For the most part, even though the U.S. Virgin Islands is not a state, most U.S. federal laws apply in the Territory. This includes federal tax law. However, that law is not governed by the Internal Revenue Service. Instead, a separate local tax code called the “mirror system” exists, and it is administered instead by the U.S. Virgin Islands Bureau of Internal Revenue (BIR).
The U.S. Virgin Islands has had authority from Congress for more than 50 years to allow for tax-exempt companies within the territory. Here are just a few of the most significant benefits of such a structure:
- These companies do not pay any taxes on income earned anywhere they do business (other than in the United States or U.S. Virgin Islands), except for a yearly $1,000 fee paid to the Government of the Virgin Islands.
- The company’s stock is also not subject to any federal or territorial inheritance, gift or estate taxes, as long as the donor or decedent is a non-citizen/non-resident of the United States.
- Capital gains earned by U.S. Virgin Islands exempt companies from the sale of any American stocks or securities are also not subject to taxation in either the United States or the Territory.
How are these companies formed?
The process of setting up a U.S. Virgin Islands exempt company is quite simple and relatively inexpensive. All it takes is a $400 incorporation fee paid to the Government of the Virgin Islands, as well as some reasonable service providers’ fees. The incorporation process typically takes only 24 to 48 hours.
To be officially incorporated, the company must have three officers and three directors. None of the directors need to be residents of the U.S. Virgin Islands. The officers must include a secretary, treasurer and president. The president must also be a director, but the secretary and treasurer are not required to serve in this role. Additionally, the secretary and president must not be the same person, and no one person may hold more than two offices.
There are also some basic requirements for businesses to meet before they are able to become exempt. They must have at least $1,000 in working capital, with no bearer shares. No U.S. citizens are allowed to own either directly or indirectly more than 10% of the stock of a U.S. Virgin Islands exempt company, whether that 10% is measured by value of the company or vote on company decisions.
Finally, U.S. Virgin Islands exempt companies must also be prepared for annual filing like any other business. However, these filing requirements are much simpler than for most organizations. No tax returns are needed, but there is a requirement for a simple franchise return, due at the end of every June.
For more information on the benefits and stipulations of forming a U.S. Virgin Islands tax-exempt company and how you might move forward with creating one, consult a skilled and knowledgeable business planning attorney.
Attorney Steven K. Hardy is Chair of the Corporate, Tax and Estate Planning Practice Group at BoltNagi, an established and widely respected corporate tax planning law firm serving clients throughout the U.S. Virgin Islands.