USVI Tax Incentives

The Virgin Islands Economic Development Authority (EDA) is a semi-autonomous government instrumentality responsible for the promotion and enhancement of economic development in the United States Virgin Islands.

It has five major components, to wit, the Government Development Bank, The Economic Development Commission, the Industrial Park Development Corporation, the Small Business Development Agency and the Enterprise Zone program.

The purpose of the Economic Development Authority is to act as an umbrella authority that assumes, integrates and unifies the functions of the aforementioned agencies under one executive board in order to achieve maximum efficiency of operations, avoid duplication of services, positions and responsibilities, reduce expenses for personnel, physical plant and operations and develop comprehensive programs for the economic development of the Territory by exercising the powers and duties of all four former entities, in conjunction with one another, and in the context of the overall goal of promoting and enhancing the economic development of the Territory.

The Economic Development Commission (EDC): The United States Virgin Islands is a relatively small insular economy having few natural resources. Consequently, it relies heavily on revenue generated from export trade and services for resident income and employment. To reconcile the difference, the federal and territorial governments have enforced a series of tax incentives suggested by the Economic Development Program. These tax incentives are designed to promote investment and growth chiefly in export related activities.?With offices in Washington, D.C., New York, St. Thomas, and St. Croix, the Economic Development Program aims at promoting growth, development and diversification of the United States Virgin Islands. The scope of the Economic Development Commission (EDC) encompasses encouragement and assistance in the creation, development and expansion of commerce and industries in the US Virgin Islands. The seven-member Economic Development Commission reviews applications from all Economic Development benefit applicants. The step by step procedure is as follows:

  • Receipt of completed applications
  • Public hearing
  • Approval/denial by the Commission
  • Approved applications are subject to the Governor’s approval
  • And finally, a USVI tax benefits and time period certificate/contract is executed.

There are EDC offices on St Thomas and St Croix. Applications for tax benefits are made through the EDC Executive Director on St. Croix. In 1991, approximately 80 active companies employing nearly 5,500 persons received EDC tax benefits. They represented a broad range of industries – manufacturing and assembly, hotels, major tourist attractions, guest houses, transportation-related and service businesses. The manufacturing sector includes oil refining, watch assembly, aluminum production, generic pharmaceuticals, rum, liquor, construction materials and a wide variety of products including high-tech electronics.

TYPES OF ACTIVITIES ELIGIBLE FOR EDC BENEFITS

Category I:

Rum Production
Milk/Dairy Production
Watch and Jewelry Manufacturing and Assembly

Category II:

Product Assembly, Manufacturing (other than Jewelry and Watch Manufacturing and Assembly)
Agriculture/Food Processing
Mariculture/Food Processing
Marine Industry
Raw Materials Processing
Hotels/Guesthouses
Transportation and Telecommunications

Category IIA – Service Businesses, not limited to, but including:

International Commercial Distribution and Trading Services
International Public Relations Services
Publicity firms
Economic, Scientific or Management Consulting Services
Public Auditing
Processing, Editing and Dubbing of Cinematographic Films
Commercial and Graphic Art Services
News Syndicates
Mail Order Firms
Assembly, Bottling and/or Export Packing Operations
Computer Service Centers
Maritime Vessels and Aircraft Repair and Maintenance Services
Machinery and Heavy Equipment Repair Services, including but not limited to Agriculture, Industrial, Construction, Mining and Transportation Equipment and Machinery
Electrical and Electronic Equipment and Watch Repair Services
The Production of Engineering and Architectural Blueprints and Plans to be used in the construction of projects to be located outside of the Virgin Islands
Photographic Laboratories, including Film Processing
Dental Laboratories
Optical and Ophthalmological Laboratories
Prefabricated Houses of any type of material
Investment Managers and Advisors
Research and Development
Business and Management Consultants
Software Developers
E-Commerce Businesses
Call Centers
High Tech Businesses
International Public Relations Firms
International Trading and Distribution
Any other businesses serving clients located outside the Virgin Islands

Category III:

Utilities
Health Care Facilities
Recreation Facilities

SECTION 934 VIRGIN ISLANDS TAX INCENTIVES

Section 934 of the US Internal Revenue Code enables the Virgin Islands to reduce VI income tax liabilities attributable to VI income effectively connected with a VI trade or business. This applies generally to VI and US corporations and to VI resident individuals and partnerships. It also permits foreign ownership of a VI corporation to receive tax benefits granted by the VI Government. Most VI business entities receiving tax benefits from the EDC are organized under this section of the Internal Revenue Code. The primary difference between a 936 US corporation and a VI entity receiving tax benefits under Section 934 is that the 936 corporation is able to repatriate profits to the US parent with no US corporate income tax obligation, while the 934 entity is subject to US income taxes on the VI income distributed to the US

SECTION 936 FEDERAL INCOME TAX INCENTIVES

Under Section 936 of the US Internal Revenue Code, US companies do not pay US income tax on dividends received from a US Virgin Islands subsidiary.
Basic Qualifications:

  • Must be a US 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 US Virgin Islands (or other possession) sources and 75% from active conduct of US Virgin Islands (or other possession) trade or business.
  • All principals must be residents of the US Virgin Islands.

Tax Benefits: Section 936 companies receive a tax credit against the US 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 US Virgin Islands trade or business
  • The sale or exchange of substantially all assets of that trade or business
  • Qualified US Virgin Islands 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 resident 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

The EDC tax exemptions are offered for 10-30 years, depending upon location of the business. To attract additional investment to the western end of St. Croix, EDC benefits have been extended to thirty years for the Frederiksted area, whereas Christiansted is twenty years, and St. Thomas has been limited to 10 years.