For companies that qualify, the U.S. Virgin Islands offers extremely advantageous tax benefits for corporations looking to improve their bottom line. The tax structures available to corporations in the U.S. Virgin Islands offer continuity with Federal tax laws while allowing for greater tax reductions and exemptions.
Corporations in the U.S. Virgin Islands are governed by the Uniform Limited Liability Company Act of 1998 and are primarily based on the Delaware model. As in all U.S. jurisdictions, within the Territory, corporations are treated as separate legal entities from their directors, employees and shareholders. Corporations can sign contracts, assume liability and be sued as if they were individuals. But unlike most stateside tax regimes, the U.S. Virgin Islands offers striking economic tax incentives to companies that qualify.
Below are the three types of corporations who benefit from the tax laws in the U.S. Virgin Islands.
Domestic Corporations Participating in the EDC Program
Domestic corporations in the Territory are corporations formed and that operate in the U.S. Virgin Islands. If a domestic corporation meets certain criteria, such as employment and local vendor requirements, they can qualify for the Virgin Islands Economic Development Commission (“EDC”), which offers a range of benefits including tax reductions and exemptions.
The EDC offers qualifying corporation’s incentives such as:
- 90 percent reduction in corporate and personal income taxes;
- 100 percent exemption on gross receipt tax, business property tax and excise tax payments; and
- Reduced customs duty from the standard 6 percent to 1 percent.
The EDC’s goal is to bring quality businesses and jobs to the territory and improve the economy. Corporations in industries such as manufacturing, technology, pharmaceuticals, tourism and finance are especially attractive. The United States Congress allows the U.S. Virgin Islands to grant these incentives to help the territory become self-supporting.
For those companies in the research, technology, and environmental sustainability sectors, the University of the Virgin Islands Research and Technology Park (“UVI RT Park”) also provides companies access to similar tax and economic incentive packages that become a part of their clientele program. A qualifying corporation can explore both the EDC and the UVI RT Park programs to determine which best suits their business model.
Foreign Sales Corporations (FSC)
Foreign Sales Corporations (“FSCs”) are corporations organized under the laws of a qualifying foreign country or U.S. possession. U.S. exporters establish FSCs to reduce U.S. federal income taxes on their export sales by roughly 15 percent. The U.S. Virgin Islands is home to more FSCs than any other jurisdiction worldwide.
FSCs pay no local taxes in the U.S. Virgin Islands. They also pay no income tax except for a nominal annual franchise tax and license fee. The U.S. government guarantees these benefits for up to 30 years.
There are two types of FSCs: regular and small. A regular FSC’s export sales exceed $5 million annually; export sales from small FSCs are $5 million or less. This distinction determines the amount of the annual franchise tax: regular FSCs pay a $1,000 annual tax while small FSCs pay $400 or $900 depending on the corporation’s sales volume. Regular FSCs are also required to hold an annual meeting in U.S. Virgin Islands.
An exempt company is a tax-free entity established under U.S. law by a foreign national. The U.S. Virgin Islands is the only jurisdiction where this can be done. Exempt companies are also called “offshore corporations” in other jurisdictions.
Exempt companies are often used as holding companies or captive insurance companies. They are also established for aircraft registered with the U.S. Federal Aviation Administration. Exempt companies may not conduct business in the U.S.V.I. Citizens, residents and corporations in the U.S. and U.S.V.I are not allowed to own more than 10 percent of the stock in an exempt company.
To learn more about business formation in the U.S. Virgin Islands, contact a skilled tax attorney at BoltNagi PC today.
Adam N. Marinelli is an Associate Attorney in the Corporate, Tax and Estate Planning Practice Group concentrating his practice in tax at BoltNagi PC, a full-service business law firm serving the U.S. Virgin Islands.