Tax Free Entities in the USVI – USVI Exempt Companies

There are three types of entities that can be established in the USVI which are either fully or partially exempt from USVI taxes and U.S. federal income taxes. One type of entity is a USVI corporation which obtains the benefits of the Virgin Islands Industrial Development Program[2] for its business activities in the USVI. These companies are fully exempt from most local taxes and receive a 90% exemption from USVI income taxes. They also enjoy a special customs duty rate of one percent. These companies are generally not subject to U.S. federal income taxes on their USVI operations.

Another tax free entity is a USVI foreign sales corporation[8] (FSC) which pays no local taxes except for a nominal annual fee. Thousands of USVI FSCs have been set up by U.S. exporters as a means to reduce U.S. federal income taxes on their export sales by about 15%.

For foreign persons, even more generous exemptions are available through the use of the third type of tax-free entity: a USVI exempt company. The USVI is the only jurisdiction in the world where a non-U.S. person can establish a tax-free entity under the U.S. flag. USVI exempt companies are often used as holding companies for portfolio investments, for the ownership of aircraft[11] that are registered with the U.S. Federal Aviation Administration, or as captive insurance companies[10]. There are a number of other offshore tax planning[9] structures that can take advantage of USVI exempt companies.

Except in the case of certain captive insurance companies, U.S. and USVI citizens, residents, and companies are prohibited from owning, directly or indirectly, ten percent or more of the stock of a USVI exempt company. With respect to income from all sources except those in the United States or the USVI, an exempt company is entirely free of all U.S. and USVI income taxes. Furthermore, except for a nominal annual franchise fee ($1,000), an exempt company is free from all local taxes as well. These tax benefits are guaranteed for 20 years by contract with the USVI government. The identity of the owner of a USVI exempt companies is not public information but it is subject to disclosure to the Virgin Islands Bureau of Internal Revenue[13] or the IRS upon proper request.

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