Tax Advantages
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company can qualify for tax free status on Federal taxes.
The Virgin Islands is a small insular economy with few natural resources. It relies heavily on export trade and services to generate resident income and employment. The federal and territorial governments have enacted a series of tax incentives designed to foster investment and growth primarily in export related activities.
The Economic Development Commission (EDC):
The Economic Development Program is organized under Title 29, V.I.C., with offices in New York, Washington, D.C., St. Croix and St. Thomas. Its basic purpose and objectives are the promotion of growth, development and diversification of the Virgin Islands. The Economic Development Commission (EDC) is empowered to encourage and assist in the creation, development and expansion of business and industries in the Virgin Islands. The seven-member commission reviews all applications for Economic Development benefits. Upon receipt of a completed application, a public hearing is held, followed by approval/denial by the Commission; approved applications are subject to the Governor's approval and a certificate (contract) for the tax benefits and time period is then executed. The EDC is headed by an Executive Director with support staff in the offices in St. Thomas and St. Croix. Applications for tax benefits are made through the Executive Director in St. Croix. In 1991 approximately 80 active companies employing nearly 5,500 persons were receiving tax benefits from the EDC representing a broad range of industries; hotels, guest houses, manufacturing and assembly, major tourist attractions, transportation related and service businesses. The manufacturing sector is represented by oil refining, aluminum production, watch assembly, generic pharmaceuticals, liquor, rum, construction materials and a variety of other products including high tech electronics.
Eligible types of activities — Tourism Related: Hotels and Guest Houses; Transportation Services; Selected Recreation Facilities.
SECTION 934 VIRGIN ISLANDS TAX INCENTIVES:
Section 934 of the U.S. Internal Revenue Code enables the Virgin Islands to reduce V.I. income tax liabilities attributable to V.I. income effectively connected with a V.I. trade or business. This applies generally to V.I. and U.S. corporations and to V.I. resident individuals and partnerships. It also permits foreign ownership of a V.I. corporation to receive tax benefits granted by the V.I. Government. Most V.I. business entities receiving tax benefits from the EDC are organized under this section of the Internal Revenue Code. The primary difference between a 936 U.S. corporation and a V.I. entity receiving tax benefits under Section 934 is that the 936 corporation is able to repatriate profits to the U.S. parent with no U.S. corporate income tax obligation, while the 934 entity is subject to U.S. income taxes on the V.I. income distributed to the U.S.
SECTION 936 FEDERAL INCOME TAX INCENTIVES:
Under Section 936 of the U.S. Internal Revenue Code, U.S. companies do not pay U.S. income tax on dividends received from a U.S. Virgin Islands subsidiary.
Basic Qualifications:
Must be a U.S. Corporation.
Must make a ten (10) year election to be a 936 company (Form 5712, U.S.IRS).
Must elect cost sharing or profit split accounting method to claim intangible income credit (Form 5735, U.S.IRS).
Must have 80% of gross income from U.S.V.I. (or other possession) sources and 75% from active conduct of U.S.V.1. (or other possession) trade or business. All principles must be residents of the U.S.V.I.
Tax Benefits:
Section 936 companies receive a tax credit against the U.S. corporate income tax in an amount equal to the portion of the tax that is attributable to the taxable income from:
The active conduct of U.S.V.I. trade or business;
The sale or exchange of substantially all assets of that trade or business; and,
Qualified U.S.V.I. source investment income.
Section 936 companies operating in more than one U.S. possession, such as in both the Virgin Islands and Puerto Rico, can qualify based on their combined possessions' trade or business.
These tax incentives include up to:
A 90% exemption of local corporate income tax payments;
A 90% exemption of income taxes paid by residents stockholders on dividends received from the enterprise;
A 1% customs duty rate for raw materials and component parts (the standard rate is 6% ad valorum);
A 100 % excise tax exemption for building materials, machinery, equipment, and supplies utilized in the construction, alteration, reconstruction, or extension of the physical plan or facilities. (Selected construction materials are also exempt from customs duties and excise taxes under Act 5015);
100% exemption from property tax and gross receipts tax;
Withholding tax reduction from 10% to 4%, with an additional reduction to 2% for reinvestment of at least one half of otherwise repatriated dividends in eligible activities for at least five (5) years.
Eligible Activities For Reducing Withholding Tax:
The V.I. Industrial Development Law also provides for reductions in the V.I. withholding tax for EDC beneficiaries on profits remitted to the U.S. if these profits are invested in the following:
Debt principal repayment for EDC firms;
V.I. Government or instrumentality obligations;
Mortgage loans for financing V.I. housing;
EDC company loans;
V.I. Government Development Bank loans:
Other activities approved by Governor and Legislature.
Additional Provisions: The EDC may grant benefits to other industries or businesses if it is determined that such activity will be beneficial to the Virgin Islands. The basic qualifications for tax incentives are:
Invest $50,000 exclusive of inventory in an eligible business;
Employ 10 U.S. Virgin Islands residents on a full-time basis.
The EDC tax exemptions are offered for ten to fifteen years, depending upon location of the business. To attract additional investment to the western end of St. Croix, EDC benefits have been extended to fifteen years for the Frederiksted area, whereas on St. Thomas and the eastern half of St. Croix benefits have been limited to ten years.
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