U.S. Virgin Islands Tax System
Overview of the USVI Tax System
“Mirror” tax code whereby USVI Substituted for “United States”
USVI Corporations File Form 1120 with the BIR
Foreign Corporations File Form 1120F with the BIR
USVI is Foreign to the US for Corporate tax purposes
Passive foreign investment companies rules
Foreign personal holding companies apply
The Virgin Islands benefits from a mirror tax law under which Virgin Islands taxpayers calculate their taxes based on the U.S. Tax Code but pay them to the Virgin Islands Government. Congress has long authorized the Virgin Islands Government to grant tax exemptions in certain areas to encourage development. To this end, the U.S. Virgin Islands Government has worked closely with the federal government to develop a comprehensive legislative and regulatory scheme to encourage ecommerce activity in the Territory.
In April 2008, the U.S. Treasury Department issued permanent guidelines that illustrate the types of ecommerce business endeavors that meet sourcing requirements to receive favorable tax benefits. The combination of bandwidth, intellectual property protection, and federal guidelines clarifying tax exemption rules provides a unique opportunity to maximize shareholder value by conducting ecommerce from the U.S. Virgin Islands.
To ensure the viability of its tax exemption program, the Virgin Islands Government has maintained a continuous effort to seek guidance and clarification from the U.S. Treasury Department regarding income sourcing rules and other eligibility requirements. As a result of these efforts, the Treasury Department issued Notice 2006-76 in August of this year. The notice illustrates and confirms the types of companies and activities which qualify for tax exemption, and confirms the application of federal tax law and regulations in determining whether income is derived from sources within the Territory and whether it is effectively connected with the conduct of a trade or business within the Territory.
The 2005 U.S. Virgin Islands legislation and the 2006 federal Treasury guidance allow for companies that use eCommerce to license their high valued intellectual property to fully realize the tax advantages of this law. Qualifying companies engaged in qualified ecommerce related activities can receive these benefits by sourcing their eCommerce transactions from online servers located at our authorized data center and building an employee base in the USVI to support their ecommerce activities. This development has the beneficial effect of spearheading economic diversification in the Territory while fostering a tax-advantaged environment for technology related business.
United States Treasury and Internal Revenue Service Guidelines
The United States Treasury and Internal Revenue Service have written guideline examples that illustrate what types of business endeavors meet their sourcing requirements to receive this favorable tax benefit. General ecommerce activities include:
- Software Downloads
- Entertainment Downloads
- Analyst Reports
- On-Demand Subscriptions
- Video Streaming
- Information Data
The Treasury’s permanent regulations clarify source income treatment for certain knowledge-based businesses, facilitating e-commerce and software intellectual property models in the US Virgin Islands. VI residents are exempt from US taxes and, to spur economic development, the VI Bureau of Revenue offers up to 90% off of mirrored US rates and a low 4% rate on dividends and royalties generated in the USVI. But what type of economic activity qualifies? The Treasury has now provided specific examples:
Example 1: Corporation A, a corporation organized in Possession X, is engaged in a business consisting of the development of computer software and the sale of that software. Corporation A has its sole place of business in Possession X and is not engaged in the conduct of a trade or business in the United States. Corporation A receives orders for its software from customers in the United States and around the world. After orders are accepted, Corporation A's software is either loaded onto compact discs at Corporation A's Possession X facility and shipped via common carrier, or downloaded from Corporation A's server in Possession X. The sales contract provides that the rights, title, and interest in the product will pass from Corporation A to the customer either at Corporation A's place of business in Possession X (if shipped in compact disc form) or at Corporation A's server in Possession X (if electronically downloaded). Assume for purposes of this example that each transaction is classified as a sale of a copyrighted article under §1.861-18(c)(1)(ii) and (f)(2).
Under the principles of section 863(a), as applied pursuant to §1.937?2(b), because Corporation A passes the rights, title, and interest to the copyrighted articles in Possession X, Corporation A's sales income is sourced to Possession X. Corporation A's sales income is also effectively connected with the conduct of a trade or business in Possession X, under the principles of section 864(c)(3) as applied pursuant to §1.937-3(b). Corporation A's income is not from sources within the United States, nor is it effectively connected with the conduct of a trade or business in the United States. Accordingly, the U.S. income rule of section 937(b)(2), §1.937-2(c)(1), and paragraph (c)(1) of this section does not operate to prevent Corporation A's sales income from being Possession X source and Possession X effectively connected income under section 937(b)(1).
Example 2: Corporation B, a corporation organized in Possession X, has its sole place of business in Possession X and is not engaged in the conduct of a trade or business in the United States. Corporation B employs a software business model generally referred to as an application service provider. Employees of Corporation B in Possession X develop software and maintain it on Corporation B's server in Possession X. Corporation B's customers in the United States and around the world transmit detailed data about their own customers to Corporation B's server and electronic storage facility in Possession X. The customers pay a monthly fee to Corporation B under a Subscription Agreement, and they can use the software to generate reports analyzing the data at any time but do not receive a copy of the software. Corporation B's software allows its customers to generate the reports from their location and to keep track of their relationships with their own customers. Assume for purposes of this example that Corporation B's income from these transactions is derived from the provision of services.
Under the principles of section 861(a)(3) and §1.861-4(a), as applied pursuant to §1.937-2(b), because Corporation B performs personal services wholly within Possession X, the compensation Corporation B receives for services is sourced to Possession X. Corporation B's services income is also effectively connected with the conduct of a trade or business in Possession X, under the principles of section 864(c)(3) as applied pursuant to §1.937-3(b). Corporation B's income is not from sources within the United States, nor is it effectively connected with the conduct of a trade or business in the United States. Accordingly, the U.S. income rule of section 937(b)(2), §1.937-2(c)(1), and paragraph (c)(1) of this section does not operate to prevent Corporation B's services income from being Territory X source or Possession X effectively connected income within the meaning of section 937(b)(1).
IRS Circular 230 Notice
In compliance with U.S. Treasury regulations, please be advised that ecommerceisland.com does not provide tax advice to any persons or entities and that communication provided herein (or in any attachment) was not intended or written to be used, and cannot be used, for the purpose of (1) avoiding tax penalties or (2) promoting, marketing or recommending to another person any transaction or matter addressed herein.