the “USVI” is effectively substituted for “United States” wherever the latter appears. Consequently, the income tax provisions of the Code, the treasury regulations promulgated thereunder, and revenue rulings and revenue procedures issued by the Internal Revenue Service are generally applicable in the USVI, with certain limitations.
As a US territory, the USVI occupies a unique status; although it is part of the United States, it has been granted authority by the US Congress to enact special tax laws to encourage investment in business operations. The USVI therefore offers many opportunities for investors and especially entrepreneurs who seek a politically stable, low-tax jurisdiction, legitimate protection of their assets from taxes, and an enticing location with excellent telecommunications. The three major USVI incentive programmes available to entrepreneurs are as follows.
Economic Development Commission Program
Although recent events demand altered ways of doing business and new business models, the infrastructure to support hotels and tourism businesses (among others) in the USVI has largely been in place for 60 years through the Economic Development Authority (EDA) and its various investment programmes and their predecessors. The Economic Development Commission (EDC) Program, administered by the EDA, offers exemptions and reductions to entities qualified as EDC beneficiaries, as well as reductions to direct and indirect owners of entities qualified as EDC beneficiaries if the owners are bona fide residents of the USVI.
The EDA is governed by a seven-person board that includes both public and private sector representation. Benefits under the EDC Program include a credit equal to 90% of the otherwise applicable income tax, which applies both to the income from the benefitted business and to the bona fide USVI resident owners on their allocations or dividends. A USVI corporation pays an effective tax rate of approximately 23.1% on its eligible income, and with the 90% tax credit the effective rate is 2.31%. (Salaries and other forms of compensation, such as guaranteed payments, are fully taxable.)
Beneficiaries are also exempt from the territory’s 5% tax on gross receipts and from USVI property tax for the property occupied by the beneficiary for its approved business activities. No withholding tax is imposed on payments to US corporations or US-resident individuals. Beneficiary companies with foreign owners are exempt from withholding tax on interest payments and are subject to a reduced withholding tax rate of 4.4% on dividend payments overseas. Similarly, no income tax is withheld on interest paid to non-resident alien individuals, and the tax rate on dividends paid to non-resident individuals is 4%.
Beneficiaries receive an exemption from USVI excise tax on building materials and machinery used in the construction of their facilities, and on raw materials brought into the USVI to produce goods. In addition, a beneficiary’s customs duties are reduced from 6% to 1% on raw materials and component parts imported from outside the United States. No local customs duties are imposed on US-made products.
Finally, in order to be eligible for EDC Program benefits, the income must also satisfy applicable federal source and effectively connected income regulations as set out in Section 937(b) of the Code and the treasury regulations promulgated thereunder.
To qualify under the EDC Program, an applicant in a qualifying business must generally make a minimum capital investment of USD100,000 (exclusive of inventory) and must meet certain minimum employment requirements. Typically, a business must employ at least ten full-time employees, but financial firms are only required to employ five full-time employees and the EDA has the authority to lower the five employee minimum or to permit a business to have several years to meet the five employee minimum upon a showing of good cause. A full-time employee is someone who works at least 32 hours a week.
At least 80% of the beneficiary’s employees must be USVI residents, unless a waiver is granted. Beneficiaries must purchase goods and services locally when available, make certain contributions to scholarships and public education, and provide a plan for civic participation. Beneficiaries must also provide employee benefits and enact a management training programme.
The application process requires the submission of a detailed application including details of the beneficiary’s ownership, financial information and a background check for beneficial owners with more than a 5% interest. Submission of the application is followed by the application’s presentation at a public hearing before the EDC commissioners and review of the application by the EDC commissioners.
Upon approval by the EDC, benefits are available for initial periods of 20 years for investments on the islands of St Thomas and St John, and for 30 years on St Croix. Beneficiaries that invest more than USD10 million are eligible to receive an additional ten years of benefits, and beneficiaries that invest between USD1 million and USD10 million are eligible for an additional five-year term of benefits. Prior to the expiration of a benefits term, a beneficiary may seek an extension of 100% of benefits for an additional term of ten years.
Recent new hotel applicants under the EDC Program have committed to constructing low-density developments that are designed to promote environmental sustainability, low-impact construction and the ability for guests to physically distance. Other hotel beneficiaries have restored historic structures in the USVI with a view to showcasing local culture and traditions, using innovative building techniques designed to enhance urban redevelopment.
EDC beneficiaries in the recreational tourism industry have likewise evolved to accommodate the growing segment of environmentally conscious tourists who are focused on experience-based travel. These businesses include a marine park offering animal experiences and activities to families, and an eco-friendly zip line park offering its guests an adrenaline-fuelled scenic adventure.
Enterprise Zone Commission Program
Businesses seeking to invest in historic preservation have additional opportunities available through the Enterprise Zone Commission (EZC) Program, which is administered by the EDA and offers tax incentives to businesses investing in designated historic and commercial districts. The mandate of the EZC Program is to facilitate the investment of private resources in productive business enterprises located in severely distressed Enterprise and Commercial Zone areas on St Croix and St Thomas, and to provide jobs for the residents of these areas.
The EZC Program was recently amended by the USVI legislature to expand the designated Enterprise Zones on St Thomas and to extend the time within which the EZC can confer benefits to areas designated as “Commercial Zones”.
The benefits available to beneficiaries under the EZC Program include a non-refundable gross receipts tax credit or income tax credit of up to 25% of the actual value expended within a fiscal year for new construction or the rehabilitation of buildings or other real property within the Enterprise Zone. Beneficiaries of the EZC Program also receive a reduced gross receipts tax rate of 3% for gross receipts derived by the Enterprise Zone business, a one-time non-refundable USD500 income tax credit for each job created within the Enterprise Zone for which a USVI resident is hired, and a property tax credit equal to the increase in property taxes assessed due to the renovation, rehabilitation or construction of property within the Enterprise Zone.
To qualify under the EZC Program, an applicant must (among other things) make a minimum capital investment of USD10,000 and employ a minimum of two full-time USVI resident employees. The application process requires the submission of a detailed application including a description of the history and current condition of the property within the Enterprise Zone and details of the construction or rehabilitation efforts to be undertaken. Applications are considered by the EZC commissioners and, upon approval, benefits are available for a five-year period.
Recent EZC Program applicants have committed to rehabilitating historically significant structures that are blighted and at risk, with the goal of preserving history and encouraging growth and reinvestment in the USVI’s historic districts.
Research and Technology Park Program
The Research and Technology Park (RTPark) Program seeks to support the USVI’s expanding technology and knowledge-based sectors in order to promote the growth, development and diversification of the USVI economy. In addition, the RTPark works to broaden the capabilities of the University of the Virgin Islands (UVI) by providing it with financial support and training opportunities for UVI students, and by creating a supportive research environment that combines the resources of UVI with those of the public sector and private industry.
The RTPark Program is ideal for applicants engaged in health fields, energy and research and system development, business process outsourcing, financial technology, marine science and sustainability, especially where technological resources are critical elements. By way of illustration, RTPark beneficiaries currently operate in the areas of data analytics, web content development, interactive media management, e-commerce, software development and licensing, technology-based management and business process services, internet advertising, telecommunications and information technology, application development, financial technology and medical device technology.
Oversight of the RTPark Program is vested in the seven-member RTPark Board of Directors (the Board), which by statute includes the chairman of the UVI Board of Trustees and the president of UVI. The Board is vested with authority to review and approve or disapprove applications by potential beneficiaries, referred to under the RTPark Program as “Protected Cells”.
In most cases, an applicant, through a legal representative, negotiates the terms of their tenancy with the RTPark’s executive director. Negotiations include the amount of the one-time entry fee paid by the applicant (which is typically at least USD50,000 and up to USD100,000 depending on the size of the applicant), the applicant’s obligation to pay annual management fees to the RTPark (typically between 2% and 3.5% of the applicant’s gross income), the structuring of a charitable donation to UVI that can include scholarships, internships, faculty support, funds for specific programmes and in-kind contributions of time, and the percentage of equity interest to be awarded to the RTPark (which can be non-voting and have different distribution rights to what the other owners have). The payments are typically based on the size of the applicant and its projected financial revenues.
Once negotiations have been finalised, a term sheet is entered into between the applicant and the RTPark, and this provides the basis for the formal application that covers the applicant and its owners. After the application is submitted, the RTPark conducts a due diligence review. The final terms are ultimately memorialised in the Protected Cell’s Park Tenant Agreement, which is executed by representatives of both the applicant and the RTPark, and serves as the operative document defining the relationship between the Protected Cell and the RTPark. Each RTPark application requires a USD2,500 application fee and a USD4,000 background-check fee that covers two individuals.
Benefits under the RTPark Program are initially available for 15 years and can be renewed for an initial renewal period of ten years, followed by subsequent renewal periods of five years, subject to Board approval. As with the benefits under the EDC Program, the RTPark offers numerous tax exemptions and reductions, the most notable of which is a 90% reduction on tax liability for the business and also for direct and indirect owners of beneficiaries if the owners are bona fide residents of the USVI. Furthermore, a Protected Cell in the RTPark receives a 90% tax credit against its income tax liability on income from the business for which benefits are granted. Such income must be effectively connected with conducting a USVI trade or business under Sections 934(b)(1) and 937 of the Code. For a corporate Protected Cell, the reduction results in an effective tax rate of approximately 2.31% on eligible income. If the beneficiary’s owners are individual residents of the USVI, they will receive the reduction on their dividends or allocations. Salaries, however, are fully taxable.
No withholding tax is imposed on payments to US corporations or US individual residents. Furthermore, RTPark beneficiaries with foreign corporate owners are exempt from withholding tax on interest payments and enjoy a reduced withholding rate of 4.4% on dividend payments overseas (while the withholding rate on non-resident individuals is 4%). In addition, the tax rates on royalties paid to non-resident individuals or foreign corporations are 4% and 4.4% respectively. The withholding tax is paid by the withholding agent (typically the RTPark beneficiary) to the Virgin Islands Bureau of Internal Revenue (BIR) on Form 8109 and then reconciled annually on Form 1042.
As with the EDC Program, beneficiaries receive an exemption from USVI gross receipts tax, which is otherwise imposed at 5% on the gross receipts of a business, with no deductions. However, this exemption does not apply to gross receipts from business activities that are not covered by a beneficiary’s grant of RTPark benefits. Moreover, the BIR requires each beneficiary to report its gross receipts (monthly, assuming annual gross receipts of more than USD225,000) on Form 720 VI, and then indicate that the beneficiary is exempt from payment of the tax pursuant to its status as an RTPark beneficiary.
Beneficiaries receive an exemption from USVI excise tax on building materials and machinery used in the construction of their facilities and on raw materials brought into the USVI to produce articles. Otherwise, a tax ranging from 2% to 25% applies to the fair market value of many items. In addition, several statutory exemptions from excise tax apply regardless of beneficiary status.
Beneficiaries receive an exemption from the USVI property tax, although the personal homes of beneficiary owners do not receive the property tax exemption, even if the respective owners maintain home offices. Moreover, if a beneficiary rents an office, the property tax exemption does not pass through to its landlord.
Because the USVI is outside the US customs zone, it has enacted its own customs law, imposing a 6% duty on items that are not manufactured in the United States. An RTPark beneficiary’s customs duties are reduced from 6% to 1% on raw materials and component parts imported from outside the USVI. Materials made in the United States are exempt from any customs duty. As with the excise tax, several statutory exemptions from customs duties apply, regardless of beneficiary status.
The RTPark Program also includes a start-up accelerator, known as Accelerate VI, which promotes local entrepreneurs to develop and grow businesses that fit within the USVI tech industry. The RTPark screens applications to Accelerate VI and the founders of each business in Accelerate VI are coupled with mentors and industry experts to help in expanding the business until it becomes a “regular” RTPark beneficiary.
Manufacturing and Agriculture as Growth Sectors
Commercial agriculture, fishing and manufacturing constitute growing sectors of the USVI economy, particularly as the interests of leisure travellers have evolved to include the desire to access locally sourced food items in support of the farm-to-table movement and to engage with producers of locally made items.
The USVI legislature has provided a number of tax benefits and economic incentives to encourage agriculture, including the Farmers, Fishermen and Consumers Assistance Act, which gives certain tax exemptions to the farming and fishing industry, including an exemption from gross receipts tax on sales of products derived from the agricultural business. The EDC Program includes agriculture, food processing, product assembly and manufacturing as eligible activities. Furthermore, the USVI Economic Development Bank, which is administered by the EDA, provides low-interest loans and micro-credit for USVI farmers and fishers, and farmers can qualify for property tax exemptions on agricultural land. Additionally, the RTPark Program can provide benefits to applicants interested in conducting research and development in agriculture as well as technology-based manufacturing and related activities.
Current beneficiaries of the foregoing programmes include not only farmers and fishers, but also local brewing companies and distilleries, some of which incorporate local botanicals and locally grown produce in their production processes.
Finally, in October 2020 the USVI legislature enacted the Virgin Islands South Shore Trade Zone Act of 2020 (SSTZ Program), which designates 3,000 acres on the south shore of St Croix as an enterprise zone and entitles approved applicants under the SSTZ Program to a credit equal to 90% of the otherwise applicable income tax, in addition to exemptions from the gross receipts tax, property tax, excise taxes and customs duties. The stated goal of the SSTZ Program is to designate an area that eliminates traditional barriers to commercial trade and investment in support of light manufacturing, trans-shipment, industrial development and the territory’s blue economy initiative. Among other requirements, an applicant in a qualifying business must make a minimum capital investment of USD100,000 (exclusive of inventory) and employ a minimum of ten full-time employees and one paid apprentice. The SSTZ Program will be administered by the EDA, and benefits under the programme will be available for a 20-year term.
Opportunity Zones and New Market Tax Credits – Federal Benefits for USVI Investments
A number of US programmes are available for investors in the USVI. The Tax Cuts and Jobs Act was passed in December 2017 and established the Opportunity Zone Program, which provides immediate and long-term tax advantages to US investors in Opportunity Zones. The Opportunity Zone Program was created to encourage private investment in economically distressed neighbourhoods by offering investors access to new capital gains tax incentives in exchange for placing qualified investments in Opportunity Zone communities. Investors can defer capital gains taxes on earnings from many types of investments up to 2027, can reduce taxes on the capital gain invested into an Opportunity Fund by 10%, and can gain permanent exclusion from capital gains taxation on Opportunity Fund investments held for at least ten years. The USVI has 14 designated Opportunity Zones incorporating half of St Croix, including the cities of Christiansted and Frederiksted, and significant portions of St Thomas, including the capital city of Charlotte Amalie, and Water Island.
The USVI is also eligible for the New Markets Tax Credit, established in 2000. New Market Tax Credits provide capital to community development entities; in exchange, investors are awarded credits against their federal tax obligations. Investors can claim allotted tax credits up to a total of 30% of the project.
Other tax credits, such as the 20% income tax credit for preserving historic properties, and income tax credits for owners of certain newly constructed or substantially rehabilitated low-income rental housing projects, are also available in the USVI.
It should be noted that, in some cases, investors can combine investments under multiple programmes, such as combining an investment under the Opportunity Zone Program with an investment that qualifies for the Economic Development Program or the Enterprise Zone Program. However, since the USVI is considered foreign to the United States for many tax purposes, it is critical to carefully structure investments in the USVI by bona fide non-USVI residents to avoid having the USVI investment be a controlled foreign corporation.
Choice of Entity
The USVI provides many options when choosing to form a legal entity within the jurisdiction, including corporations, limited liability companies and partnerships, such as general partnerships, limited partnerships, limited liability limited partnerships and limited liability partnerships.
The most commonly formed entity in the USVI is the limited liability company (LLC). The USVI has adopted the Uniform Limited Liability Company Act, and the formation and governance of an LLC are similar to that imposed in the 50 states and the District of Columbia.
With the exception of general partnerships, which are formed simply by the agreement of the partners, all entities are formed through filings with the Office of the Lieutenant Governor of the USVI, Division of Corporations & Trademarks. Federal law, including the Securities Act of 1933 and the Securities Exchange Act of 1934, applies in the USVI. Additionally, the USVI has adopted the Uniform Securities Act for territorial-level securities regulations. As mentioned, careful consideration should be taken when structuring business operations in the USVI, including the choice of entity, along with tax elections available under the Code.
Many of the USVI economic incentives and related programmes provide personal tax benefits for bona fide USVI residents on their allocations or dividends. To be a bona fide USVI resident, a person must meet one of five alternative physical presence tests each year, have a closer connection to the USVI than any other location, and have a USVI tax home. The most-used “physical presence” test involves being in the USVI for all or part of 183 days in a given year; however, individuals that travel frequently can satisfy the physical presence test by spending no more than 90 days in the United States each year or by not having a significant connection to the United States at any time during the year (like having a home or children located in the US). The establishment of a “closer connection” involves such factors as having a home, filing returns as a USVI resident, obtaining a USVI driver’s licence, registering to vote and voting in the USVI, and having a USVI bank account, although no single factor is determinative. A “tax home” is an individual’s principal place of business. In most cases, the individual must be a bona fide resident of the USVI for the entire year in order to get benefits on their income from the benefitted business.
Applicability of the Net Investment Income Tax
Finally, Section 1411 of the Code imposes a Medicare contribution on unearned income and specifically imposes a tax equal to 3.8% of an individual’s net investment income for a taxable year. The Treasury Regulations promulgated under Code Section 1411 provide that bona fide residents of US territories are subject to the tax only if they have a US income tax filing requirement. However, bona fide residents of the USVI have no income tax obligation (or related return filing requirement) with the United States, provided that they properly report income and pay income tax to the BIR. Therefore, the tax imposed by Code Section 1411 does not apply to bona fide residents of the USVI because they will not have an income tax liability to the United States if they fully comply with the tax laws of the USVI.