US VIRGIN ISLANDS Law and Practice Contributed by: Marjorie (Jorie) Roberts, Duncan J.J. Kessler and Jessica McKenney, Marjorie Rawls Roberts PC
removed the Governor from the approval process for new applicants. Income Tax Benefits An EDC Program beneficiary receives a substantial reduction in, or exemption from, all taxes imposed on businesses operating in the USVI. A beneficiary under the EDC Program receives a 90% tax credit against its income tax liability on income from the business for which benefits are granted. Such income must be sourced or effectively connected with the conduct of a USVI trade or business under Code Sections 934 (b) (1) and 937 and the Treasury Regulations promulgated thereunder. The reduction results in an effective tax rate of approximately 2.31% on income from the busi - ness. Tax benefits also extend to passive income from certain qualifying investments, such as USVI govern - ment obligations. The 90% income tax reduction also extends to divi - dends received by a corporate beneficiary’s USVI bona fide resident shareholders, and to distributions or allocations to the USVI bona fide resident share - holders or partners of a subchapter “S” corporation or partnership, respectively, that have been granted benefits by the EDC. Beneficiaries of the EDC Program are exempt from withholding tax on interest payments and are subject to a reduced withholding tax rate of 4% on dividends. Other forms of passive income payments (such as royalties) are subject to withholding tax at a 10% rate (or 11% if a corporation). However, no withholding tax is imposed on payments to US entities. Other Tax Benefits Exemptions Beneficiaries receive an exemption from the USVI gross receipts tax on their receipts from their approved activities, which is otherwise imposed at a 5% rate on the gross receipts of a business, with no deductions. USVI entities engaged in business activities that are not covered by their grant of EDC benefits must pay gross receipts tax on the gross receipts from such business activities. Although exempt from gross receipts tax for business activities covered by a ben - eficiary’s grant of benefits, the BIR requires that each beneficiary report its gross receipts (on a monthly
basis, assuming annual gross receipts of more than USD225,000), and indicate that the beneficiary is exempt from payment of the tax pursuant to the EDC Program. Beneficiaries receive an exemption from USVI excise tax on building materials and machinery used in the construction of their facilities and on raw materials brought into the USVI to produce articles. Other - wise, a tax ranging from 2% to 25% applies to the fair market value of many items. A number of excise tax exemptions exist, including exemptions for steel, concrete and lumber. Beneficiaries receive an exemption from the USVI property tax. However, the personal homes of the owners of a beneficiary do not receive the property tax exemption, even if the respective owner maintains a home office. Moreover, if a beneficiary rents an office, the property tax exemption does not pass through to the beneficiary’s landlord. Customs Because the USVI is outside the US customs zone, it has enacted its own customs law, imposing a 6% duty on items that are not manufactured in the United States. An EDC Program beneficiary’s customs duties are reduced from 6% to 1% on raw materials and component parts imported from outside the USVI. Materials made in the United States are exempt from any customs duty. In addition, as with the excise tax, there are a number of customs duty exemptions. Although the foregoing exemptions and reductions are imposed at the entity level, as mentioned above, a beneficiary’s owners receive the income tax benefit on dividends and/or distributions if the owners are bona fide USVI residents. The University of the Virgin Islands Research and Technology Park Protected Cell Corporation As an alternative to the tax benefits provided under the EDC Program, businesses in the USVI can qualify for tax benefits under the University of the Virgin Islands (UVI) Research and Technology Park Protected Cell Corporation Act. The UVI Research and Technology Park Corporation and its subsidiary, the UVI Research and Technology Park Protected Cell Corporation
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