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NOTICE REQUIRED BY NEW IRS RULE The Virgin Islands is not a Caribbean "tax haven," at least in the pejorative sense, but instead offers very legitimate, Internal Revenue Code-sanctioned tax advantages for those who make the Virgin Islands their primary residence and for certain foreign taxpayers who wish to locate their worldwide headquarters under the United States flag. Although the Virgin Islands is a separate taxing authority, by Act of Congress the Internal Revenue Code is adopted as the income tax code of the Virgin Islands. The effect of this scheme is to create a taxing structure for the Virgin Islands "mirroring" the provisions of the federal tax code. There is no separate local income tax. Also pursuant to Congressional mandate, individuals who are bona fide residents of the Virgin Islands throughout the tax year satisfy their worldwide income tax obligations to the United States by filing their income tax returns with the Virgin Islands Bureau of Internal Revenue and paying any tax due to the Virgin Islands. Virgin Islands corporations must also report their worldwide income to the Virgin Islands Bureau of Internal Revenue. The Industrial Development Program The Virgin Islands has enacted an Industrial Development Program to encourage investment in the Territory. A broad range of startup or expanding businesses are eligible, including manufacturing, tourist related development, high-tech enterprises and financial and management services (with clients outside the Territory). Eligible applicants include Virgin Islands corporations, partnerships, and limited liability companies. If an applicant is approved, a certificate is issued waiving virtually all local taxes and up to 90% of the income tax otherwise payable on Virgin Island source income derived from the approved activity for a period of up to 15 years. As a result, a reduction in income taxes provided by the Industrial Development Program is the equivalent of a reduction in federal income taxes. (Many states offer similar economic development/tax incentive packages, but they can offer only state tax benefits and not federal.) In the case of beneficiaries that are S corporations, partnerships, limited liability companies or other "pass through" entities, the tax benefits are available directly to shareholders, partners or members who are Virgin Island residents. In the case of a beneficiary that is a C corporation, dividend income to a Virgin Islands shareholder will be 90% income tax-free. The American Jobs Creation Act of 2004 contained several provisions that directly impact the Virgin Islands Industrial Development Program including statutory requirements to be met in claiming Virgin Islands residency and a definition of Virgin Islands source income. Temporary regulations have been issued which have been the subject of extensive comment. It is unclear when final Regulations will be adopted. Because of the technical requirements of the statutory changes and the new Regulations, it is critical that anyone considering applying for benefits under the Industrial Development Program seek legal advice from an attorney familiar with these provisions. Exempt Companies (Foreign Investors) The Virgin Islands has also authorized a special kind of corporation, the "Exempt Company," to operate in the Virgin Islands virtually tax free. Such companies may not have more than 10% of their stock, either by value or voting control, owned by United States citizens or residents or Virgin Islands residents. In addition, such companies may not engage in any active trade or business in the Virgin Islands or the United States. Exempt Companies may, however, act as the "headquarters" of a worldwide business conglomerate owned by nonresident aliens, as holding companies for investment in the securities of United States corporations, or as captive insurance companies. An Exempt Company is fully protected by United States treaties just like any other United States corporation. An Exempt Company may also register aircraft with the United States Federal Aviation Administration, receiving an "N" tail number. General/Miscellaneous Tax Considerations Although income taxation in the Virgin Islands is controlled by the "mirror" internal revenue code discussed above, all Virgin Islands employers and self-employed individuals pay FICA and Medicare taxes to the United States Treasury using special return forms specified by the Internal Revenue Service. The Virgin Islands has no sales tax per se, but does impose a 4% gross receipts tax; also excise taxes and customs duties on certain imported goods, but at rates substantially less than certain other Caribbean jurisdictions. Property taxes in the Virgin Islands are also relatively low (at least when compared to most East Coast jurisdictions). Current property tax rates are set at three-quarters of one percent of market value. Estate and Gift Taxes The Virgin Islands currently does not impose either a gift or inheritance tax on residents. However, with the exception noted below, the Federal estate and gift tax (subject to the usual exemptions as to amount) still applies to all United States citizens residing in the Virgin Islands and to all other residents who transfer property located in the United States. There is one remarkable exception: United States citizens who were born in the Virgin Islands or who obtained their citizenship by being naturalized here are treated as nonresident aliens for purposes of the Federal estate and gift taxes. As a result, they are taxed only on transfers of United States situs property. This makes the Virgin Islands an especially attractive place to reside while qualifying for citizenship. Hamm & Barry offers professional services in all areas of income and estate and gift tax law, with a particular emphasis on the taxation of foreign activities. We would be happy to discuss with you any tax aspect of your business operations. We invite the participation of your local attorney and/or tax advisor. |
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