IMPROVE YOUR
BOTTOM LINE
Subscribe to the
EDC Advisor today:

Email

We value your privacy. We will not rent or sell your email address.
Share/Bookmark

Frequently Asked Questions

faq

General Questions:

  1. How and why does the EDC Program exist?

    The EDC Program is authorized by a U.S. Congressional mandate which was legislatively codified in Internal Revenue Code §934 and went into effect on January 1, 1960. Its basic purpose is to allow the U.S. Virgin Islands to reduce income taxes for its residents as an incentive to attract new business to the islands in the same manner that mainland States provide tax incentives through their economic development commissions. However, because the US Virgin Islands is a Territory of the United States its economic development commission program can provide federal income tax incentives.

    Under the authority of the Congressional mandate, the U.S. Virgin Islands chose to use this U.S. legislation to attract new business to the islands by providing a 90% income tax credit to businesses and their owners in exchange for them meeting certain economic obligations to the local U.S. Virgin Islands community. In other words, it is somewhat of an economic quid-pro-quo in the same manner in which mainland States provide similar economic incentives to businesses that locate and operate their business within those State’s borders.

    The noble purposes and objectives of the US Virgin Islands Economic Development Commission (EDC) are declared to be:


    • the promotion of the growth, development and diversification of the economy of the United States Virgin Islands;
    • to benefit the people of the United States Virgin Islands by discovering and developing to the fullest possible extent the human and economic resources available therein;
    • the establishment and preservation of opportunities of gainful employment for residents of the United States Virgin Islands;
    • the promotion of capital formation for the industrial development of the United States Virgin Islands;
    • the contribution of beneficiaries to the development of the educational system of the Territory;
    • the preservation of the environment, beauty and natural resources of the United States Virgin Islands;
    • all of which purposes and objectives are declared to be in the public interest.

    So it’s a win-win – it’s great for you and great for the islands! And it’s founded in solid law and political policy that furthers the purposes of the United States Government.

  2. What basic requirements do I need to meet to be able to receive the EDC tax credits?

    The basic requirements for entitlement to the EDC tax credits are:


    • The income for which you desire to receive the EDC tax credit must be “Non-U.S. Source Income”.

    • You must be a “bona fide resident” of the U.S. Virgin Islands. Alternatively, you may own a USVI C-corporation which owns the ownership interest in the USVI EDC beneficiary company and receives the 90% EDC tax credit on its “Non-U.S. Source Income” which passed-thru from the USVI EDC beneficiary company.

    • You must be an owner (or part-owner) of a USVI EDC beneficiary company that has been approved and is in compliance with all of its obligations to the USVI Economic Development Commission (“EDC”).

    • The income to receive the EDC tax credit must be received by this EDC beneficiary company and be an “eligible activity” of the EDC beneficiary company according to the terms of the EDC Certificate issued to the EDC beneficiary company by the US Virgin Islands Economic Development Commission.

    Please see other FAQs below for further descriptions of each of these basic requirements.

  3. What do the terms "U.S. Source Income" and “Non-U.S. Source Income” mean?

    Generally, any income treated as U.S. Source Income (i.e. from within the continental United States) or as “effectively connected” with the conduct of a U.S. trade or business is not treated as income from within the US Virgin Islands or as effectively connected with a trade or business within the US Virgin Islands and is, therefore, ineligible to receive the 90% EDC tax credit. This concept is referred to as the "U.S. income rule" and its stated pupose is to prevent erosion of the U.S. tax base.


    • U.S. Source Income: In general terms, the "US income rule" income treats income as U.S. Source Income if the location of the activity from which the income is derived is located within the U.S. The following are specifically defined as U.S. Source Income in Internal Revenue Code §§861 through 865:

      • Interest: Interest received from the US government, a US resident or a US entity.
      • Dividends: Dividends from a US corporation (unless an IRC §936 election is in effect).
      • Rents: From property located within the US.
      • Royalties: From property located within the US.
      • Personal Services: Compensation for labor or personal services performed within the US.
      • Sales of Real Property: Gains from the sale of real property located within the US.
      • Sales of Inventory Property: Gains from the sale of inventory property located within the US.
      • Underwriting Income: Underwriting income from insuring US risks.

    • Non-U.S. Source Income (or U.S. Virgin Islands Source Income): If income is not defined as “U.S. Source Income” as described above, then it is considered Non-U.S. Source Income and would be eligible to receive the 90% EDC income tax credit. Income is generally considered “Non-U.S. Source Income” (also referred to as “foreign source” income) if the location of the activity from which the income is derived is outside of the U.S. and is also not “effectively connected” with a trade or business operation located within the U.S.

    Example of Non-U.S. Source Income: Consulting income is sourced within the U.S. Virgin Islands if the consulting services are performed within the U.S. Virgin Islands. The location of the client for whom the services are performed is irrelevant. Therefore, the fact that the client for whom the services are performed is located in the U.S. and the client pays for the services with funds from a U.S. bank account the consulting income is irrelevant in determining whether the consulting income is eligible to receive 90% EDC tax credit.

    For more in-depth information regarding the definitions of U.S. Source Income, Non-U.S. Source Income and "effectively connected" income please see Treasury Regulation §1.937-2 and §1.937-3 on our Federal Law page.

  4. What do I have to do to become a “bona fide resident” of the U.S. Virgin Islands?

    Generally, Internal Revenue Code §937 provides that the term "bona fide resident" of the U.S. Virgin Islands means a person who meets a three-part test with respect to the U.S. Virgin Islands for the tax year:


    • Physical Presence Test: an individual must be physically present in the USVI for at least 183 days during the tax year. [Note: Any portion of a day is counted as an entire day. See FAQ below for a description of the exceptions to this general rule that are available.]

    • "Tax Home" Test: an individual must not have a “tax home” outside the USVI during the tax year. Essentially, this means that the individual's principal place of business during the year must be located within the USVI. Or if you have no regular or principal place of business, then your regular place of abode must be located within the USVI.

    • "Closer Connection" Test: an individual must not have a “closer connection” to the United States or a foreign country during the tax year. This is a subjective test in which many factors are weighed to determine whether or not you have a closer connection to the USVI than anywhere else. These factors include, but are not limited to, the following:

      • the location of your permanent home. It is immaterial whether a permanent home is a house, an apartment, or a furnished room. It is also mmaterial whether the home is owned or rented. It is material, however, that the dwelling be available at all times, continuously, and not solely for stays of short duration.
      • the location of your family
      • the location of your personal belongings, such as automobiles, furniture, clothing and jewelry
      • the location of social, political, cultural or religious organizations
      • the location where you conduct your routine personal banking activities
      • the location where you conduct your business activities (other than those that constitute your tax home)
      • the location of the jurisdiction in which you hold a driver's license
      • the location of the jurisdiction in which you vote
      • the country of residence which you designate on forms and documents
      • the types of official forms and documents you file, such as Form 1078 (Certificate of Alien Claiming Residence in the United States), Form W-8 (Certificate of Foreign Status) or Form W-9 (Payer's Request for Taxpayer Identification Number)


    Please see Treasury Regulation §1.937-1 subsections (d) and (e) on the Federal Law page for complete definitions of “tax home” and “closer connection”, respectively.

  5. Are there any exceptions to the 183 day per year physical presence requirement in order to be a "bona fide resident" of the U.S. Virgin Islands for federal tax purposes?

    Yes, the following exceptions are available:


    • 3-Year Average of 183 Days Per Year: Physical presence in the USVI for at least 549 days during the three-year period consisting of the current tax year and the two immediately preceding tax years, provided that the individual was also present in the USVI for at least 60 days during each of those three years.

    • Less than 90 Days in US: Physical presence in the United States for no more than 90 days during the tax year.

    • De Minimus Earned Income in US: Have no more than $3,000 of earned income in the United States and have a physical presence for more days in the USVI than in the United States for the tax year.

    • "Significant Connection": Have no "significant connection" to the United States during the tax year. Having no "significant connection" to the United States means not having any of the following:

      • a permanent home in the United States
      • a current registration to vote in any political subdivision of the United States
      • a spouse or child who has not attained the age of 18 whose principal place of abode is in the United States other than a child who is:

        1. in the United States because the child is living with a custodial parent under a custodial decree or multiple support agreement; or
        2. A child who is in the United States as a student.

    For more in-depth information regarding these exceptions please see Treasury Regulation §1.937-1 on our Federal Law page.

  6. I can’t be in the USVI for 183 days per year. Is there an alternative to me having to personally become a "bona fide resident" of the US Virgin Islands?

    Yes. While there are a few limited exceptions to the general residency rules for an individual, a US Virgin Islands C corporation automatically qualifies by definition as a "bona fide resident" of the US Virgin Islands. Assuming the federal source income requirements are met, A USVI C corporation’s income is eligible for the 90% EDC tax credit. A USVI C corporation may accumulate earnings for periods of time or distribute its income via a dividend distribution to its shareholder(s).

    Dividends paid to the shareholders of a USVI C corporation, which is an EDC beneficiary company or an owner of an EDC beneficiary company, are subject to the usual taxation on those dividends (currently taxed at 15%), but USVI resident shareholders also receive a 90% EDC tax credit against their dividend income from the USVI C corporation thereby reducing the effective corporate dividend tax rate from 15% to 1.5%! In many cases it is desirable and appropriate for the VI C corporations earnings to be accumulated and distributed during a future year when its shareholder meets the USVI residency requirements.

  7. What does it take for a company to become an EDC beneficiary company and, therefore, be able to receive the 90% EDC tax credit on its eligible income?

    A company must have a valid Certificate for tax benefits issued by the U.S. Virgin Islands Economic Development Commission (“EDC”). A company must complete an application, submit it to the EDC and be approved by the EDC after a public hearing with the EDC Commission in order to be issued an EDC Certificate for tax benefits. Pursuant to the EDC Program law, a summary of some typical requirements for applicants to be granted an EDC Certificate for tax benefits are as follows:

    • Provide full-time employment for at least 10 local residents of the U.S. Virgin Islands who have resided in the V.I. for at least one year prior to being hired by the EDC beneficiary company.
    • Provide full health benefits to all employees.
    • Provide at least a 5% employer-provided retirement plan contribution for all employees via a 401(k) or similar type of retirement plan.
    • Invest at least $100,000, exclusive of inventory, in an industry or business that advances the economic well-being of the USVI.
    • Contribute at least $50,000 to local USVI charities annually. Additionally, this charitable contribution amount is increased by 2.5% per year.
    • The individual owner must be an actual investor in the enterprise for which industrial development benefits are sought, not a contractor, subcontractor or other person or corporation acting as an agent.
    • Comply with all federal and local laws and regulations, including environmental laws.
    • Provide an easement for free access to the beach or shoreline, if the applicant will be doing business on property that adjoins the shoreline.

    The above-stated requirements are a guide as to typical requirements that have been imposed in the past by the EDC. The actual requirements imposed on a new applicant will likely vary for each applicant as determined by the EDC. If these requirements are too burdensome for you, please contact us to discuss alternatives that may also be available to you.

  8. Are all business activities eligible for EDC tax benefits?

    For purposes of USVI local law, eligible activities of EDC beneficiaries generally fall within several categories. [Note: this question does not address the additional source income requirements contained in the U.S. Federal tax laws.] Although the EDC has the authority to grant benefits to any business that will advance the economic well-being of the U.S. Virgin Islands and its people. Category IIA provides for the broadest scope of eligible activities.

    Eligible Activities for which an EDC beneficiary may receive benefits are:

    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 including, but not limited to:


    • 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 US 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
    • Technology Businesses
    • International Public Relations Firms
    • International Trading and Distribution
    • Any other businesses serving clients located outside the US Virgin Islands

    Category III:


    • Utilities
    • Health Care Facilities
    • Recreation Facilities

  9. What if I am unable to continually provide employment for 10 local US Virgin Islands resident employees as the EDC's local law requires?

    You can request an exemption from the Economic Development Commission for the period of time until you expect to meet this requirement. However, the EDC has typically required that you offset not meeting this obligation by increasing other obligations in a similar amount, such as increasing your annual charitable contributions to qualified local VI charities. So generally speaking, you cannot significantly reduce the overhead costs associated with the obligation to employ 10 local USVI resident employees.

    If it is impractical for you to employ 10 local US Virgin Islands resident employees and to makeup this obligation to the EDC in other financially substituted ways, please contact us to explore other alternative solutions that may be available.

  10. Are there any additional state or local income taxes in the U.S. Virgin Islands?

    No. There are no income taxes imposed at the local level, territorial level or any state equivalent level. There are also no sales taxes imposed in the US Virgin Islands. The federal income tax is the only income tax imposed (Note: to be technically correct, under the "mirror code system" of taxation it is actually a territorial income tax that is imposed which amounts to a federal tax equivalent. But, for all practical purposes, it can be thought of as a federal tax). The US Virgin Islands government is the taxing and collecting authority instead of the IRS. While a gross receipts tax of 4% is imposed on the gross revenues of businesses, EDC beneficiaries are 100% exempt from the gross receipts tax.

  11. What tax laws apply in the US Virgin Islands?

    The USVI income tax laws mirror the US income tax laws. However, the US estate and gift tax laws apply directly without being mirrored.

    The territorial income tax laws of the US Virgin Islands were established by U.S. federal law pursuant to the Naval Service Appropriations Act of 1922 and Title 48 United States Code Section 1397 (48 U.S.C. §1397), which provides as follows:

    "The income tax laws in force in the United States of America and those which may hereafter be enacted shall be held to be likewise in force in the Virgin Islands of the United States, except that the proceeds of such taxes shall be paid into the treasuries of said islands."

    The effect of this provision of the federal law is to create a so-called "mirror code system" of taxation where the Internal Revenue Code is applied in the US Virgin Islands as a territorial income tax by substituting the term "Virgin Islands" for "United States" where appropriate. Consequently, the income tax provisions of the Internal Revenue Code (IRC), the Treasury Regulations promulgated thereunder, and Revenue Rulings and Revenue Procedures issued by the Internal Revenue Service (IRS) are generally applicable in the US Virgin Islands with certain limitations.

    Three principles underscore the application of the IRC to the US Virgin Islands:


    1. Separate Taxing Structure: The effect of the Naval Service Appropriations Act of 1922 was to create a separate taxing structure in the US Virgin Islands by mirroring the provisions of the IRC.
    2. Domestic vs. Foreign: For the purposes of applying the IRC to the US Virgin Islands, a domestic corporation is a corporation incorporated in the US Virgin
      Islands, while a foreign corporation is one chartered elsewhere, including the United States.
    3. Intended Result: Provisions of the IRC are not mirrored if to do so would produce a clearly erroneous result, such as the provisions which deal specifically with the territories.

    Application to Corporations: Under this "mirror code system", a USVI corporation is generally treated as a domestic corporation for purposes of the USVI income tax laws and as a foreign coporation for purposes of the US income tax laws.

    Application to Individuals: Internal Revenue Code §932(c) requires individuals who are bona fide residents of the US Virgin Islands to satisfy their US income tax liability by paying income tax to the USVI on their worldwide income.



Ask your question here:


Question:
Email: 1

1 - Notification of when your question has been answered. (Optional)

.............................................................................................................................

For additional information about Clearwater Consulting Concepts services, call (340) 775-2888 or allow us to contact you by completing our web form.