The legal system of the United States Virgin Islands (USVI) is, in most respects, similar to the legal systems of the 50 states of the United States of America. Federal sources of law, such as the Constitution of the United States, statutes enacted by the US Congress, regulations promulgated by US administrative agencies, and executive orders issued by the President of the United States, are generally applicable in the USVI. However, because the USVI is an unincorporated territory of the United States, Congress may vary the applicability of most federal laws in the USVI in a way that deviates from the 50 states. For example, the USVI constitutes a separate customs zone with different tariff rates from the rest of the United States (based on the Danish customs law in effect when the United States purchased the USVI from Denmark in 1917), and Congress has authorised unique variations in the federal income tax laws in the USVI that differ from the uniform federal income tax laws in the 50 states. However, overall, the USVI operates under a mirror tax code with the US Internal Revenue Service (IRS), meaning that the USVI has adopted the Internal Revenue Code of 1986, as amended, and the applicable Treasury Regulations, as its own code pursuant to the Naval Services Appropriation Act of 1922, 48 U.S.C. 1397 (the “Code”). Section 1397 specifically provides that taxes will be paid to the USVI. This is further expanded in other statutes and regulations, including Section 932(c), which specifies that bona fide residents of the USVI pay income taxes on their worldwide income to the USVI Bureau of Internal Revenue (BIR).

Congress has, through the Revised Organic Act of 1954, as amended, and its predecessor Organic Acts, also established a territorial government for the USVI that includes a locally elected Governor, a locally elected unicameral legislature and locally created administrative agencies – as well as a judicial system, discussed below. The USVI Legislature may enact general statutory laws for the territory (subject to the veto of the Governor) to the extent they do not conflict with federal law. The Legislature may also grant rule-making authority to the local executive agencies, and the Governor has the power to issue executive orders.

The judicial system in the USVI comprises both federal and local courts (previously referred to as “territorial courts”). The jurisdiction of the federal District Court of the Virgin Islands is substantially similar to that of the federal district courts in the 50 states. However, because Congress established the District Court of the Virgin Islands pursuant to its authority under Article IV of the US Constitution rather than Article III, there are some important differences. For example, the District Court has exclusive jurisdiction over questions of income tax in the USVI and may preside over some criminal cases based on local law. Decisions of the District Court are appealable to the US Court of Appeals for the Third Circuit (headquartered in Philadelphia, Pennsylvania) and, ultimately, to the Supreme Court of the United States, similar to cases arising from Delaware, Pennsylvania and New Jersey.

In parallel with the federal District Court, there is a two-tier territorial judiciary. The Superior Court of the Virgin Islands is the trial court of general jurisdiction that presides over both criminal and civil cases, as well as appeals from territorial administrative agencies, and has a specialised division for family cases, including juvenile matters. The Superior Court also has a magistrate division that presides over probate matters, landlord–tenant disputes, small claims, traffic violations and certain misdemeanours. Decisions of the Superior Court are appealable to the Supreme Court of the Virgin Islands. The Supreme Court was established in 2004 by the Legislature and began exercising its authority in 2007. Decisions of the Supreme Court are appealable to the Supreme Court of the United States. Like most of the 50 states, the USVI follows the common-law tradition in which judge-made case law informs legal decision-making. The USVI previously followed the Restatements of the Law published by the American Law Institute. However, since the USVI Supreme Court case Banks v International Rental & Leasing Corp., 55 V.I. 967 (V.I. 2011), the common-law principles are now established through a legal analysis by the court as outlined in Banks, and the legal analysis may still determine that the Restatement of the Law is the best rule.

The USVI is part of the United States, so federal statutes governing foreign investment in the United States, such as the Foreign Investment Risk Review Modernization Act of 2018 and the regulations promulgated thereunder, apply in the USVI.

Additionally, the USVI is included within the definition of “United States” in the United States’ extensive network of Treaties of Friendship, Treaties of Commerce, and Navigation and Bilateral Investment Treaties, officially known as Treaties Concerning the Encouragement and Reciprocal Protection of Investment. These treaties provide a number of important benefits, most notably protection in the case of expropriation. As a note, the US International Trade Administration lists the Bilateral Investment Treaties currently in force between the United States and other countries. In contrast, the USVI is not included in the United States’ network of income tax treaties (nor are other US territories) and is not able to enter into its own tax treaties. However, the USVI has agreements with the United States for the exchange of information relating to taxes, namely, the Tax Implementation Agreement Between the United States of America and the Virgin Islands, dated 24 February 1987, and IRS Notice 2007-31, which includes the Working Arrangement.

Legislating Foreign Investment and Growth in Particular Sectors

The USVI does not have separate legislation or other rules limiting foreign investment in the USVI. Foreign businesses, like other businesses, must register to do business with the Office of the Lieutenant Governor and obtain the appropriate approvals and licences for their business. The USVI as an unincorporated territory is also subject to the federal review process for any merger, acquisition or real estate transaction that involves critical infrastructure, sensitive personal data, or proximity to a military or government site (a “CFIUS review”). The USVI has local laws that address mergers and acquisitions as well.

Not only does the USVI have few prior-approval or criteria requirements for foreign investment, the USVI has enacted a number of economic incentive programmes to attract US and foreign investors to work and invest in the USVI. These programmes are generally, but not always, managed by the Virgin Islands Economic Development Authority (EDA), which actively seeks investment in certain USVI sectors. Examples of incentive programmes in the USVI include the Economic Development Commission (EDC), the University of the Virgin Islands Research and Technology Park (“RTPark”) and the South Shore Trade Zone (SSTZ) programmes.

Eligible EDC beneficiary industries are outlined in 29 V.I.C.  § 708 and include multiple categories:

• “Legacy Virgin Islands Industries” – such as rum distilling, watch and jewellery manufacturing, and milk/dairy production;
• “Product Assembly, Manufacturing, Repair and Maintenance and/or Export Operations”;
• “Facilities, Tourism and Communications Developments – including Hotels/Guesthouses, Health Care, Recreation and Retirement Facilities, Transportation, Utilities (including Alternative Energy Industry), and Telecommunication”;

• “Designated Services Businesses”, as defined in 29 V.I.C. § 703(g), which includes, among other listed businesses, investment managers, trading services, financial services, medical services, and other businesses serving clients outside the USVI as deemed appropriate by the EDC; and

• “International Financial Service Entities”. Under 29 V.I.C. § 708(t), applicants in this category are exempt from most of the regulations governing other EDC entities but must comply with provisions of the International Banking Center Regulatory Act.

The SSTZ Program provides incentives for investment in the industries of production, warehousing, trading, transportation and forwarding, fairs and expositions (hotels, training and conference facilities), financial and credit services, think tanks, etc, within a designated area along the south shore of St. Croix. The RTPark Program provides investment incentives for companies with a focus on technology, research and science, or fields that are extensively “knowledge or skills based”.

While these programmes do not limit foreign investment generally, they each have their own rules and regulations, and application and approval processes, to qualify for admittance into the programmes and subsequent benefits. The EDC and SSTZ Programs require that applicants be approved by the EDA, a USVI government entity, and the RTPark Program requires approval of the RTPark Board, a quasi-government entity. Both the EDA and RTPark Programs have continuing compliance commitments related to ownership structure, legal documentation and financial reporting.

Lastly, foreign investors in USVI real estate are subject to the Foreign Investment in Real Property Tax Act of 1980, which is codified in Sections 897 and 1445 of the Code.

There are no specific steps for foreign investors to follow in order to obtain approval before investing, although investors in real estate may be subject to the withholding percentage of real-estate purchase price. The businesses themselves may be subject to CFIUS review if involved in the sectors mentioned in 2.1 Approval of Foreign Investments. If a business is a banking (including a foreign bank), insurance or financial services entity, then it is subject to licensing and regulation by the Virgin Islands Division of Banking, Insurance & Financial Regulation, which is administered by the Office of the Lieutenant Governor and/or the Virgin Islands Banking Board, of which the Lieutenant Governor serves as the Chairman, but this is not necessarily specific to foreign investors.

For investors that want to invest with the benefits of a tax incentive programme, eg, the EDC or RTPark Program, applicants must apply for benefits and be approved through those respective programmes.

Foreign investment itself is not conditioned upon certain commitments, although those seeking to benefit from one of the USVI incentive programmes have certain commitments relating to local employees, using local businesses, charitable contributions, etc, which are generally statutory and apply to all applicants.

All USVI exempt companies (as described in 3.1 Most Common Forms of Legal Entity) must still file a specific annual report and annual franchise tax report prescribed by the Lieutenant Governor for exempt companies and pay an annual franchise tax of USD1,000. See 13 V.I.C. § 860.

USVI companies have access to the US court system for dispute resolution. The District Court of the Virgin Islands operates no differently from the district courts in the 50 states, and it is in the Third Circuit – the same as Delaware. Moreover, cases can be heard in the Superior Court of the Virgin Islands.

Beneficiaries under the EDC Program can request modifications, extensions, renewals or waivers under the Program. See, eg, 29 V.I.C. § 715. Additionally, applicants and beneficiaries of the Program can appeal any actions of the EDC in the Superior Court of the Virgin Islands. See 29 V.I.C. § 724.

Like the United States, the USVI primarily uses corporations, limited liability companies (LLCs), general partnerships, limited liability partnerships (LLPs) and limited liability limited partnerships (LLLPs).

Under 13 V.I.C. § 62, corporations must have at least three directors (unless the corporation has fewer than three shareholders), and under § 69 any two offices (but not more than two) other than those of president and secretary may be held by the same person. LLCs may be formed by one member, while LLPs require at least two partners. In our experience, most entities are LLCs or LLPs, which limit the liability of their members or partners. Some persons may prefer LLPs depending on their initial capital, as under 13 V.I.C. § 531 every USVI or foreign corporation doing business in the USVI must pay an annual franchise tax of USD1.50 for each USD1,000 in “stock, capital, and paid in capital stock used in conducting business in the [USVI]”. However, an LLP pays a flat annual franchise tax of USD150.

LLCs are the most common entities and are well-suited for a wide range of business activities while providing their members with flexibility in governance. For example, LLCs do not require mandatory annual meetings or the appointment of directors or officers, and, other than certain statutory fiduciary duties (duty of loyalty, duty of care, the obligation of good faith and fair dealing, and access to books and records), an LLC’s operating agreement may differ from the provisions found in the LLC Act.

The V.I. Code specifically provides for foreign corporations, foreign LLCs and foreign limited partnerships doing business in the USVI. See 13 V.I.C. §§ 401–407; 13 V.I.C. §§ 2001–2009; 26 V.I.C. §§ 521–528.

On 8 December 1986, the Legislature enacted the exempt companies’ legislation, which subsequently went into effect on 24 February 1987, upon the signing of the Tax Implementation Agreement Between the United States of America and the Virgin Islands. On 17 August 1993, then-USVI Governor Alexander Farrelly signed into law the Exempt Company Amendments Act of 1993, which made significant changes to the USVI exempt companies’ legislation to enhance the use of exempt companies by foreign investors.

USVI exempt companies offer many of the benefits of other offshore jurisdictions’ international business companies but with the added advantages of US flag protection, access to US courts, non-coverage of the Common Reporting Standard, and the ability to obtain an “N” registration number from the US Federal Aviation Administration for foreign-owned aircraft.

The V.I. Code (13 V.I.C. §§ 850–863) provides for exempt companies. According to § 855, most exempt companies are treated as “a foreign corporation which does not earn United States Virgin Islands source income and which is not engaged in trade or business within the United States Virgin Islands”. However, an exempt insurer, exempt mutual fund or exempt international banking facility has additional provisions that relate to its exempt status. A USVI exempt company offers foreign investors substantial tax benefits. An exempt company is effectively exempt from tax on all income except for income derived from US sources and effectively connected with a US trade or business. A USVI exempt company is exempt on interest income received on deposits with banks or savings institutions located in the USVI or abroad, as well as on amounts held by an insurance company under an agreement to pay interest on the amounts. USVI exempt companies are also exempt from tax on dividends and interest received from another exempt company and on gains or losses from the sale, exchange or other disposition of the stock of another exempt company. They are also exempt from all local USVI taxes, shareholders of a USVI exempt company are not subject to any withholding tax, and stock held by a non-resident alien individual in a USVI exempt company is not subject to federal estate tax or to USVI inheritance tax, so use of a USVI exempt company can be an important estate planning tool for foreign individuals. Such individuals can place their worldwide assets in a USVI exempt company to obtain the many benefits such an entity provides without subjecting those assets to any estate tax liability.

Moreover, most exempt companies are exempt from licensing unless certain circumstances are met, except that exempt insurers and exempt international banking facilities must be licensed. Exempt companies can request to enter into a contract signed by the Lieutenant Governor providing for the tax exemption benefits for 20 years, provided the exempt company remains in compliance with all USVI laws, regulations and rules and current with any USVI taxes and fee payments.

Standard corporations, LLCs and exempt companies must have a minimum amount of USD1,000 in capital to commence business. See, eg, 13 V.I.C. § 2; 13 V.I.C. § 1203.

The Office of the Lieutenant Governor, Division of Corporations & Trademarks, serves as the registry for all corporate filings in the USVI. To incorporate, companies must generally provide the name of the corporation; verify whether their intended name is currently in use or not; describe the nature of the business; provide a physical and mailing address and a registered agent address; name the partners, members or directors along with their titles and physical and mailing addresses; list the amount of capital of the company and the Par Value of the company; list the amount of shareholders; provide copies of government IDs; and indicate whether the application is to be expedited or not expedited.

Effective in 2018, the Division of Corporations & Trademarks implemented an electronic filing system for entity formations and registrations. With the exception of exempt LLCs, which require paper filings, all entity formations, registrations and annual reporting requirements must be submitted to the Division using the Division’s online system, Catalyst. Applications are submitted through the Catalyst online portal. It generally takes one to three days to determine name availability. Checking name availability with the United States Patent and Trademark Office (USPTO) and the local Division of Corporations & Trademarks takes only about 20 minutes. Expediting filings take one to three days for registration and formation. Regular registration and formation takes about seven to 20 days. It takes six to eight weeks for business licence approval.

Each USVI (and foreign) corporation, including LLCs, must file an “Annual Report on Domestic or Foreign Corporations” and a “Report of Corporation Franchise Tax Due” with the Office of the Lieutenant Governor, Division of Corporations & Trademarks. The Annual Report is due by 30 June of each year. The annual franchise tax due is based on the type of entity created under USVI law. For example, LLCs pay a minimum of USD300 annually, based on their capital.

Moreover, the different domestic and foreign entities in the USVI, eg, corporations, LLCs, limited partnerships, etc, have various requirements for filing changes with the USVI.

Corporations can either be one-tiered or two-tiered. Generally this comes down to the purpose, size and scope of the company and whether it is a foreign entity registering to do business in the USVI or a new company. The most common framework is a one-tier structure with founders, executives and management board members also running the day-to-day operations. Within the most common entity, an LLC, there is generally at least one member, and an LLC may be either member-managed or manager-managed.

Directors and officers have protection from personal liability so long as they are acting in good faith. The USVI does have a “wilful misconduct” exception codified in 13 V.I.C. § 809 in which directors and officers may be responsible for losses that were occasioned by their wilful misconduct. Further, corporate limited liability does not extend to situations of fraud or failure to maintain a corporation’s separate legal identity (eg, commingling of corporate funds with the personal funds of shareholders), or consistent failure to follow corporate formalities (eg, failure to hold annual meetings of shareholders and directors and failure to appoint officers on a consistent basis). In such situations, courts in the USVI do allow a suit against a corporation’s stockholders if doing so prevents fraud or gross injustice to third parties.

USVI courts have adopted the equitable remedy of “piercing the corporate veil”, with the seminal case for the current remedy being Donastorg v Daily News Publishing Co., Inc., 63 V.I. 196 (2015). However, USVI courts view it as an extraordinary remedy that must be proved by the injured party by clear and convincing evidence and only when the case involves fraud, would promote injustice and/or involved an unlawful act that directly harmed the plaintiff.

Statutory law governing employment and employer–employee relations is the basis of the employment relationship. The USVI laws governing the employment relationship are derived from US federal laws, such as the Fair Labor Standards Act, and territorial statutes, rules and regulations governing occupational health and safety, labour relations and employment discrimination. Case law further provides particular guidelines in the way of equitable remedies or in situations where statutory language is silent or ambiguous, such as in non-compete clauses. In 2019, the Superior Court of the Virgin Islands held in Arvidson v Buchar, 71 V.I. 277 (V.I. Super. Ct. 2019), that a covenant not to compete was invalid and unenforceable when not only did it fail to make clear what legitimate business interests it was created to protect, it did so without giving a durational restriction, a territorial restriction and a manner restriction, and it could not be equitably reformed, as supplying the time, place and manner terms would equate to the court supplying the essential terms of the covenant.

The USVI protects collective bargaining by employees, as found by statute in 24 V.I.C. § 64, as well as protecting employees through safety, labour relations and employment anti-discrimination laws. The Virgin Islands Department of Labor (DOL) and the Virgin Islands Public Employees Relations Board are two territorial agencies that oversee non-union employer–employee relations in the USVI. Oversight of union relations is provided by the federal National Labor Relations Board, Region 12.

In addition to collective bargaining and employee protection laws, employment may be limited by other laws to protect employees, such as the USVI Labor Relations Act, the USVI Plant Closing Act and, as discussed in 4.4 Termination of Employment Contracts, the USVI Wrongful Discharge Act. Additionally, some labour laws in the USVI provide for preferential hiring of qualified residents of the USVI before hiring qualified non-residents.

Lastly, any arbitration agreement must not limit the remedies that an employee would have available in court. Pre-dispute waivers of remedies or substantive protections written into an arbitration agreement by the employer are not enforceable and are against public policy. Employees retain the right to elect arbitration at the time a dispute arises, or for a reasonable time thereafter. There can be nothing in the agreement to unfairly limit the employees’ access to arbitration due to economic reasons. If an employee cannot afford arbitration, the employer must absorb the expense, if both parties agree to arbitration.

Lastly, the DOL is mandated to assist resident workers in the USVI to obtain, safeguard and protect their preference to be employed in occupations and industries in the USVI. One way the DOL does this is by requiring employers in the USVI to submit job openings on the Virgin Islands Electronic Workforce System (VIeWS).

Employment contracts can be written, verbal or implied, so long as there is an offer, an acceptance and consideration. Contracts may be implied or expressed, and each party has a duty of good faith and fair dealing in performance and enforcement. Employment contracts usually state terms relating to the date of commencement of employment and date of termination of employment or terms of renewal of the contract, wages to be paid, benefits to be provided by the employer to the employee, circumstances in which the employment contract may be terminated, avenues of resolution of contract dispute, language relating to confidentiality, non-compete and other terms specific to the employer’s business.

The DOL regulates employment contracts along with payment of required minimum wages and tipped wages, meal and rest period requirements for certain circumstances, employment discrimination, sexual harassment and child labour laws.

Working time is governed by the USVI Fair Labor Standards Act, 24 V.I.C. § 20, which mandates generally a 40-hour work week, no more than five consecutive work days, and no longer than eight-hour workdays, unless overtime hours are paid as calculated at a rate of no less than 1.5 times the regular rate at which the employee is employed. The USVI recognises exemptions to these rules for restaurant or tourist industry workers. Some salaried workers are exempt from minimum or maximum working time, including executives and certain professional workers whose work requires advanced knowledge or skill.

Additionally, other workers may not be included as “employees” for the purpose of working time requirements such as: an individual employed in domestic service in a private home; an individual employed by the United States, or by the USVI Government or any instrumentality thereof; an individual engaged in the activities of an educational, charitable, religious or non-profit organisation where the employer–employee relationship does not, in fact, exist or where the services rendered to such organisation are on a voluntary basis; or an individual employed as a seaman or engaged in the catching, taking or selling of any fresh fish, shellfish or crustacea.

The USVI has adopted the Wrongful Discharge Act detailed in 24 V.I.C. § 76, which provides nine grounds for appropriate discharge, for example, performing work in a negligent manner, advancing the interests of a competitor, or incompetence. Moreover, the law does not prevent termination of an employee due to cessation of business or general cutback because of economic hardship. If wrongfully terminated, the employee can timely appeal their termination to the Commissioner of Labor, who can conduct an investigation, hold hearings and, if the employee was wrongfully terminated, order they be reinstated with back pay. These orders can then be taken to the Superior Court of the Virgin Islands, which can enforce, modify or set aside the order of the Commissioner.

Additionally, under the USVI Plant Closing Act, an employer with fewer than 1,000 employees that is closing a facility, planning a relocation or any other action resulting in an employment loss is required to provide a 90-day advance written notification to the DOL and to the affected employees, and their union, as applicable. For an employer with more than 1,000 employees, 180 days’ advance notification must be given.

In case of a mass layoff that will not result in a plant closing, the employer must give at least 30 days’ advance notification of the mass layoff to any affected employees and their respective labour unions, and at least ten days’ advance notification to the DOL. An employer is not required to provide notice of a mass layoff, relocation or employment loss if it results from a physical calamity or an act of terrorism or war. Severance pay to the affected employees must equal one week’s pay for every year of service with the employer in addition to any final wage payment owed to the employee.

There is no requirement that an employee be represented. Union employees may be represented by their union representative, and union representatives designated or selected by a majority of employees for collective bargaining are the exclusive representatives of all employees in the union for negotiations on employment contracts.

Employers must follow federal labour laws when it comes to informing employees, such as National Labor Relation Acts Postings and Occupational Safety and Health Act Postings.

As previously touched on, the Code applies in the USVI as the USVI tax code through the use of a substitution scheme known as the “mirror” system. Pursuant to the mirror system, the words “Virgin Islands” are substituted for the words “United States” wherever they appear in the mirror Code. Also under the mirror Code, “any changes to, interpretations of, regulations and revenue rulings on and court interpretations of the substantive tax provisions of the Internal Revenue Code are applicable to Virgin Islands tax cases as long as the particular provision at issue is not manifestly inapplicable or incompatible with a separate territorial income tax...”

The Code contains several sections – notably Sections 932, 934 and 937 – that deal specifically with the USVI and, more particularly, govern the extent to which the USVI can grant tax incentives and how USVI residents and persons with USVI source income file their income tax returns. Guidance contained in IRS Publication 570 (Tax Guide for Individuals with Income from US Territories) discusses the filing requirements of USVI residents and US citizens and residents with USVI source income, and is updated annually.

Individuals who perform work in the USVI but are not bona fide residents of the USVI are required to file Form 1040 with the IRS and with the BIR and, on the return filed with the BIR, include IRS Form 8689 (Allocation of Individual Income Tax to the U.S. Virgin Islands) to allocate taxes for income earned in the USVI to the BIR. Often, this allocation is made based on the time spent working in the USVI. Taxes on USVI income are then paid to the BIR and other taxes are paid to the IRS with a credit given on the return filed with the IRS for income taxes paid to the BIR.

Individuals who are bona fide residents of the USVI during the entire taxable year pay the full amount of their tax liability on their worldwide income to the USVI tax authorities (the BIR). An employee who performs above a minimum threshold of work in the USVI that qualifies as USVI source income is subject to taxation. Guidance for filing by USVI residents and non-residents of the USVI with USVI source income is provided in IRS Publication 570, “Tax Guide for Individuals With Income from U.S. Territories”.

Employers that have USVI employees must pay Federal Insurance Contributions Act (FICA) taxes, which are also referred to as Social Security and Medicare taxes, to the IRS. Starting in 2024, employers pay FICA taxes using Form 941 (Employer’s Quarterly Federal Tax Return), but do not answer questions regarding US income tax withholding – unless they have an employee who is subject to such withholding – because income taxes for USVI employees are paid to the BIR on Form 941 V.I. (Employer’s Quarterly Virgin Islands Tax Return).

Additionally, employers must pay USVI and US unemployment insurance taxes as well as USVI workers’ compensation insurance.

Income tax is withheld from the pay of most employees. An individual’s pay includes their regular pay, bonuses, commissions and vacation allowances. It also includes reimbursements and other expense allowances paid under a non-accountable plan.

If an individual’s income is low enough, such individual will not have to pay income tax for the year and may be exempt from withholding. Each individual has the responsibility of requesting their employer to withhold income tax from non-cash wages and other wages not subject to withholding. If such employer does not agree to withhold tax, or if an insufficient amount of tax is withheld, the individual may have to pay an estimated tax to the BIR.

In addition, FICA is made applicable by specifically defining “United States” to include the USVI for purposes of the Old Age, Survivors and Disability Insurance (OASDI, also known as Social Security) and hospital insurance taxes (“Medicare”). Also, FICA taxes on self-employment income apply. These taxes are paid to the IRS and not the BIR because they are not “mirrored” to the USVI. The IRS has specific authority to administer and collect these taxes in the USVI.

The FICA taxes are imposed in equal percentages on both the employer and the employee. The employer collects the employee’s percentage via withholding. The Social Security tax rate is 6.2% on annual wages up to a maximum of USD184,500 for 2025. The Medicare tax rate is 1.45% on all wages without limit. Self-employed individuals are required to pay the employer’s percentage of FICA tax in addition to their own. Additionally, individuals who make over a certain amount (based on filing status) pay an additional 0.9% in Medicare tax. There is no employer match for this additional Medicare tax, but the employer is responsible for withholding the 0.9% once an employee’s wages exceed USD200,000 in a year (regardless of filing status).

In the case of an individual who is not a bona fide resident of the USVI, the taxation depends on whether the person is a US citizen or US resident or a resident of a foreign country.

In the case of a resident of the United States (US citizen, resident alien, or a person meeting the physical presence test set out for aliens who do not have a green card in the United States) deriving USVI source income, or income effectively connected with a USVI trade or business, the person must file a return with the IRS and the BIR, and a credit is granted against the US tax liability for taxes paid to the BIR. The person must sign each return and must attach Form 8689 (Allocation of Individual Income Tax to the U.S. Virgin Islands), which is used to allocate income and tax liability between the United States and the USVI.

A non-resident of both the USVI and the United States who is engaged in a trade or business in the USVI must pay tax on the income effectively connected with that USVI trade or business. The person must file a return with and pay tax on that income to the BIR. A non-resident of both the USVI and the United States who is not engaged in a trade or business in the USVI but who has USVI source income is generally subject to a 10% withholding tax, which is to be paid to the BIR by the USVI payor of the income. However, if the income is interest on a loan secured by USVI real property with a value equal to or greater than the loan, then no withholding tax is due.

The determination of whether someone is a resident alien or non-resident alien of the USVI is made under the same principles under Code Section 7701(b) as in the United States, but as mirrored to the USVI. An alien (whether resident or non-resident) is an individual who is not a US citizen. For the purposes of determining whether a person is a resident alien or a non-resident alien under the mirrored Code Section 7701(b) definition of resident alien and non-resident alien, presence in the United States (meaning the 50 states and the District of Columbia) does not count as residency in the USVI, even though entry to the USVI falls under the immigration laws of the United States (that is, the USVI does not have its own immigration procedures, and US law treats the USVI as part of the United States for all purposes).

Exemptions

Cash or property received as employment compensation by a non-resident of the USVI will not be USVI source income under mirrored Code Section 861(a)(3) if:

• the compensation is earned while the individual is temporarily present in the USVI;
• the taxpayer is not present in the USVI for more than 90 days during the taxable year;
• the compensation does not exceed USD3,000; and
• the employer is either:
1. a foreign person not engaged in a business in the USVI; or
2. a foreign office of a USVI person.

If income meets these four requirements, it is exempted from USVI taxation.

If income does not meet these four requirements, it is subject to USVI withholding tax at a rate of 10%.

Investment Income

Investment income consisting of interest and dividends is, under Code principles as mirrored to the USVI, generally sourced to the situs of the payor. Rents and royalties are generally sourced to the location where the property giving rise to the rents and royalties is located.

Such income from the USVI would be USVI source income not effectively connected with a USVI trade or business (assuming it is not related to a USVI trade or business) and taxed under Code Section 871(a). The tax imposed by Code Section 871(a)(1) and its attendant withholding under Code Section 1441 are reduced to 10% by the USVI with regard to non-resident aliens.

The 3.8% Net Investment Income Tax found in Section 1411 of the Internal Revenue Code is not applicable to bona fide residents of the USVI per Treasury Regulation Section 1.1411-2(a)(2)(vi)(A).

Capital Gains Income

Capital gains income is, under Code principles as mirrored to the USVI, generally sourced to the situs of the owner of the capital asset and recipient of the gain. Thus, capital gains income received from the sale of a USVI-situs capital asset by a non-resident is not subject to USVI tax, other than a gain from the sale of USVI real estate, as property is considered sourced from where it is located. Code Section 865 also contains a number of exceptions to the general rule that the source of income from the sale of personal property is based on the residence of the seller.

Exceptions exist for sales of inventory property, gain from the sale of depreciable personal property, intangibles, and sales of stock in an affiliate that is located in a foreign country. See Code Sections 865(b)–(f).

In addition, Treasury Regulation Section 1.937-2(f) provides special rules for gains from certain dispositions of property by former US residents. Specifically, if an asset is transferred to the USVI by a US resident who then moves to the USVI, any gain on the sale of the asset is all US source for ten years, or if an election is made, the gain must be allocated based either on the value of the asset as of the date of the individual’s change in residency (if publicly traded), or on a formula of USVI days over total days in the holding period (if not publicly traded).

The USVI offers a variety of tax incentive programmes under either the EDA or the RTPark in the industries that were indicated in 2.1 Approval of Foreign Investments. While there are a variety of programmes, such as the SSTZ, the Enterprise Zone Act, and the Sustainable Tourism through Arts-based Revenue Streams (STARS) Act programmes, the primary tax incentive programmes for FDI are the EDC Program and the RTPark Program. Each programme has general requirements consistent with their applications requiring notification to relevant agencies such as the Department of Labor, background checks, board approvals, compliance obligations and charitable contribution obligations.

EDC Tax Benefits

Under the USVI economic development laws, qualifying businesses (corporations, partnerships, limited liability companies, trusts and sole proprietorships) receive tax benefits if they meet certain investment criteria. The tax benefits are granted by the territory’s seven-member EDC. As of June 2020, approximately 105 businesses received tax benefits under the EDC Program, including hotels and other tourism-related businesses, goods-producing businesses, and businesses serving customers outside the territory.

In order to meet the minimum qualifications for tax benefits, an applicant must invest at least USD100,000 (exclusive of inventory) in an eligible business, and employ a certain amount of USVI residents depending on the business category. The minimum investment and employment numbers may be reduced by the EDC in specified circumstances. Beneficiaries are also required to purchase from local vendors meeting certain requirements imposed by the EDC.

The EDC grants tax benefits for 20 years for investments on the islands of St. Thomas and St. John, and for 30 years on St. Croix. In addition, 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. Benefits packages may be extended upon proper application and review.

However, benefits packages may not be extended for more than ten years at 100% of benefits. Historically, the Governor of the USVI had to approve all beneficiaries. However, in December 2017, the Legislature removed the Governor from the approval process for new applicants.

Income Tax Benefits

An EDC Program beneficiary receives a substantial reduction in, or exemption from, all taxes imposed on businesses operating in the USVI. A beneficiary under the EDC Program receives a 90% tax credit against its income tax liability on income from the business for which benefits are granted. Such income must be sourced or effectively connected with the conduct of a USVI trade or business under Code Sections 934(b)(1) and 937 and the Treasury Regulations promulgated thereunder. The reduction results in an effective tax rate of approximately 2.31% on income from the business. Tax benefits also extend to passive income from certain qualifying investments, such as USVI government obligations.

The 90% income tax reduction also extends to dividends received by a corporate beneficiary’s USVI bona fide resident shareholders, and to distributions or allocations to the USVI bona fide resident shareholders or partners of a subchapter “S” corporation or partnership, respectively, that have been granted benefits by the EDC.

Beneficiaries of the EDC Program are exempt from withholding tax on interest payments and are subject to a reduced withholding tax rate of 4% on dividends. Other forms of passive income payments (such as royalties) are subject to withholding tax at a 10% rate (or 11% if a corporation). However, no withholding tax is imposed on payments to US entities.

Other Tax Benefits

Exemptions

Beneficiaries receive an exemption from the USVI gross receipts tax on their receipts from their approved activities, which is otherwise imposed at a 5% rate on the gross receipts of a business, with no deductions. USVI entities engaged in business activities that are not covered by their grant of EDC benefits must pay gross receipts tax on the gross receipts from such business activities. Although exempt from gross receipts tax for business activities covered by a beneficiary’s grant of benefits, the BIR requires that each beneficiary report its gross receipts (on a monthly basis, assuming annual gross receipts of more than USD225,000), and indicate that the beneficiary is exempt from payment of the tax pursuant to the EDC Program.

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. A number of excise tax exemptions exist, including exemptions for steel, concrete and lumber.

Beneficiaries receive an exemption from the USVI property tax. However, the personal homes of the owners of a beneficiary do not receive the property tax exemption, even if the respective owner maintains a home office. Moreover, if a beneficiary rents an office, the property tax exemption does not pass through to the beneficiary’s landlord.

Customs

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 EDC Program 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. In addition, as with the excise tax, there are a number of customs duty exemptions.

Although the foregoing exemptions and reductions are imposed at the entity level, as mentioned above, a beneficiary’s owners receive the income tax benefit on dividends and/or distributions if the owners are bona fide USVI residents.

The University of the Virgin Islands Research and Technology Park Protected Cell Corporation

As an alternative to the tax benefits provided under the EDC Program, businesses in the USVI can qualify for tax benefits under the University of the Virgin Islands (UVI) Research and Technology Park Protected Cell Corporation Act. The UVI Research and Technology Park Corporation and its subsidiary, the UVI Research and Technology Park Protected Cell Corporation (RTPark), are structured as public corporations and autonomous instrumentalities of the USVI government. The purposes of the RTPark include developing a technology sector in the USVI in order to promote the growth, development and diversification of the USVI economy and, more broadly, to promote a sector focused on developing knowledge-based businesses.

Further, the RTPark exists to broaden the capabilities of UVI by training students and creating a supportive research environment that combines the resources of UVI with those of the public sector and private industry. Oversight of the RTPark Program is vested with the seven-member RTPark board of directors (the “Board”). The Board has the authority to approve or disapprove applications by potential beneficiaries, referred to under the RTPark Program as “Protected Cells”.

Income tax benefits

The income tax benefits granted to beneficiaries of the RTPark Program are substantially similar to those received by beneficiaries of the EDC Program. A beneficiary under the RTPark Program receives a 90% tax credit against its income tax liability on income from the business for which benefits are granted. Such income must be sourced from or effectively connected with the conduct of a USVI trade or business under Code Sections 934(b)(1) and 937 and the Treasury Regulations promulgated thereunder.

The reduction results in an effective tax rate of approximately 2.31% on income from the business. If the beneficiary’s owners are bona fide residents of the USVI, they receive the reduction on dividends and/or distributions. Salaries and other forms of compensation such as guaranteed payments, however, are fully taxable.

With respect to income tax benefits, the main difference between the RTPark Program and the EDC Program concerns the duration of benefits granted to each programme’s beneficiaries. RTPark Program beneficiaries receive an initial 15-year term of benefits, with an initial renewal period of ten years at full benefits, and subsequent renewal periods of five years at full benefits.

Other tax benefits

The other tax benefits granted to beneficiaries of the RTPark Program are also essentially the same as those received by beneficiaries of the EDC Program. The one exception is that royalties under the RTPark Program receive the reduced withholding tax rate that is only applicable to dividends paid under the EDC Program.

The US tax system allows eligible corporate groups to elect to file consolidated returns for federal income tax purposes in lieu of separate returns. As the USVI follows the mirror system, corporations organised in the USVI are also eligible to elect to file consolidated returns for USVI income tax purposes with the BIR in lieu of filing separate tax returns. However, USVI corporations that elect to file a consolidated return may not include corporations organised in the United States and vice versa.

A “consolidated group” is an affiliated group that files a taxable year consolidated return. An affiliated group is a group of “includible corporations”, which are connected through stock ownership with a common parent that is an includible corporation. Generally, all corporations are includible corporations, except those that are specifically excluded.

Such excluded entities that may not file consolidated returns include:

• tax-exempt corporations;
• life insurance corporations;
• foreign corporations (which includes corporations formed in the United States);
• regulated investment companies;
• real estate investment trusts;
• domestic international sales corporations; and
• “S” corporations.

While many foreign jurisdictions combat perceived thin capitalisation abuse by mandating specific debt-to-equity ratios and by disallowing interest expense deductions on excess indebtedness, the United States (and thereby the USVI through the adoption of the mirror Code) has adopted a somewhat different approach. It must be determined in each case whether a purported loan is in fact indebtedness or whether the loan represents an equity investment in the corporation.

Concerning the classification of an investment in a corporation as either debt or equity, Code Section 385 sets out five factors that are to be considered, namely:

• whether there is a written unconditional promise to pay on demand or on a specified date a sum certain of money in return for an adequate consideration in money or money’s worth, and to pay a fixed rate of interest;
• whether there is subordination to or preference over any indebtedness of the corporation;
• the ratio of debt to equity of the corporation;
• whether there is convertibility into the stock of the corporation; and
• the relationship between holdings of stock in the corporation and holdings of the interest in question, ie, whether or not such holdings are proportional.

The United States does not have a debt-to-equity ratio that can be used as a safe harbour to ensure debt treatment. Instead, the debt-to-equity ratio is merely one factor taken into account by the IRS and the courts, although it is generally believed that the IRS will not challenge a ratio of 3:1 or less on debt instruments that do not have equity features.

IRS Notice 94-47 provides a list of the factors that it will consider in deciding the debt or equity character of an instrument. The characterisation of an instrument for federal income tax purposes depends on the terms of the instrument and all surrounding facts and circumstances. Among the factors that may be considered in making this determination are:

• whether there is an unconditional promise on the part of the issuer to pay a sum certain on demand or at a fixed maturity date that is in the reasonably foreseeable future;
• whether holders of the instruments possess the right to enforce the payment of principal and interest;
• whether the rights of the holders of the instruments are subordinate to the rights of general creditors;
• whether the instrument gives the holders the right to participate in the management of the issuer;
• whether the issuer is thinly capitalised;
• whether there is an identity between the holders of the instruments and stockholders of the issuer;
• the label placed upon the instruments by the parties; and
• whether the instruments are intended to be treated as debt or equity for non-tax purposes.

No particular factor is conclusive in making the determination of whether an instrument constitutes debt or equity. The weight given to any factor depends upon all the facts and circumstances, and the overall effect of an instrument’s debt and equity features must be taken into account.

The IRS stated that certain categories of instruments will be closely examined on audit to determine whether debt treatment is appropriate. This includes financial instruments that are treated as equity for regulatory, rating agency or financial accounting purposes, but sought to be treated as debt for income tax purposes; instruments with unreasonably long maturities; and instruments with provision for payment of principal using stock of the issuer.

The US transfer pricing regime of Code Section 482 applies to the USVI by virtue of the mirror system. Code Section 482 provides that gross income, deductions, credits and other allowances may be allocated among two or more organisations, trades or businesses under common ownership or control whenever it is determined that such action is necessary to prevent the evasion of taxes or to clearly reflect the income of the parties.

True taxable income is determined by evaluating transactions between commonly controlled taxpayers against the standard of comparable transactions between unrelated persons dealing at arm’s length. If a taxpayer’s results differ from its true taxable income, the taxpayer may be subject to a reallocation of income, deductions, credits or any other item or element affecting taxable income. The permissible methods for determining an arm’s length price depend on the type of transaction and are fully set out in the Treasury Regulations issued under Code Section 482.

The US tax law and regulations as applicable in the USVI contain numerous anti-abuse rules that are intended to prevent taxpayers from claiming inappropriate tax benefits. USVI taxpayers are also subject to numerous reporting requirements, including with respect to interests in foreign assets and certain transactions that have the potential for tax avoidance or evasion.

While a part of the United States, the USVI is outside the tariff zone of the United States. The USVI imposes its own flat 6% duty rate on imported items. Further, goods imported into the USVI that have undergone “substantial transformation” are able to then be shipped into the United States free of mainland tariffs. Thus, the USVI, given its proximity to the mainland United States, is a prime location for FDI for those seeking to work in the importation and exportation of goods with minimal impact from tumultuous developments in the current US tariff regime.

The USVI has laws regarding merger and consolidation under the General Corporation Law in 13 V.I.C. §§ 251–256, regarding conversions and mergers under the Uniform Limited Liability Company Act in 13 V.I.C. §§ 1901–1907 and regarding conversions and mergers under the Uniform Partnership Act in 26 V.I.C. §§ 191–198. The statutes require some sort of plan or agreement, and may also require a vote, and a filing or notification made with the Lieutenant Governor. Additionally, corporations also require a filing with the district courts where the merging entities are located. Mergers can occur with domestic USVI entities or certain other entities, including foreign entities.

See 6.1 Merger Control Notification.

The Virgin Islands Antimonopoly Law forbids agreements in restraint of trade between competitors. Forbidden agreements include agreements to fix prices, fix levels of production or distribution, or allocate territories and customers. The law is construed similarly to federal antitrust law.

The Virgin Islands Antimonopoly Law forbids the use of monopoly power for the purpose of excluding competition or manipulating prices. The law is construed similarly to federal antitrust law.

The laws of the United States relating to patents, trade marks and copyrights, and the enforcement of rights arising thereunder, have the same force and effect in the USVI as in the continental United States. The District Court of the Virgin Islands has the same jurisdiction in causes arising under such law as is exercised by United States district courts.

Inventions are patented to grant the inventor the right to exclude others from making, using, offering for sale or selling the invention in the United States or importing the invention into the United States. Patents are issued by the USPTO. The three types of patents are utility, design and plant patents.

Filing for a non-provisional patent requires patent law expertise, scientific knowledge, and extensive attention to detail and time. An inventor may apply for a provisional patent before a non-provisional patent, providing the means to establish an early effective filing date and permit the use of the term “Patent pending” before filing a non-provisional patent application. The term of a provisional patent is 12 months.

The term of a non-provisional, new patent is generally 20 years from the date on which the application for the patent was filed in the United States or from the date an earlier related application was filed in special cases, subject to the payment of maintenance fees. US patent grants are effective only within the United States, US territories and US possessions.

To apply for a provisional or a non-provisional patent, an inventor may file a paper or online application. Once a patent is issued, the patentee must enforce the patent without aid of the USPTO.

A trade mark is a device, name, symbol or word used with goods to designate the source of the goods and to distinguish them from goods of others. A service mark identifies and distinguishes the source of a service rather than goods. The purpose of applying and obtaining trade mark or service mark rights is to prevent others from using a confusingly similar trade mark or service mark. It does not prevent others from making the same goods or from selling the same goods or services under a different trade mark or service mark. Trade mark registrations can be filed by paper or online.

A registered trade mark requires regular maintenance. Six years after the registration date, a Declaration of Use or Excusable Non-Use must be filed with applicable fees and evidence showing that the trade mark is in use. If this declaration is not filed, the registration is cancelled.

The Madrid Protocol is a filing treaty to ensure protection for trade marks in multiple countries through filing one application. It is the right of each country whether or not trade mark protection is granted. If granted, the trade mark is protected in that country.

Industrial design is a combination of applied art and science to improve a product in its function, aesthetics, usability and ergonomics. The Hague Agreement is an international registration system which offers the possibility of obtaining protection for up to 100 industrial designs in designated member countries and intergovernmental organisations (referred to as “Contracting Parties”) by filing a single international application in a single language either directly with the International Bureau of the World Intellectual Property Organization or indirectly through the office of applicant’s Contracting Party.

Applicants can file international design applications through the USPTO as an office of indirect filing. Industrial design patents have a 15-year term from issuance.

Copyright is a form of protection provided to the authors of “original works of authorship” including literary, dramatic, musical, artistic and certain other intellectual works, both published and unpublished. The 1976 Copyright Act generally gives the owner of copyright the exclusive right to reproduce the copyrighted work, to prepare derivative works, to distribute copies or phonorecords of the copyrighted work, to perform the copyrighted work publicly, and to display the copyrighted work publicly.

The copyright protects the form of expression rather than the subject matter of the writing. For example, a description of a machine could be copyrighted, but this would only prevent others from copying the description; it would not prevent others from writing a description of their own or from making and using the machine. Copyrights are registered by the Copyright Office of the Library of Congress, and applicants may file paper or online applications. For works created after 1 January 1978, a copyright is good for 70 years after the death of the author.

A person, association or entity doing business in the USVI under any name other than its own, whether they are a resident or non-resident, must have their tradename approved, file an application for the tradename, and pay a USD50 fee to the Office of the Lieutenant Governor of the USVI, Division of Corporations & Trademarks. The application should set forth the name or style under which said business will be known, the location of the business, a brief description of the kind of business to be transacted under the tradename, and the real name or names of the party or parties conducting or intending to conduct business and the addresses of the party or parties. The application must be notarised before an officer authorised by the laws of the USVI to authenticate signatures.

A certificate of tradename is issued for a period of two years and is renewable. If the party or parties fail to renew the tradename within six months of the expiration date, the tradename becomes available to anyone who files for the tradename and pays the required fee.

If a person, association or entity doing business in the USVI fails to or refuses to obtain a tradename certificate, the USVI Attorney General may institute an action in the District Court of the Virgin Islands to enjoin the conduct of the business. Further, the violating entity may not commence or maintain any court action in the USVI.

When the party or parties cease to conduct business in the USVI, notice of the date of cessation, sworn to by a person, partner, corporate officer, member, executor or administrator, must be filed within ten days after the business ceases.

Contract, common law, federal regulations and USVI statutory law govern data protection requirements. The most applicable local statute is 14 V.I.C. § 2209, which deals with the crime of identity theft. This statute outlines the requirements for companies or persons that conduct business in the USVI regarding notifications of any breach of digital security and leaking of personal information such as social security numbers and driver’s licence numbers.

Any business that targets or does business in the USVI must follow both territorial and federal laws regarding data protection and notification in case of breach.

The USVI has also established a Bureau of Information Technology, which includes in its mandate the development of the policies and standards to be followed in providing for the confidentiality of information; ensuring the security of the USVI’s informational and physical assets; providing for the preservation of the USVI information processing capability; and co-ordinating research and identifying problems affecting information security and their solutions.

While there are no specific legal reforms expected that will affect foreign investment in the USVI, please see the Trends and Developments article for a deeper discussion of trends and developments in this field, particularly with regard to the economic incentive programmes.