US VIRGIN ISLANDS LAW AND PRACTICE Contributed by: Marjorie Roberts, Sean Foster, Renée Marie André, Lisa Wisehart, David Bornn, Duncan J. J. Kessler and Jessica McKenney, Marjorie Rawls Roberts PC
• the employer is either (i) a foreign person not engaged in a business in the USVI or (ii) a foreign office of a USVI person. If income meets these four requirements, it is exempt from USVI taxation. If income does not meet these four requirements, it is subject to USVI withholding tax at a rate of 10%. Investment income consisting of interest and divi - dends is, under Code principles as mirrored to the USVI, generally sourced to the situs of the payor. Rents and royalties are generally sourced to the loca - tion of the property that gives rise to them. Such income from the USVI would be USVI source income not effectively connected with a USVI trade or business (assuming it is not related to a USVI trade or business) and taxed under Code section 871 (a). The tax imposed by Code section 871 (a)(1) and its attendant withholding under Code section 1441 are reduced to 10 percent by the USVI with regard to non- resident aliens. Foreign investors in USVI real estate are subject to the Foreign Investment in Real Property Tax Act of 1980, codified in Sections 897 and 1445 of the Code. This statute imposes a 15% withholding tax on the disposition of a USVI real property interest by a for - eign person, unless one of several statutory excep - tions applies, such as when the property is not sold for a gain. 9.3 Tax Mitigation Strategies Overview of Tax Reduction Opportunities There are ways for entities and individuals to reduce the taxes they owe in the USVI. For instance, a busi - ness that plans to be capital-intensive can owe up to USD150,000.00 or more a year in franchise tax if organised as a corporation or LLC; however, an LLP offers similar liability protection and has a flat annual fee of USD150.00. EDC and RTPark Program Benefits Moreover, a beneficiary under the EDC Program receives a 90 percent tax credit against its income tax liability on income from the business for which
benefits are granted. Such income must be effectively connected with the conduct of a USVI trade or busi - ness under Code sections 934 (b)(1) and 937 and the Treasury Regulations promulgated thereunder or from USVI sources. 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. Additionally, 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 withhold - ing tax at a 10% rate (or 11% rate for corporations). However, no withholding tax is imposed on payments to US entities. Exemptions and Incentives for Businesses Beneficiaries also 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. Beneficiaries receive an exemption from the USVI excise tax on building materials and machinery used in the construction of their facilities and on raw mate - rials brought into the USVI to produce articles. Oth - erwise, 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. The USVI is outside the US customs zone, and as such, it has its own customs law that imposes a 6% duty on items not manufactured in the United States. An EDC beneficiary’s customs duties on raw materi - als and component parts imported from outside the
676 CHAMBERS.COM
Powered by FlippingBook