U.S. Virgin Islands
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You don’t hear much about the U.S. Virgin Islands as a tax haven anymore because most writers today cover the better-known tax havens like the Channel Islands, the Bahamas, Bermuda or Cayman. But, the U.S.V.I. is a lot better tax haven than most people realize, offering tax incentives for U.S. companies and foreign investors alike. Foreign investors who do not seek residence or citizenship in the U.S. Virgin Islands or the United States can establish a tax-free U.S. Virgin Islands exempt company for their worldwide investments (other than investments in the United States or the U.S. Virgin Islands). Not surprisingly, the U.S. Virgin Islands have seen a rapid increase in the establishment of exempt companies. A foreign investor can use a U.S. Virgin Islands exempt company to hold his or her worldwide assets because such entity pays no taxes in the U.S. Virgin Islands, except for an annual US$1,000 franchise tax on its non-U.S., non-Virgin Islands income. The irony in all this is that the U.S. government offers tax haven status to non-U.S. citizens while denying the same tax breaks to its own citizenry. This is political hypocrisy at its worst! Why should a foreigner be offered freedom from current and future taxes, while citizens of the U.S. living on the mainland are excluded from the same policy? U.S. Virgin Islands Voting Trust According to Marjorie Rawls Roberts (chief council and technical advisor to the U.S. Virgin Islands Bureau of Internal Revenue), a foreign investor can use a U.S. Virgin Islands exempt company with a U.S. Virgin Islands voting trust to own an aircraft used overseas in order to qualify for the ‘N’ registration number from the U.S. Federal Aviation Administration. This is an interesting suggestion, as the exploitation of a voting trust by a U.S. government official in a foreign tax structure is almost revolutionary. In addition, a U.S. Virgin Islands exempt company is covered by the United States extensive network of treaties of Friendship, Commerce and Navigation and bilateral investment treaties that offer protection against expropriation of assets and other benefits. A Frenchmen from Paris could form a U.S. Virgin Islands exempt company, have it purchase bonds in a Canadian utility paying a 12% interest, and not pay any Canadian withholding taxes (normally 25% on the interest paid to countries without an income tax treaty with Canada). Under the U.S.-Canadian income tax treaty, dividends and interest withholding taxes are reduced to 15% and 0%. An investor from a country without extensive treaty networks (like Bermuda the Caymans or the Bahamas) could structure an investment into one of the 60 plus countries with which the U.S. has an investment treaty through a U.S. Virgin Islands exempt company to obtain the benefits of the treaty. It’s all perfectly legal, and the U.S. government is backing the idea. Moreover, a U.S. Virgin Islands exempt company has access to the Federal court system, and stock in a U.S. Virgin Islands exempt company is not subject to U.S. Virgin Islands inheritance tax, nor to U.S. estate tax, nor are the underlying assets held by the U.S. Virgin Islands exempt company. USVI Exempt Companies Act of 1986 The USVI Exempt Companies Act of 1986 is authorized under new provision IRC §934(b)(3) of the U.S. Internal Revenue Code (added by the Tax Reform Act of 1986). It became operative on February 24, 1987 with the signing of the Tax Implementation Agreement (TIA) between the U.S. and the Virgin Islands. Under this law, qualified foreign owned companies can elect for a 20-year local exemption from all taxes except for a $1,000 annual franchise tax. To qualify the company must pass certain tests:
Other Possible USVI Uses Offshore spot market oil trading firm or subsidiary * International Import & Export company (to avoid the European VAT taxes) * Tax Free base for foreign currency trading subsidiary * foreign security investment companies * * Note, that this rule (part of the USA’s CFC legislation) prevents the company from being a CFC or even from having any “U.S. shareholders” [as defined under IRC §951(b)] that could be subject to tax imputation under the CFC provisions. Buy a Piece of Paradise and You Can Qualify for U.S. Citizenship A foreign investor seeking U.S. citizenship can qualify by investing a minimum of US$500,000 on the island of St. Croix in the U.S. Virgin Islands which offers available flat land and a highly educated work force. The business should employ at least 10 persons. The investor will qualify for an immigrant employment creation visa for such investment from the Immigration and Naturalization Service, leading to U.S. citizenship. An investor can also qualify for the U.S. Virgin Islands/industrial development benefits by making the investment. The investor will thus be exempt from any property taxes and gross receipts taxes on the investment, receive substantial reductions in excise taxes and customs duties, and as a resident of the U.S. Virgin Islands pay income tax at less than a 4% rate on his income from the investment. Once the investor obtains U.S. citizenship in the U.S. Virgin Islands, the investor will be exempt from Federal estate and gift taxes on all his/her non-U.S. situs assets (including the investment in the U.S. Virgin Islands) and will be similarly exempt from all U.S Virgin Islands inheritance and gift taxes. U.S. Virgin Island’s Old Inhabitant Rule Residents of the British Empire, upon which it is said the sun never sets, have a choice of 10 to 20 tax havens in which they can move to escape the jurisdiction of the Inland Revenue (Britain’s IRS). Citizens of the United States are generally held taxable on all their worldwide income, no matter where they move. The United States has no network of low and no-tax havens comparable with the British, but certain territories of the United States have been blessed (by a combination of Congressional legislation and local law) with tax breaks that effectively make them suitable tax havens in certain situations. Unfortunately for the USVIs and the American taxpayer, one extraordinary loophole – the old “inhabitant rule” – has recently been repealed by Congress. Under the old inhabitant rule, a U.S. citizen or foreigner who qualified as a bona fide U.S.V.I. resident by December 31st of that year was not required to file a U.S. federal income tax return with the IRS for any tax year he/she was resident of the V.I., and more important had no U.S. tax liability. This rule is repealed for tax years starting in 1987. Geography, History and Climate The U.S. Virgin Islands comprise 68 islands and cays located in the Caribbean Sea, 1,075 miles southeast of Miami and 40 miles east of Puerto Rico. Three miles separate the two smaller inhabited islands of St. Thomas (32 sq. miles). Both islands are distinguished by a rugged mountainous topography with numerous sandy beaches and inlets along the shoreline. St. Croix (84 sq. miles), lying 40 miles south of St. Thomas, has rolling hills and a broad central plain. All the islands enjoy a mild, tropical climate. Christopher Columbus landed in St. Croix on his second voyage to the new world in 1493. He named the islands after the legend of St. Ursula and her 11,000 virgin martyrs. Claims to all or part of the U.S. Virgin Islands were made by Spain, England, Holland, France and the Knights of Malta. In 1670 Denmark took control to St. John, and later bought St. Croix from the French in 1733. Under Denmark, the islands developed as sugar growing, slave holding estates. Around the turn of the twentieth century, the U.S. became interested in purchasing the islands, and finally bought the Virgin Islands in 1917 from Denmark to build a naval base against the German threat to the Panama Canal. Today, St. Croix (54,300), St. Thomas (52,300) and St. John is a premier tourist resort center with the highest standard of living in the Caribbean. “Mirror” System of Taxation The U.S. Virgin Islands, Guam, the Northern Mariana Islands and American Samoa currently use the mirror system of taxation. Each possession transforms the Internal Revenue Code, as amended, into a local code by substituting its name for the name of the “United States” when appropriate. According to the VI Naval Appropriations Act of July 12, 1921 “…the income tax laws now in force in the United States and those which may hereafter be enacted shall be held likewise in force in the Virgin Islands of the United States, except proceeds of such taxes shall be paid into the treasuries of the Virgin Islands.” Additionally, all U.S. Treasury Regulations, Revenue Rulings, procedures and policies with certain exceptions are applicable. Those exceptions involve definitions of income, residency and taxing jurisdiction between the U.S. and the USVI. Tax Incentives Under the Industrial Development Commission (IDC) It’s the tax incentives offered by the VI Industrial Development Commission (IDC) that make the USVI and attractive place to do business. The IDC is the investment development agency of the VI government. Applications for tax benefits are made through the Director in St. Croix. A seven-member commission reviews an application, and forwards its recommended applications to the Governor of the VI for approval. There is nothing comparable in the U.S. domestic tax system to the incentive programs offered by the governments of our U.S. “territories & possessions”. Eligible types of activities include:
In addition, the IDC may grant benefits to other industries or businesses if it is determined that such activity will be beneficial to the Virgin Islands. Qualifying for Tax Incentives
Maximum IDC tax exemptions and subsidies are offered for 10 to 15 years depending on the location. These tax incentives include:
IRC §936 Federal Income Tax Incentives Domestic U.S. manufacturers that have large export sales overseas are afforded few real tax breaks and incentives under the U.S. Internal Revenue Code. A U.S. producer that exports his product overseas will be held taxable on those profits, the same as on his domestic profits. Although limited tax relief is provided for Foreign Sales Corporations (FSCs) under IRC §921, many U.S. manufacturers have chosen to use the concessions offered under IRC §936, designed especially for U.S. corporations operating in Puerto Rico (PR) and the U.S.V.I.s. IRC §936 exempts a Puerto Rican or USVI company from the USA’s “Controlled Foreign Corporation” provisions, even if these companies are 100% owned by the U.S. parent company. Moreover, under IRC §936 U.S. companies do not pay U.S. income tax on dividends received from USVI or Puerto Rican subsidiaries, and the subsidiaries themselves can operate tax free under the local tax incentive legislation offered by the Industrial Development Commission. Effectively, then, a USVI subsidiary of Eli Lilly (a big U.S. drug manufacturer) can put up a plant in PR or the USVI to manufacture it’s “Darvon” (Lilly manufactures “Darvon” in Puerto Rico), and pay local corporate taxes under the IDC programs of 2.8% to 4.5%, and pay no U.S. income taxes on these “offshore profits” even when remitted back to the USA as a dividend. To qualify for the Section 936 incentives the following conditions must be met:
Puerto Rico, due to its size, has benefited more than the USVI from the tax incentive legislation under 936, but both “territories” serve the U.S. investor equally well. Through September 1981 no fewer than 750 U.S. companies conducted manufacturing activities in PR through subsidiaries, with an estimated $3 billion dollars of net income going tax-free that year. Virtually every major U.S. manufacturers, and hostellers are represented offshore in the USVI and Puerto Rico. Advantages for USVI Based Subsidiaries
Example #1: Coca-Cola opens a bottling subsidiary in the USVI (or PR) and has $100,000,000 in gross sales in 1989, and before tax profits of $10,000,000. Under the USVI IDC incentive program, the regular U.S. income tax rate of 28 % will be applied to the profits, but 90% of the tax payment is exempt, making the actual tax paid the USVI Treasury $280,000. That’s an effective tax rate of 2.8%. In December 1988 the USVI subsidiary passes a $9,720,000 dividend to its U.S. parent, Coca-Cola USA. The entire dividend is exempt from U.S. federal income taxes under IRC §936. The USVI dividend withholding tax of 4% (reducible to 2%) was ignored in the example. Example #2: In 1989 Coca-Cola USA’s New Jersey bottling plant sells $100,000,000 of soda to a Canadian distributor, realizing $10,000,000 in before tax profits (same as #1 above). Coca-Cola NJ would pay U.S. federal income taxes at rates up to 18% and owe approximately $2,800,000 in federal tax. It would also be liable to New Jersey States taxes. The USA offers no tax incentives to U.S. manufacturers under the Code, other than that found under IRC §936. Exempt International Banking Legislation for exempt companies provides for a complete tax exemption (except for a $1,000 annual franchise fee and a $4,000 annual license fee) for exempt international banking facilities. USVI International Banks may operate the same as any V.I. bank except it may not serve local USVI persons. Section §934(b)(3) of the U.S. Internal Revenue Code restricts the U.S, ownership in such banks to 10% or less. International USVI banks may obtain a 20-year contract exempting them from taxes through the Lieutenant Governor’s Office. Exempt Captive Insurance Companies Title 22, Chapter 55 provides for USVI exempt insurance companies or “captives” as they are commonly called. Firms that underwrite insurance or conduct reinsurance business with respect to risks situated exclusively outside the USVI are exempt from USVI insurance laws, and are eligible for a complete tax exemption, except for a $1,000 franchise tax and a $6,000 or $3,000 license fee depending on the class of the insurer. Exempt Insurance Management companies, which are equivalent to the management company of a mutual fund, are eligible for the Industrial Development Commission tax incentives. The IDC incentives generally allow for a 90% tax exemption from the USVI’s regular corporate tax rate of 28% in 1989. New USVI Laws Being Drafted A few years ago, Derek M. Hodge, USVI Commissioner of Insurance informed the Tax Haven Reporter that John J. Sarchio with the law firm of Hughes, Hubbard and Reed had been hired to draft amendments to the Virgin Islands Exempt Insurance Companies/Exempt Support Facilities Act, and the Exempt International Banking Acts. These amendments were to be completed in January 1989 when Lieutenant Governor Hodge will review Mr. Sarchio’s recommendations, before sending them to the Governor for his transmittal to the Legislature. You can write commissioner Hodge for more information at his office in St. Croix: Derek M. Hodge, Commissioner of Insurance, P.O. Box 490, Christiansted, St. Croix, USVI 00820, Tel. 809-773-6449. (Courtesy of New Providence Press: Tax Havens of the World). Find the contact names, addresses, numbers and information for local government offices, banks, accountants, company formation services, investment and management companies, advisors, experts, maildrops, real estate agents and other useful local contacts in the THE OFFSHORE MANUAL & DIRECTORY. |