While the U.S. Virgin Islands is not a state, it is still subject to the majority of U.S. federal laws, given that it is an unincorporated territory. A mirror federal tax code applies in the territory, but rather than being administered by the Internal Revenue Service, it is administered by the Virgin Islands Bureau of Internal Revenue.
In 1986, Congress gave the U.S. Virgin Islands legislature the authority to create tax-free companies in the territory. The territory immediately after enacted legislation that would allow for the creation of U.S. Virgin Islands exempt companies.
So what do you need to know about tax-free entities in the U.S. Virgin Islands, and what are the benefits of those types of companies? Here’s some information.
The benefits of exempt companies
Exempt companies in the U.S. Virgin Islands do not pay any federal or territorial taxes of any kind on income earned anywhere in the world other than the U.S. or the Virgin Islands, except for the $1,000 annual franchise fee paid to the territorial government. In addition, stock in exempt companies is not subject to federal or territorial gift, estate or inheritance taxes if the decedent is a non-resident non-citizen of the United States.
U.S. Virgin Islands exempt companies are also able to elect a 20-year local exemption from all taxes except for the aforementioned franchise fee. Upon a $100 payment, the territory’s Corporate and Trade Name Division of the Office of the Lieutenant Governor will issue a contract guaranteeing the benefits to the client for a period of 20 years.
Most U.S.-sourced passive income earned by an exempt company, such as dividends, as well as most types of royalties and interest would be subject to a 30 percent withholding tax at the source, the same rate that would be imposed for payments of these types of income made to companies incorporated in other countries where the United States does not have any active tax treaties.
Exempt companies in the territory come with a certain level of privacy. The only information on the public record for these companies is the names and addresses of officers and directors — shareholder identity can remain private.
Finally, the formation of these types of companies is relatively easy and inexpensive. The incorporation fee paid to the U.S. Virgin Islands government is just $400, and the actual process of incorporation is typically able to be accomplished within just 24 to 48 hours, so long as the exempt company has at least one director. The directors and officers of an exempt company do not need to be residents of the U.S. Virgin Islands. All exempt companies must have minimum initial capital of $1,000.
These are just a few of the most important elements to know about U.S. Virgin Islands exempt companies. For more information about how BoltNagi can assist you with forming such a company, contact our team today.
Steven K. Hardy is Chair of the Corporate, Tax and Estate Planning Practice Group at BoltNagi PC, a full-service business law firm based on St. Thomas, U.S. Virgin Islands.