TAX STRUCTURE OF THE UNITED STATES VIRGIN ISLANDS

 

 

 

 

 

 

 

 

 

 

 

 

 

Gizette L. Thomas

 Acting Director

 

John P. deJongh, Jr.

  Governor

 

T  A  B  L  E  O  F  C  O  N  T  E  N  T  S

 

Foreword                                                                                                                     1

Organization of the Virgin Islands Government                                                          2

Income Tax Laws in Effect in the United States Virgin Islands                         4

General Principles                                                                                                        4

Individual Income Tax                                                                                                 8

Corporate Income Tax                                                                                                  10

Partnerships                                                                                                                12

Withholding from Wages, Social Security & Unemployment Taxes                             13

Pension, Profit Sharing and Employees Benefit Plans                                       14

Charitable Organizations                                                                                             14

Estate Taxes                                                                                                                 15

Gift Taxes                                                                                                                    16

Custom Duties                                                                                                             17

Miscellaneous Local Internal Revenue Taxes                                                                17

Gross Receipts Tax                                                                                                      17

Excise Tax                                                                                                                   19

Hotel Room Tax                                                                                                           21

Highway User’s Tax                                                                                                    21

Entertainment Tax                                                                                                       22

Fuel Tax                                                                                                                       23

Telephonic Long Distance Tax                                                                                     23

Gross Revenue Tax                                                                                                      23

Investment Alternative Tax                                                                                         24

 

LOCAL TAXES NOT ADMINISTED BY THE VI BUREAU OF INTERNAL REVENUE

 

Real Property Tax                                                                                                        25

Franchise Tax                                                                                                              25

License Fees                                                                                                                  26

Stamp Tax                                                                                                                   27

Workmen’s Compensation                                                                                            27

Special Aids to Businesses                                                                                            28

Economic Development Program                                                                                 28

Foreign Sales Corporations                                                                                          29

Exempt Companies                                                                                                      30

Exempt International Banking Facilities                                                                       30

Captive Insurers                                                                                                          31

 

 

 

 

 

 

F  O  R  E  W  O  R  D

 

This booklet is issued to provide generalized information concerning income and other taxes of the United States Virgin Islands.  It contains information that was current at the time of publication.

 

The TAX STRUCTURE OF THE UNITED STATES VIRGIN ISLANDS booklet has been prepared by the Virgin Islands Bureau of Internal Revenue (BIR) – Office of the Chief Counsel.  While every effort has been made to ensure that the information contained in this publication is complete and accurate, it is not intended to be a substitute for the provisions of the statues themselves or for court decisions, regulations, or rulings interpreting applicable statutory provisions in light of specific facts.  Requests for rulings covering Virgin Islands taxes should be addressed to the Director at the BIR’s St. Thomas office.

 

The contact information for the BIR for St. Thomas and St. John is:

Virgin Islands Bureau of Internal Revenue

9601 Estate Thomas

St. Thomas, Virgin Islands   00802

(340) 774-5865 – TELEPHONE

(340) 714-9345 – FAX

 

 

The contact information for the BIR for St. Croix Office is:

 

Virgin Islands Bureau of Internal Revenue

4008 Estate Diamond Plot 7-B

Christiansted, VI  00820-4421

(340) 773-1040 – TELEPHONE

(340) 773-1006 – FAX

 

 

 

 

 

 

ORGANIZATION OF THE VIRGIN ISLANDS GOVERNMENT

 

The organization of the Government of the United States Virgin Islands (the Virgin Islands) rest upon the Revised Organic Act of 1954, 48 U. S. C. §1397, 68 Stat 497, in which the US Congress declared the Virgin Islands to be an unincorporated US territory.  The executive power of the Virgin Islands is vested in the Governor who, together with the Lieutenant Governor, is elected by qualified Virgin Islands voters for a four year term.  The Governor is limited to two consecutive terms.

 

The Virgin Islands Bureau of Internal Revenue (the BIR) is responsible for the administration of the internal revenue laws of the Virgin Islands.  The Director of the BIR is appointed by the Governor, with the advice and consent of the Virgin Islands Legislature, and serves at the discretion of the Governor.

 

The Legislature power of the Virgin Islands is vested in a unicameral legislature consisting of 15 senators: seven from St. Croix, seven for St. Thomas and one Senator – at – Large who must have certain ties to St. John.  Senatorial elections are held every two years.

 

A non-voting delegate, who is elected by Virgin Islands’ voters for two year term, represents the Virgin Islands in the United States House of Representatives.  The delegate can sit and vote in committee.

 

The Judicial power of the Virgin islands is vested in the District Court of the Virgin Islands and the Territorial Court of the Virgin Islands, as provided in the Revised Organic Act of 1954.  The District Court of the Virgin Islands functions as a United States federal district court in all causes arising under the Constitution, treaties, and laws of the United States and also has original jurisdiction in all causes arising in the Virgin Islands where exclusive jurisdiction has not been conferred upon the Territorial Court.  The District Court of the Virgin Islands also functions as an appellate court for appeals from the decisions of the Territorial Court.  Appeals from the decisions of the District Court of the Virgin Islands are made to the US Court of Appeals for the Third Circuit, which is based in Philadelphia, Pennsylvania.

 

The US Tax Court does not have jurisdiction to hear tax cases arising under the income tax laws of the Virgin Islands.  However, a VI taxpayer can file a timely petition in the District Court of the Virgin Islands prior to payment of any asserted income tax deficiency, similar to the procedure that applies in the US Tax Court.

 

The Virgin Islands tax system incomes income, gross receipts, excise, highway user’s, hotel room, real property, entertainment, franchise, fuel, gift, inheritance, and stamp taxes.  Other fees and licenses requirements are also in effect for such services as registering vehicles, obtaining driver’s licenses and obtaining business licenses.

 

Whenever the Virgin Islands tax laws require the filing of tax returns, statements, notices or schedules, the form or other documents should be directed to the Bureau of Internal Revenue, 9601 Estate Thomas, St. Thomas, Virgin Islands 00802 or 4008 Estate Diamond Plot 7-B, Christiansted, Virgin Islands 00820-4421, unless otherwise indicated in this or another BIR publication or release.  All checks must be made payable to the Virgin Islands Bureau of Internal Revenue.


INCOME TAX LAWS IN EFFECT IN THE VIRGIN ISLANDS

 

 

GENERAL PRINCIPLES

 

The sources of the Virgin Islands taxing authority include the Internal Revenue Code of 1986 (the IRC) and the Naval Service Appropriations Act of 1922, which established the principle that the IRC applies in the Virgin Islands under a “MIRROR SYSTEM” whereby the “VIRGIN ISLANDS” is substituted for the “UNITED STATES” wherever necessary to give the IRC the proper effect in the Virgin Islands and vice versa.

 

Specifically, the Naval Service Appropriations Act provided in pertinent part that “the income tax laws in force in the United States of America and those which may hereafter be enacted shall be held to be likewise in force in the Virgin Islands of the United States, except that proceeds of such taxes shall be paid into the treasuries of said islands.”  Consequently, the income tax provisions of the IRC, the Treasury Regulations promulgated thereunder, and Revenue Rulings and Revenue Procedures issued by the Internal Revenue Service (the IRS) are generally applicable in the Virgin Islands with certain limitations.

 

Three principles underscore the application of the IRC to the Virgin Islands.  First, the effect of the Naval Service Appropriations Act was to create a separate taxing structure in the Virgin Islands by mirroring the provisions of the IRC.  Second, for purposes of applying the IRC to the Virgin Islands, a domestic corporation is a corporation incorporated in the Virgin Islands, while a foreign corporation is one chartered elsewhere, including the United States.  Third, provisions of the IRC are no mirrored if to do so would produce a clearly erroneous result, such as the provisions which deal specifically with the territories (i.e. IRC §§934 and 936).


SIGNIFICANT CHANGES MADE BY THE TAX REFORM ACT OF 1986

 

The Tax Reform Act of 1986 (TRA) made several changes to the income tax laws applicable to the Virgin Islands.  First, TRA provided that the Revised Organic Act of 1954 would be treated as if it had been enacted before the IRC, so that the IRC controls in cases of conflict.  TRA specified that the Revised Organic Act of 1954 will have no effect on any person’s liability to the United States.

 

Second, the US Treasury Department was also given the authority to specify sections of the IRC that would no be mirrored in the Virgin Islands, but it has not done so to date.

 

Third, TRA allowed the Virgin Islands to enact non-discriminatory local income taxes in addition to those contained in the mirror system.  However, the Virgin Islands Legislature has no enacted such taxes to date.

 

Fourth, TRA gave the Virgin Islands the authority to reduce or rebate all or part of the VI tax liabilities of individuals and corporations attributable to VI source income or income effectively connected with a VI trade or business, other than the VI tax liabilities of citizens or residents of the United States who are not bona-fide residents of the Virgin Islands (IRC §934(b) (1)).

 

Fifth, TRA gave the Virgin Islands the authority to reduce or rebate the tax on all non-US income of certain qualified foreign corporations, generally defined as a corporation where less than 10 percent of total voting power of the corporation’s stock and the total value of the corporation’s stock is owned by one or more US persons (IRC§934(b) (3)).

 

Sixth, TRA extended the benefits of §936 of the IRC – the POSSESSIONS CORPORATION TAX CREDIT – to qualifying US corporations operation in the Virgin Islands.

 

Finally, the enactment of §932 of the IRC altered the way that US individuals are taxed in the Virgin Islands, as more fully discussed on pages 8 and 9.

 

TAX ADMINISTRATION

 

Utilizing the IRC, Treasury Regulations, IRS Revenue Rulings and IRS Revenue Procedures gives the Virgin Islands the benefit of a sophisticated and successful income tax system.  Further, it enables VI taxpayers to used the hundreds of IRS forms and accompanying instructions in print for filing returns, preparing supporting schedules, filing claims, making payments and so forth.  Only a few of these forms have been modified for local use.  In particular, the forms for transmitting payroll withholding, Form 501VI and 941VI, and the form for informing employees of the amount of tax withheld, Form W2-VI, have been modified for use in the Virgin Islands.  Any questions in interpreting Federal forms for use in the Virgin Islands should be referred to the BIR.

 

            All references to the District Director or to the Commissioner of Internal Revenue should be interpreted to mean the Director of the Virgin Islands Bureau of Internal Revenue.  Similarly, all references to the Internal Revenue Service, the Federal Depository, and similar references should be interpreted as the BIR.  Directions in forms or in instruction pamphlets that refer to District Directors, the Commissioner of Internal Revenue, the Internal Revenue Service, Federal Depository, and so forth are appropriate for use in the Virgin Islands.

 

            A Virgin Islands taxpayer has the same appeal rights concerning disputed income taxes as his or her counterpart does in the United States.  The taxpayer is entitled to a “one level of appeal” hearing, at which the standards and guidelines for settlement are substantially similar to those in the United States.

 

A statutory notice of deficiency (a 90-day letter) issued in cases where agreement on income tax matters is not reached.  Since the US Tax Court does no have jurisdiction to hear VI income tax cases, the taxpayer may take his or her case directly to the District Court of the Virgin Islands without first paying the deficiency.

The Processing and Returns Branch for all three islands is centrally located on St. Thomas.  The primary responsibilities of this branch are the processing of all tax returns and the depositing of all revenues received by the BIR.  St. Croix has its own daily deposit functions.  Excise tax collections are also carried out separately on each island.  Other processing functions such as the issuance of tax clearance letters for the STOP TAX EVASION PROGRAM (STEP) have also been decentralized to the St. Croix District.  The Department of Finance accepts payment for the BIR on St. John and in Frederiksted, St. Croix.

 

The Computer Operations Branch is responsible for the automated processing of all tax information on computer systems located on both St. Thomas and St. Croix.  The primary services rendered by the BIR’s computer branch are transmittal of taxpayer refunds to the Department of Finance for issuance, billing of outstanding liabilities and provision of current management information.

 

The Audit Branch has agents on St. Thomas and St. Croix.  The agents receive IRS training.  Audit procedures and forms are generally the same as those of the IRS.  This branch is responsible for the classification and examination of income tax and local tax returns.

 

The Delinquent Accounts and Returns Branch is responsible for the collection of all unpaid internal revenue taxes of the Virgin Islands, other than real property taxes, stamp taxes and franchise taxes.  Collection of these taxes is discussed subsequently in this publication of pages 24 through 27.  Revenue Officers in the Delinquent Accounts and Returns Branch receive IRS training and collection procedures and forms are generally the same as those used in the United States, including levies, liens and seizures.  The Delinquent Accounts and Returns Branch posts revenue officers on both St. Thomas and St. Croix with revenue officers form St. Thomas assigned to cover St. John as well.

 

The Criminal Investigations Division is responsible for the investigation of tax fraud and tax evasion cases.  Criminal cases are referred to the Department of Justice for prosecution.  The special agents of the Criminal Investigation Division receive IRS training at Glenco, Georgia.

 

INDIVIDUAL INCOME TAX

 

GENERAL.   Individuals who are bona fide residents of the Virgin Islands on the last day of the tax year (GENERALLY DECEMBER 31) file Form 1040( See Appendix: Exhibit 1) with the Virgin Islands and pay tax on their worldwide income to the Virgin Islands.  If a VI resident taxpayer has non-VI source income, he or she must also complete VI Form 1040 INFO (NON-VIRGIN ISLANDS SOURCE INCOME OF VIRGIN ISLANDS RESIDENTS) (See Appendix: Exhibit 2) and attach it to Form 1040 before filing it with the BIR.

 

The VI tax liability for all other US citizens or residents with VI income is computed as a fraction of the taxpayer’s total liability, based on the ratio of adjusted gross income.  Such individuals must file signed identical returns with the United States and the Virgin Islands by April 15 of the following year (assuming a calendar year taxpayer), using IRS FORM 8689 (See Appendix: Exhibit 3) to figure out what portion of income tax must be paid to the Virgin Islands.  This form must be attached to both returns.  The US return should be filed with the IRS Center, Philadelphia, PA 19255 and the VI return should be filed with the BIR in St. Thomas.  When this procedure is followed, both a taxpayer’s payment s to the Virgin Islands and VI employer withholdings are credited against his or her US tax liability.

 

Section 932 of the IRC provides that the United States will be treated as including the Virgin Islands for purposes of determining the US tax liability of US citizens or residents with Virgin Islands income, and the Virgin Islands will be treated as including the United States for purposes of determining VI tax liability.  In effect, this ensures that US citizens who do not reside in the Virgin Islands are not treated as non-resident aliens by the Virgin Islands for tax purposes.  IRS Publication 570 – TAX GUIDE FOR INDIVIDUALS WITH INCOME FROM US POSSESSIONS, discusses the filing requirements of VI residents and US residents with VI income.

 

In addition, taxpayers who fall under §932 of the IRC can exchange Virgin Islands and US real estate free of tax under the like-kind exchange rules of IRC §1031.

 

TEMPORARY WORKERS.  Persons who perform any work in the Virgin Islands receive VI source income and this must pay tax to the Virgin Islands on their VI source income using FORM 8689 as described above.

 

TAX PROCEDURES FOR NON-RESIDENT ALIEN INDIVIDUALS.  Individuals who are not US citizens or residents of the United States or the Virgin Islands must continue to file  for FORM 1040NR (See Appendix: Exhibit 4) with the Virgin Islands and pat tax to the Virgin Island on VI income, taking a foreign credit where applicable for the taxes paid.

 

PUERTO RICO RESIDENTS.  US citizens who reside in Puerto Rico and have Virgin Islands or Virgin Islands and US source income must file FORMS 1040 and 8689 with the BIR and the IRS reporting only the Virgin Islands and US source income.

 

Puerto Rico residents who are resident aliens with Virgin Islands income are required to file FORM 1040 with the BIR.  While the law is unclear regarding the filing requirements of Puerto Rico resident aliens with Virgin Islands and US income, the BIR suggests those individuals file FORMS 1040 and 8689 with the BIR and the IRS Philadelphia Service Center.

 

If the individual also has Puerto Rico income, deductions must be prorated by the percentage of the Virgin Islands and US adjusted gross income to the total adjusted gross income.  The individuals are allowed the full personal exemption(s) deduction, however, Puerto Rico residents who work in the Virgin Islands are not entitled to the EARNED INCOME CREDIT.

 

CORPORATE INCOME TAX

 

 

TAX PROCEDURES FOR DOMESTIC AND FOREIGN CORPORATIONS.  A domestic corporation for Virgin Islands income tax purposes is one that is organized under the laws of the Virgin Islands.  A foreign corporation is one that is not organized in the Virgin Islands, including a corporation organized in the United States.  A domestic corporation pays income taxes on its worldwide income to the Virgin Islands, generally using FORM 1120 (See Appendix: Exhibit 5).  A foreign corporation pays VI income taxes only on its VI income and its income VI source income and its income effectively connected with a Virgin Islands trade of business, using FORM 1120F (See Appendix: Exhibit 5A).  The subchapter S election of corporations organized in the US is not valid in the Virgin Islands, therefore, such corporations are deemed foreign corporations required to file  FORM 1120F.

 

TEN PERCENT SURCHARGE.  The Virgin Islands imposes a ten (10) percent surcharge on the total Virgin Islands income tax liability of all corporations, both domestic and foreign.  This surcharge was authorized by the US Congress in 1976 and first enacted by the Virgin Islands Legislature for calendar year 1985.  It is found in §581, Chapter 16 Title 33 of the Virgin Islands Code.  The surcharge is due when regular tax payments (estimated and final) are due.  For example, a corporation that falls within the 15 percent bracket under the IRC would owe tax at a 16.5 percent rate (15 percent plus 1.5 percent) and would pay 110 percent of the amount otherwise due under the Internal Revenue Code as estimated tax payments and with the extension request and/or final return.  This ten percent surcharge cannot be claimed as a deduction by the corporate taxpayer.

 

CONSOLIDATED RETURNS.  A Virgin Islands corporation cannot file a consolidated income tax return with a related US tax entity.

 

SALE OF VI REAL PROPERTY BY FOREIGN CORPORATIONS.  The Foreign Investment in Real Property Tax Act of 1980 is applicable to foreign corporations owning real property interests in the Virgin Islands, as well as to non-resident alien individuals.  Under this Act as applicable to the Virgin Islands, a foreign corporation (or non-resident alien individual) pays tax attributable to gain from the sale of VI real property to the BIR under the terms of §897 of the IRC.  IRC §1445 provides for a withholding tax on a disposition of VI real property occurs after January 1, 1985, if the disposition does not meet one of the specific exceptions set out in IRC §1445.  US corporations, trusts, and partnerships, but not individuals, are subject to the withholding rules.

 

Requests for reduced withholding pursuant to the treasury regulations promulgated under IRC §1445, should be directed to Office of the Chief Counsel on St. Thomas at 9601 Estate Thomas, St. Thomas, VI 00802 or St. Croix at  4008 Estate Diamond Plot 7-B, Christiansted, VI 00820-4421.

 

FOREIGN SALES CORPORATION.  The 1984 Tax Equity and Fiscal Responsibility Act and subsequent legislation passed by the Virgin Islands Legislature make the Virgin Islands an attractive location for US exporters desiring to form Foreign Sales Corporation (FSC).  US exporters can earn tax-exempt income by using VI FSC to perform some outside the United States that an US company might otherwise perform, such as solicitation and advertising.  Special rules allow small exporters to qualify for FSC benefits without meeting all the FSC tests.  FSC’s are discussed in more detail on page 29.

 

RULING REQUIREMENTS FOR CERTAIN OUTBOUND TRANSACTIONS.  Section 367 of the IRC, which requires a ruling where a reorganization occurs between a domestic and a foreign subsidiary or parent, must be considered whenever a liquidation, merger, or other form of reorganization occurs between a VI corporation and its foreign subsidiary or parent, including a US corporation.  Ruling requests should be directed to the Director of the Virgin Islands Bureau of Internal Revenue at 9601 Estate Thomas, St. Thomas, VI 00802.

 

 

 

PARTNERSHIPS

 

Virgin Islands partnerships and foreign partnerships within the Virgin Islands income file their FORM 1065 – US PARTNERHIP RETURN OF INCOME with the BIR.  If the partnership is engaged in a trade or business in the Virgin Islands, then each member, whether a resident or non-resident of the Virgin Islands, must report his or her share of partnership income to the BIR.  If the partnership is created or organized in a jurisdiction other than the Virgin Islands but has VI income, it must file a FORM 1065 and report that income.  In such a case the partnership’s resident or non-resident partners must report their share of VI income to the BIR following the filing procedures set out in IRC §932 if they are individuals.

 

WITHHOLDING FROM WAGES, SOCIAL SECURITY

& UNEMPLOYMENT TAXES

 

GENERAL RULE.  The VI law covering the withholding on wages by employers and remittance to the Virgin Islands Government is the same as the United States as it relates to the dates for remittance, amounts to be remitted, the calculation of withholding amounts, and the notification to employees of the amounts withhold by January 31 of the following year.  Taxpayers should consult CIRCULAR E (PUBLICATION 15) for the applicable amounts and dates.  The withholding and remittance of social security (FICA) and Federal unemployment taxes (FUTA) also follow the same procedures as the United States.

 

REMITTANCE OF INCOME TAX WITHHOLDING.  Income tax withheld from wages paid for services performed in the Virgin Islands, whether by a VI employer, a US employer or and employer base elsewhere are remitted to the VI Bureau of Internal Revenue.  Deposits are made during the quarter as required by Circular E are made to the BIR on FORM 501VI – WITHHOLDING TAX DEPOSIT.  FORM 941VI – EMPLOYER’S QUARTERLY WITHHOLDING TAX RETURN must be filed by the last day of the moth following the quarter.  At this time, the employer must pay the amount due on the return minus the credit given for any deposits made.  IRS FORMS 941 AND 501 CANNOT BE USED FOR THIS PURPOSE.  Also, all payments must be made directly to the BIR.  There is no procedure in place for deposits to be made to a bank or to the IRS and then transferred to the BIR.

 

RULES FOR FICA AND FUTA.  FICA and FUTA are in force in the Virgin Islands but remitted to the IRS Center, Philadelphia, PA 19255 not to the BIR.  IRS Circular SS (PUBLICATION 80) sets out the procedures for handling FICA and FUTA taxes.

 

FORM W-2 VI AND FORM W-3SS.  By January 31, each employer must give a wage and tax statement to each employee who earned wages for services performed in the Virgin Islands during the preceding year.  In the Virgin Islands, a special FORM W-2VI MUST BE USED.  Similarly, FORM W-3SS also a special form used in the Virgin Islands must be used to transmit COPY FORM A of FORM W-2VI to the SOCIAL SECURITY ADMINISTRATION while COPY 1 must be used to transmit COPY 1 of FORM W-2VI to the BIR.

 

Self-employed residents of the Virgin Islands must use FORM 1040SS to report self-employment income and pay self-employment tax to the IRS Center, Philadelphia, PA 19255.  Form 1040SS may be obtained at the Federal Building, Room 216 Veterans Drive, Charlotte Amalie, St. Thomas, Virgin Islands, 00802, (340) 774-7870 or at both of the BIR offices.

 

PENSION, PROFIT SHARING AND EMPLOYEE BENEFIT PLANS

 

The Virgin Islands is considered to be a state for the provisions of the Employee Retirement Income Security Act of 1974.  Generally, the IRS must approve a plan falling within the purview of the Act.  Additionally, all provisions governing employee benefits are mirrored to the Virgin Islands.  For example, a VI employer can set up a “cafeteria plan” under IRC §125 if the plan otherwise qualifies.

 

 

CHARITABLE ORGANIZATIONS

 

TAX-EXEMPT CHARITABLE ORGANIZATIONS.  A charitable organization that is a branch of a national charity such as the American Red Cross or the American Lutheran Church does not need to file an application for tax-exempt status with the BIR for recognition as a charitable organization.  Such an organization should, however, provide the BIR with a copy of the national organization’s exemption letter from the IRS in order to obtain a letter exempting the organization form certain VI taxes.  Other organizations can apply for tax-exempt status under IRC §501(c) (3) by fling FORM 1023.  Upon receiving a favorable determination letter, contributions to the organization are deductible as charitable contributions.

 

Under current practice as developed between the BIR and the IRS, the BIR reviews and forwards each completed Form 1023 to the IRS for final approval to ensure that charitable deductions are allowable to both VI and US contributors.  Once the IRS issues a letter granting tax-exempt status, the BIR issues a similar letter granting exemption from certain VI taxes, including the gross receipts tax, excise tax and entertainment tax which are separately discussed in this publication on pages 15 to 20.  IRS approval takes four to five months on average but can take longer.  FORM 1024 is used to apply for tax exemption by organizations that do no qualify as charities such as business leagues.

 

Forms 1023 and 1024 may be obtained form the BIR’s Office of Chief Counsel on St. Thomas or St. Croix.  Exempt organizations are required to file FORM 990 – RETURN OF ORGANIZATION EXEMPT FORM INCOME TAX with the BIR and the IRS by the 15th day of the fifth month after the organization’s accounting period ends.

 

HOMEOWNERS’ ASSOCIATIONS.  FORM 1120H is used by homeowners’ associations to request a partial tax exemption and must be filed with the BIR annually.  Exemption is automatic with the filing; a letter of approval from the BIR is not issued.

 

 

FEDERAL ESTATE TAX

 

The federal estate tax is not mirrored to the Virgin Islands but is administered by the IRS.  Federal estate tax returns are filed with and any taxes owed are paid to the IRS Center, Philadelphia, PA 19255 and not to the Virgin Islands.  Federal estate tax is payable by all US estates having a value that exceeds the total of exemptions granted by the IRS.  Certain exemptions for non-US situs assets apply to persons who are born or naturalized in the Virgin Islands and who die while resident in the Virgin Islands (or another possession).

 

VIRGIN ISLANDS INHERITANCE TAXES

 

Although a Virgin Islands inheritance tax is set out in Chapter 1, Title 33 of the VI Code, effectively all inheritances after 1984 is exempt form taxation.  Specifically, under Section 5 of Chapter 1, an inheritance is exempt form the payment of inheritance taxes if the decedent, when living, would have been considered a “a non-resident not a citizen of the United States” under 26 USC §2501(c), if the decedent was a resident of the Virgin Islands, or if the decedent owned property in the Virgin Islands at the time of his or her death.  The liberal exemption form inheritance tax applicable when the decedent resided or owned property in the Virgin Islands if effective for inheritances resulting from an individual who died after September 18, 1984.

 

GIFT TAXES

 

FEDERAL GIFT TAX.  US citizens residing in the Virgin Islands who make gifts in excess of annual exclusion (generally $10,000.00 per recipient) must file a Federal gift tax return with the IRS Center, Philadelphia, PA 19255.  Again, a limited exemption may apply for gifts of VI assets by VI residents who were naturalized or born in the Virgin Islands.

 

VIRGIN ISLANDS GIFT TAX.  Similar to the Virgin Island inheritance tax, although Virgin Islands law contains gift tax provisions in Chapter 2, Title 33, VIC, all gifts are effectively exempt form the tax.  Specifically, a person is exempt form gift tax if he or she is considered a “non-resident not a citizen of the United States” under 26 USC §2501(c), or if the person was a resident of the Virgin Islands at the time the gift is made.  The exemption from gift tax is effective for gifts made after September 18, 1984.

 

CUSTOM DUTIES

 

Custom duties in the Virgin Islands are imposed under the US custom law and are administered by the Custom Service, a division of the US Treasury Department.  Custom duties are generally imposed at the rate of six percent ad valorem on all articles, good, merchandise and commodities that ate manufactured or those originated outside the territorial sovereignty of the United States and are brought into the Virgin Islands.  However, the Virgin Islands Legislature has the authority to reduce the custom duties and has exempted certain tourist and construction items from all custom duties.  Certain other exemptions apply including exemptions stemming from Danish law.

 

MISCELLANEOUS LOCAL INTERNAL REVENUE TAXES

 

The following local internal revenue taxes are codified in Chapters 3, 4 and 5, Title 33 of the Virgin Islands Code.

 

GROSS RECEIPTS TAX

 

IN GENERAL.  The Virgin Islands gross receipts tax is a tax on total receipts form the conduct of a business within the Virgin Islands without reduction for cost of goods sold or services or any other expenses.  A taxpayer’s tax year for gross receipts tax purposes should generally follow the taxpayer’s fiscal year for income tax purposes.

 

$5,000.00 – PER-MONTH EXEMPTION.  The gross receipts tax falls into the following two categories:

1.      Those businesses with annual gross receipts of $150,000 or more and

2.      Those businesses with annual gross receipts of less than $150,000.

 

Businesses in the fist category pay a tax of four (4) percent on their entire gross receipts with businesses in the second category pay a tax of four (4) percent on receipts in excess of $5,000.00 per month.  The $5,000.00 per month exemption is lost if not used in one month.  For example, a business with gross receipts of $3,000.00 in one month and $7,000.00 in a second month would owe tax on $2,000.00 times four percent, or $80.00, while a business with gross receipts of $5,000.00 in each month would owe no tax.

 

GROSS RECEIPTS TAX EXEMPTIONS.  Commissions earned on sale of VI lottery tickets, gross income of banks, gross income of franchised bus operators, receipts of certain costume jewelry manufacturers and receipts form farming and fishing are not subject to the gross receipts tax.  Reverse osmosis water production plant operators may be eligible for a partially exempt form the gross receipts tax.  The tax does not apply to premiums on insurance written or on airline tickets but commissions earned by insurance agents and travel agents are subject to the gross receipts tax.  Also, Economic Development beneficiaries may be exempt form the gross receipts tax as discussed more fully on pages 28 and 29.

 

FILING REQUIREMENTS.  Businesses with gross receipts of more than $120,000.00 per year are required to file monthly reports of FORM 720VI – GROSS RECEIPTS MONTHLY TAX RETURN. 

 

Such businesses receive gross receipts tax returns from the BIR to pay their gross receipts tax for one year.  Businesses with gross receipts of $120,000.00 or less per year are instead required to file an annual report with the BIR by the 30th day following the last day of the ear concerned on FORM 720B – GROSS RECEIPTS ANNUAL TAX RETURN.  For a calendar year business the return is due on January 30 of the following year.

 

A business that is exempt form payment of the gross receipts tax is required to file a return.  Beneficiaries of the territory’s Economic Development Commission Program are required to file FORM 720VI monthly, indicate their gross receipts and write EDC BENEFICIARY EXEMPT across the bottom of the return.  Tax-exempt charitable organizations, homeowners’ associations and other entities and individuals that receive business receipts but are not required to pay gross receipts tax should still monthly or annually returns depending on whether or not their actual annual gross receipts exceed $120,000.00.

 

RELATED ENTITIES OR INDIVIDUALS.  Corporation sharing more than 50 percent common ownership businesses owned by the same taxpayer or members of a family and other related businesses only get one $5,000.00 per month exemption for all related businesses and must combine all receipts from all businesses to determine whether the $150,000.00 threshold has been reached.

 

EXCISE TAX

 

IN GENERAL.  All persons, firms, and corporations doing business in the Virgin Islands except those that are specifically exempted must pay excise tax on all goods, merchandise, or commodities manufactured in or brought into the Virgin Islands for sale or disposition in the course of a trade or business for processing or manufacturing or for any other business purpose.  The excise tax is based on the invoice of such merchandise, plus a mark-up of five percent.  Rates of tax depend upon the applicable category and range form two percent to twenty-five percent.

 

Drugs, medicine and clothing are taxes at two percent; tires are taxes at five percent; self-propelled vehicles, firearms, ammunition and bicycles are taxes at ten percent; US beers are taxes at $1.55 per case; foreign beers at $2.08 per case; liquor at $6.00 per case or $2.50 per wine gallon, whichever is greater; cigarettes at 25 percent; tobacco (exclusive of cigars) at 20 percent; some leather goods and perfumes at three percent; rums at $4.70 per case or $1.96 per wine gallon whichever is greater and carbonated drinks at a rate of three percent plus $0.36 per case.  Under the Anti-liter and Beautification Act of 1990, the “catch-all” rate for other items is four percent unless and exemption applies.

 

Contractors doing business in the Virgin Islands on government projects are liable for excise tax on their imports.  For equipment imported under a lease or rental agreement for a period of 180 days or fewer, the excise is based on the actual rental charge or on approximate arms-length rental charge.

 

PAYMENT.  Cargo (both foreign and domestic) imported into the Virgin Islands for business purposes is cleared by the US Customs Service and the BIR.  An importer is required to pay excise tax on cargo to the BIR at the time of entry unless the importer has a qualifying excise tax bond or rider to its Customs bond.  Most merchants have such bond or riders which give them the 15th day of the following month to pay the BIR.  Payment of the excise tax is submitted using FORM 721VI – EXCISE TAX RETURN.

 

EXEMPTIONS.  The importation or manufacture of the following categories of merchandise is exempt from the VI excise tax: certain educational materials including books; most food stuff; coal; fuel oil; molasses used in the production of rum, animal and poultry feed; commercial fertilizers; motor vehicles requiring licensing for highway use; goods, merchandise and commodities brought into the Virgin Islands for disposition in the course of export trade; and certain sales to the US or VI Government.  Certain specific tourist and construction items are exempt form excise taxes as well as from customs duties.

 

Importers of exempt items are required to complete FORM 721-TC – VI NON-TAXABLE EXCISE TAX RETURN for items exempted pursuant to Bill No. 14-0411 (Tourist and Construction Items) or FORM 721 EP VI – NON-TAXABLE EXCISE RETURN  for items not exempted under Bill No. 14-0411.

 

HOTEL ROOM TAX

 

The Virgin Islands imposes a tax on hotel room rentals.  The tax applies to and individual who stays in a hotel or a guest house as well as one who rents or leases and apartment, condominium or residence for a day, week or month if the total rental or lease period is less than 90 days.  Guests pay a hotel room tax of eight (8) percent of their gross room rate which is the total sum charged to a guest for the use of one or more rooms plus any additional charges, such as and energy surcharge or maintenance fee but not charges for food, beverages and gratuities.  It is collected by the hotel or other leaser and remitted to the Bureau monthly on FORM 722VI – HOTEL ROOM TAX RETURN by the 30th day of the following month.

 

HIGHWAY USER’S TAX

 

A highway user’s tax is imposed in the Virgin Islands to provide funding for highway construction and maintenance.  Every person or firm registering a vehicle requiring licensing in the Virgin Islands for the first time must pay a highway user’s tax based upon the unladen weight of the vehicle at the rate of sixteen cents per pound with a minimum tax of $25.00.

 

Automobiles that are imported for use as taxicabs are exempt from the imposition of the highway user’s tax.  However, when such a vehicle is first registered in the Virgin Islands as a private vehicle, the person registering and licensing the vehicle must pay the highway user’s tax no mater what period of time has elapsed since the vehicle was imported for use as a taxicab.  Qualified charitable organizations are granted an exemption from the tax on up two motor vehicles at a time.

 

ENTERTAINMENT TAX

 

A five percent tax is imposed on the gross receipts derived form performances and entertainment including theatrical performances, motion pictures, boxing matches, circuses and concerts but not dances.  However, no tax is imposed where the performance or entertainment is sponsored by a recognized religious, charitable, civic, educational or other organization not giving or promoting the performance or entertainment for profit.  Also no tax is imposed on businesses that pay VI gross receipts tax on their receipts form the performance or entertainment.

 

The entertainment tax is dire the business day following the performance or entertainment if a BIR employee is no assigned to collect the tax at the performance or entertainment.  The entertainment tax should be reported using FORM 720-ENT – ENTERTAINMENT TAX RETURN.

 

FUEL TAX

 

A tax of 14 cents per gallon is imposed upon sale of gasoline and diesel fuel manufactured, sold or consumed in the Virgin Islands.  The tax is imposed upon the manufacturer or importer of fuel and is due within thirty (30) days after the end of the month concerned.

 

Fuel sold to the Virgin Islands Government or fuel used to fuel aircraft, motorboats, yachts, or any other motor vehicle not operating on the public highways or for industrial or other purposes not connected with the fueling of motor vehicles is exempt form this tax.

 

TELEPHONIC LONG DISTANCE TAX

 

The Virgin Islands Government imposes a 2.5% surtax on the total charges of all telecommunication long distance calls originating from or terminating in the VI.  The surtax applies to every individual, firm, corporation or other telephone company engaged in providing telecommunication services in the VI.

 

The surtax shall be paid by the company and not separately listed on the customer’s bill.  The surtax is filed on forms provided by the BIR and is due within 30 days following the last of the calendar month concerned.

 

The following taxes are codified in Chapter 21 Title 32 of the Virgin Islands Code.

 

 

GROSS REVENUE TAX

 

The Virgin Islands imposes a tax on gross revenue of a casino licensee’s gaming operations.  The tax rate varies between 8 and 12 percent, depending on the number of years in existence.  Gross revenue is defined as the total of all sums, including checks, whether collected or not, actually received by a casino licensee for gaming operations, less only the total of all sums paid out as winnings to patrons and a deduction for uncollectible gaming receivables.  The deduction for uncollectible gaming receivables shall no exceed the lesser of: (1)  4% of the total sums received minus winnings paid to patrons; or (2) a reasonable provision for uncollectible patron checks received from gaming operations.  The casino licensee must file a monthly tax return with the BIR within 30 calendar days following the last day of the month concerned to report the gross revenue tax.

 

INVESTMENT ALTERNATIVE TAX

 

An investment alternative tax is imposed on the gross revenue of a casino licensee.  The tax, in the amount of 2.5 percent of gross revenue is due within 30 days following the last day of the fiscal year.  Casino licensees must make partial payment of the investment alternative tax to the BIR on or before the 15th day of the first, fourth, seventh and tenth month of each year.  The amount of the partial payment is determined by calculating 1.25% of the estimated gross revenues for the three months period immediately preceding the fist day of the due date months.  Casino licensees are exempt from paying the investment alternative tax on gross revenues received during the fist fiscal year.  An investment tax credit against the investment alternative tax is available for casino licensees who purchase bonds issued by the Casino Reinvestment Development Authority or who make approved eligible investments.

 

 

 

 

 

LOCAL TAXES NOT ADMINISTERED BY THE

 VIRGIN ISLANDS BUREU OF INTERNAL REVENUE

 

The following local taxes and fees are administered by offices other than the Virgin Islands Bureau of Internal Revenue.

 

REAL PROPERTY TAX

 

Real property tax is generally lower in the Virgin Islands than elsewhere.  A tax rate of 1.25 percent is applied against 60 percent of the actual value of the property.  The real property tax may be reduced by establishing a homestead exemption.  If the owner occupies at least a portion of the property full-time, the first $20,000.00 of the assessed value is not taxable.  For veterans and widow/widowers of veterans, the exemption is also $20,000.00.  Persons 60 years and over having maximum income of $7,500.00 per year are granted an exemption of up to $20,000.00 of the assessed value.  The maximum exemption in any situation is $20,000.00 or $250.00 in tax.

 

Property used solely for farming with sales to the public is entitled to a 95 percent exemption.

 

The Lieutenant Governor’s Office is responsible for the administration of the real property tax.  Inquiries may be directed to the Office of the Lieutenant Governor, Tax Assessor’s Office, #18 Kongens Gade, St. Thomas, VI 00802, (340) 776-8505 or 1131 King Street, Christiansted, VI 00820, (340) 773-6449.

 

FRANCHISE TAX

 

Every corporation organized under the laws of the Virgin Islands and every foreign corporation qualified to do business in the Virgin Islands is required to pay by June 30th of each year a franchise tax of $1.50 for each one thousand dollars of capital stock used in conducting business in the Virgin Islands with the minimum payment of $150.00.

 

 Pursuant to Chapter 5, Title 13 of the Virgin Islands Code, this tax is administered by the Lieutenant Governor’s Office.

 

Foreign Sales Corporation (FSC) franchise taxes range form $400.00 for a small FSC to up to $25,000.00 for a FSC having gross receipts in excess of $500 million a year.  However, a FSC may reduce its franchise tax liability by an amount equal to 50 percent of the wages paid in the previous year to VI resident employees up to a maximum reduction of 50 percent of the franchise tax liability per year.

 

Inquiries regarding the franchise tax should be directed to Office of the Lieutenant Governor, Corporation Division, 52E-1 Estate Thomas, St. Thomas, VI  00802, (340) 776-8515.

 

LICENSING FEES

 

Every individual, partnership, firm or corporation engaged in any profession, trade and craft, business or occupation must obtain an annual license form the Department of Licensing and Consumer Affairs, Property and Procurement Building, #1 Subbase Room 205, St. Thomas, VI 00802, (340) 774-3130 or Golden Rock Shopping Center, Christiansted, VI 00820, (340) 773-2226 and pay a fee for the license.  The details and costs may be found in Chapter 9, Title 27 of the VI Code.

 

As part of the Virgin Islands Government Stop Tax Evasion Program (STEP), in order to get a new or renewal license, the taxpayer must complete and file FORM LIC1 – APPLICATION FOR TAX FILING AND PAYMENT STATUS REPORT – LICENSING with BIR and receive a favorable tax filing and payment status report letter.  Every individual, partnership, firm or corporation applying for a Coastal Zone Management Permit form the Virgin Islands Department of Planning and Natural Resources must complete and file FORM CZM – APPLICATION FOR TAX FILING AND PAYMENT STATUS REPORT – CZM with the BIR and similarly obtain a favorable report letter.

 

STAMP TAX

 

A stamp tax of two percent of the value of the property being transferred is imposed by the Virgin Islands upon the instrument evidencing the conveyance of real property or upon the bill evidencing the sale of personal property.  Certified copies of documents form the Office of the Lieutenant Governor, Recorder of Deeds are taxed at the rate of $10.00 for the first page and $1.00 for each additional page.

 

Stamps are sold by the Recorder of Deeds in the Office of the Lieutenant Governor, at #18 Kongens Gade, St. Thomas, VI  00802, (340) 774-2991 Ext. 212 or 1131 King Street Ste 101, Christiansted, VI 00820-4970 (340) 773-6449.

 

WORKMEN COMPENSATION

 

Workmen Compensation is mandatory for every employer of one or more employees in the Virgin Islands.  The premium rates vary with the various classifications of employees.  FORM GIF 1A – THE EMPLOYER’S REPORT TO THE COMMISSIONER OF FINANCE must be filed annually by February 28th to show the number of workers employed, the kind of occupation or industry, total wages paid and the amount of premium payable.  The annual premium is then paid in two installments, on March 31 and on June 30.  The first installment must consist of at least one-half of the annual premium plus any additional premium amount that is due (Chapter 11, Title 24, VIC).

 

Further information can be obtained form the Department of Finance, Government Insurance Fund, 76 Kronprindsens Gade, St. Thomas, VI 00802, (340) 774-4750 Ext. 2255 or the Department of Finance, Government Insurance Fund, 4008 Estate Diamond Lot 48, Christiansted, VI 00820-4421, (340) 773-1105.

SPECIAL AIDS TO BUSINESSES

 

ECONOMIC DEVELOPMENT PROGRAM

 

Economic Development benefits are granted to certain businesses that locate in the Virgin Islands.  The income tax benefits were enacted by the Virgin Islands pursuant to the authority granted b the US Congress in §934(b)(1) of the IRC to reduce or rebate taxes on Virgin Islands income.  To apply, applicants must generally invest at least $50,000.00 exclusive of inventory; employ at least ten (10) persons full-time who are residents of the Virgin Islands and comply with all local and federal laws.  Certain small manufacturers may qualify with as little as a $20,000.00 investment and two employees.  Also, US corporations meeting the requirements of IRC §936 are eligible to apply for Virgin Islands economic development benefits.

 

Beneficiaries may be exempted form such Virgin Islands taxes as real property taxes, gross receipts taxes and certain excise taxes.  Specifically, a beneficiary is exempt form excise taxes on (i) building materials, machinery, equipment and supplies for use in construction of the physical plant and (ii) raw materials and component parts brought into the Virgin Islands for the purpose of producing, creating or assembling an article, good or commodity as a result of industrial or manufacturing processing of such raw materials and component parts.  In addition, beneficiaries may receive a reduction of up to 90 percent of income taxes and reduced withholding tax rates on dividend and interest payments.  Finally, beneficiaries may be subject to reduced customs duties on the importation of raw materials.

 

To qualify fir benefits, the business must generally be engaged in assembly, processing of raw materials or products, manufacturing, agriculture, mariculture, transportation, utilities, hotel or guest house operations, recreation or be a designated service business serving customers outside the Virgin Islands.

 

The Virgin Islands Economic Development Commission administers this program and many inquiries should be made to the EDC at PO Box 6400, St. Thomas, VI 00801, (340) 774-8104.  Additional information is also provided in the US Virgin Islands Business Guide which is prepared by the EDC as a general information source for local and foreign business persons, entrepreneurs and prospective investors.

 

FOREIGN SALES CORPORATION

 

Legislation enacted by the Virgin Islands Legislature provides tax incentives to US exporters establishing Foreign Sales Corporations or FSCs in the Virgin Islands.  A FSC that is incorporated in the Virgin Islands is eligible for the benefits provided by this legislation (Chapter 12, Title 13, VIC).

 

FSCs are exempt form payment of income tax and form the locally enacted gross receipts, excise tax and custom duties.  In addition, FSCs are exempt from the withholding provisions of §§1441 and 1442 of the IRC as they apply in the Virgin Islands.  Likewise, the provisions of IRC §§871(a)(1) and 881 imposing a tax on citizens and residents of the United States and on the shareholders of US corporations with respect to payments received form VI sources, are no applicable to FSCs.

 

In order for a FSC to receive the above exemptions, it must hold both directors and shareholders meeting in shareholders meeting in the Virgin Islands annually.  The shareholders meeting requirement, but no the directors meeting requirement, can be waived by shareholders written consent.  Also, a FSC must maintain an office in the Virgin Islands that has a resident agent in charge on whom service of legal process against the corporation may be made.  However, a FSC that meets the requirements of IRC §922(a)(1)(D)(i) will be deemed to have satisfied this requirement.

 

Information on the US Virgin Islands as a location for FSC is available from the Lieutenant Governor’s Office, #18 Kongens Gade, St. Thomas, VI 00802, (340) 774-2991.

 

 

EXEMPT COMPANIES

 

The US Virgin Islands Exempt Companies Act of 1986, located in Chapter 14, Title 13 of the VI Code is authorized under § 934 (b)(1) and §934(b)(3) of the IRC and became operation in February 1987, with the signing of the Tax Implementation Agreement between the United States and the Virgin Islands.  Under this Act, foreign owned companies with no US or VI trade or business can elect for a 20 year local exemption form all taxes except an annual $1,000 franchise tax.  There are no local requirements for licenses, accounts or meetings in the Virgin Islands.  Exempt companies must generally have less than 10 percent US and VI ownership and bearer shares are treated as owned by US persons.  Ownership of VI exempt companies is subject to disclosure to the IRS under the terms of the Tax Implementation Agreement.

 

EXEMPT INTERNATIONAL BANKING FACILITIES

 

VI exempt international banking facilities are authorized under §934(b)(1) of the IRC.  Chapter 21, Title 9 of the VI Code provides complete tax exemption for exempt international banking facilities except for a $1000.00 annual franchise tax and a $4,000.00 annual license fee.  These banks may generally carry out the same activities as other VI banks except that they may no serve VI persons.  Like other exempt companies, they must have less than 10 percent US and VI ownership, must elect to be exempt and must obtain a 20 year contract through the Lieutenant Governor’s Office.

 

CAPTIVE INSURERS

 

Firms that underwrite insurance or conduct reinsurance business with respect to risks that are situated exclusively outside the Virgin Islands may be exempt from Virgin Islands insurance laws pursuant to Chapter 55, Title 22 of the Virgin Islands Code if they met the requirements to be an exempt international insurer.  These companies are also eligible for complete tax exemption except for a $1,000.00 franchise tax and a $6,000.00 license fee.  To be eligible for tax exemption, a firm must meet the general ownership requirements of VI exempt companies.  Exempt Insurance Management companies are also eligible for EDC tax incentives.