The US Virgin Islands (USVI) is an unincorporated territory of the USA located approximately 1,100 miles south-east of Miami, Florida. Acquired from Denmark in 1917, the USVI is made up of the islands of St. Croix, St. John, St. Thomas and Water Island, plus numerous uninhabited cays, with a total population of just under 90,000. The USVI uses US currency, has US financial and banking systems, and no exchange controls exist.
The USVI has a varied history as a global crossroads and thus as a cradle of artistic and cultural expression. French Impressionist painter Camille Pissarro was born on St. Thomas in 1830, and the band The Mamas and the Papas first got together in Creque’s Alley in 1966. Alexander Hamilton spent his early and formative years living and working on St. Croix, and Mexican General Santa Anna lived in St. Thomas from 1858 until the late 1860s. Actor Kelsey Grammer was born in St. Thomas in 1955. On St. Croix basketball great and Hall of Famer Tim Duncan was born in 1976 and started his athletic career there, as a swimmer.
The USVI’s prime natural resources include pristine beaches, crystal-clear seas, a mild year-round climate, the natural harbour on St. Thomas, the Virgin Islands National Park on St. John, and the rainforest on St. Croix. (The final “beaches in Paradise” scenes for both “Trading Places” and “The Shawshank Redemption” were filmed on St. Croix.) These assets, combined with the investment security of a US jurisdiction and a variety of federal and local incentives, have cemented tourism as the major local economic activity. The USVI recently completed a long-term economic strategy and action plan, Vision 2040, with goals that include diversifying the territory’s economic base through growth in target industries including hospitality and tourism with a focus on extended stay visits, authentic experiences, and cultural offerings.
Recent hotel projects have involved separate cottages in largely undeveloped areas and a focus on the overall guest experience. Lovango Resort and Beach Club, a resort located on a private island overlooking Caneel Bay, St. John, includes luxury tree house and “glamping” style accommodations, the Villa Lovango, moorings for yachters, and waterfront dining and has been favourably reviewed in publications ranging from Travel & Leisure to Vogue. On the west end of St. Thomas, fifteen minutes from the Cyril E. King Airport, The Botany Hotel will offer a luxury boutique resort experience through separate ocean view suites and villas designed with low environmental impact when it opens, slated for autumn 2024. Also, the downtown areas of St. Thomas and St. Croix have been revamped with board walks and cobbled streets and Enterprise Zone Tax Incentives are available for businesses in certain areas of Christiansted, Frederiksted, and Charlotte Amalie that qualify as museums and art galleries, experiential tourism, restaurants, and producers and retailers of the USVI’s cultural products.
The government of the USVI (GVI) has also supported the development and reconstruction of small to major traditional hotels and resorts since much of the USVI’s hotel inventory was damaged or destroyed in Hurricanes Irma and Maria in 2017. The iconic Frenchman’s Reef Hotel, which was closed in 2017 due to damage caused by Hurricanes Irma and Maria, is now owned by an affiliate of Fortress Investment Group and is expected to reopen in the first half of 2023 as a Westin property, after hundreds of millions of new investment capital. On St. Croix, the Buccaneer Hotel and the Divi Carina Bay Resort have both received significant upgrades. Also, the Hibiscus Beach Hotel on St. Croix’s north shore – closed since the 2017 hurricanes – has new owners and is planning to reopen at the end of 2024 and when fully operational to have 80 rooms and all other typical hotel amenities. The GVI is also looking to meet the needs of US and international tourists that seek all-inclusive hotels.
The USVI has been the home of renowned international yachting regattas since the 1960s. The USVI is further enhancing its location as a major yachting centre with incentives for yachts and other boats in place and upgrades at the two IGY facilities. Yacht Haven Grande (now owned by MarineMax) recently hosted the second annual Caribbean Charter Yacht Show, and is attracting many yachts seeking a secure, well-located, and attractive home base. The GVI has worked with the local charter boat and sport fishing industries to expand their USVI operations.
Finally, the USVI is the home of a variety of tourist attractions that include two zip lines, a funicular tramway, and a recently expanded marine park, Coral World, that offers family-friendly animal experiences and activities.
The USVI combines the ability to grant tax incentives with its status as part of the USA. It offers banks that are insured by the Federal Deposit Insurance Corporation and is covered by the USA’s extensive network of bilateral investment treaties (but not tax treaties). The USVI has two federal judges and is part of the Third Circuit Court of Appeals. It has direct flights to many US mainland cities.
Tax system overview
The Internal Revenue Code of 1986, as amended (the “Code”), applies in the USVI under a “mirror” system whereby the “USVI” is effectively substituted for “United States” wherever the latter appears. Consequently, the income tax provisions of the Code, the Treasury Regulations promulgated thereunder, and revenue rulings and revenue procedures issued by the Internal Revenue Service (IRS) are generally applicable in the USVI, with certain limitations.
As a US territory, the USVI occupies a unique status; although part of the USA, it has been granted authority by the US Congress to enact special tax laws to encourage investment in business operations. The USVI therefore offers many opportunities for investors and especially entrepreneurs who seek a politically stable jurisdiction with proven tax incentive programmes, legitimate protection of their assets, and an enticing location with excellent telecommunications. The four major USVI incentive programmes available to entrepreneurs are set out below.
Economic Development Commission Program
Although recent events demand altered ways of doing business and new business models, the infrastructure to support hotels and tourism businesses (among others) in the USVI has largely been in place for 60 years through the Economic Development Authority (EDA) and its various investment programmes and their predecessors. The Economic Development Commission (EDC) Program, administered by the EDA, offers exemptions and reductions to entities qualified as EDC beneficiaries, as well as reductions to direct and indirect owners of entities qualified as EDC beneficiaries if the owners are bona fide residents of the USVI. The EDA is governed by a seven-person board that includes both public and private sector representation.
Benefits under the EDC Program include a credit equal to 90% of the otherwise applicable income tax, which applies both to the income from the benefited business and to the bona fide USVI resident owners on their allocations or dividends. A USVI corporation pays an effective tax rate of approximately 23.1% on its eligible income, and with the 90% tax credit the effective rate is 2.31%. (Salaries and other forms of compensation, such as guaranteed payments, are fully taxable.) Beneficiaries are also exempt from the territory’s 5% tax on the USVI source gross receipts of a business, and from USVI property tax for the property occupied by the beneficiary for its approved business activities.
No withholding tax is imposed on payments to US corporations or US-resident individuals. Beneficiary companies with foreign owners are exempt from withholding tax on interest payments and are subject to a reduced withholding tax rate of 4.4% on dividend payments overseas. Similarly, no income tax is withheld on interest paid to non-resident alien individuals, and the tax rate on dividends paid to non-resident individuals is 4%.
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 goods. In addition, a beneficiary’s customs duties are reduced from 6% to 1% on raw materials and component parts imported from outside the USA. No local customs duties are imposed on US-made products. Finally, in order for income to be eligible for EDC Program benefits, the income must also satisfy applicable federal source and effectively connected income regulations as set out in Sections 934 and 937(b) of the Code and the Treasury Regulations promulgated thereunder.
To qualify under the EDC Program, an applicant in a qualifying business must generally make a minimum capital investment of USD100,000 (exclusive of inventory) and must meet certain minimum employment requirements. Typically, a business must employ at least ten full-time employees, but “designated service” firms (which by definition serve clients located outside the USVI) are only required to employ five full-time employees and the EDA has the authority to lower the five-employee minimum or to permit a business to have several years to meet the five-employee minimum upon a showing of good cause. At least 80% of the beneficiary’s employees must be USVI residents unless a waiver is granted.
Beneficiaries must purchase goods and services locally when available, make certain contributions to scholarships and public education, and provide a plan for civic participation. Beneficiaries must also provide employee benefits and enact a management training programme.
The application process requires submission of a detailed application including details of the beneficiary’s ownership, financial information, and a background check for beneficial owners with a 5% or greater interest. Submission of the application is followed by the application’s presentation at a public hearing before the EDC commissioners and review of the application by the EDC commissioners. Upon approval by the EDC, benefits are available for initial periods of 20 years for investments on the islands of St. Thomas and St. John, and for 30 years on St. Croix. In addition, beneficiaries that make an additional investment in the beneficiary business – in infrastructure, new construction, or refurbishment – in an aggregate amount of not less than USD2.5 million during the term of their existing certificates are entitled to 100% of existing benefits for an additional period of five years upon the expiration of their certificates. Beneficiaries that invest in infrastructure, new construction, or refurbishment in an aggregate amount of not less than USD1 million may be granted 100% of their existing benefits for an additional five years upon the expiration of their certificates, upon a finding of good cause by the EDA Board. Prior to expiration of a benefits term, a beneficiary may seek an extension of 100% of benefits for an additional term of ten years.
Recent new hotel applicants under the EDC Program have committed to constructing low-density developments that are designed to promote environmental sustainability, low-impact construction, and the ability for guests to physically distance. Other hotel beneficiaries, such as King Christian Hotel in Christiansted, have restored historic structures in the USVI with a view to showcasing local culture and traditions using innovative building techniques designed to enhance urban redevelopment. And hotels that have been operating in the USVI for decades are undergoing major upgrades and, in many cases, adding new brands to the USVI’s hotel offerings. EDC beneficiaries in the recreational tourism industry have likewise evolved to accommodate the growing segment of environmentally conscious tourists who are focused on experience-based travel.
Hotel Development Program
The Hotel Development Act (HDA) Program, also administered by the EDA, was initially passed in 2011 to provide a means for financing new hotel development projects (and hotels seeking substantial upgrades) in the USVI. In 2019, the HDA Program underwent a complete overhaul in order to promote the tourism industry of the USVI and to provide for the planning, financing, reconstruction, renovation and maintenance of new and existing hotels in the territory. Specifically, the programme was amended to provide for the development, construction, reconstruction and renovation of commercial facilities and other hotel facilities. Now, the hotel room occupancy tax (HROT) can be 100% utilised by developers of new hotels, or up to 50% of the HROT for existing hotels where at least 70% of the units were previously damaged – by hurricanes, for example – for the development, construction, reconstruction and renovation of the facility. Additionally, the amendment provides for the imposition of an economic recovery fee (ERF) to finance, fund or cover the costs incurred for renovation, reconstruction, construction, improvement and development of hotel properties and related facilities or infrastructure. The amount of the ERF is the difference between the percentage rate of hotel room occupancy tax applicable at the time of the application (currently set at 12.5%) and a percentage rate over such tax, not to exceed 7.5%, which is determined by the applicant and subject to implementation protocols. The ERF can be collected and deposited into an ERF trust account for a period of 30 years and is only available to applicants applying before 31 December 2028. Any funds remaining after completion of the approved project can be used by the developer for other expenditures for improving or enhancing the ERF project.
Enterprise Zone Commission Program
Businesses seeking to invest in historic preservation have additional opportunities available through the Enterprise Zone Commission (EZC) Program, which is administered by the EDA and which offers tax incentives to businesses investing in designated historic and commercial districts.
Under the EZC Program, applicants must be a licensed business that is owned by a USVI resident and that is ecologically compatible with the location. Qualifying businesses get a 90% income tax exemption and complete exemptions from the gross receipts and property taxes. Businesses must also meet certain requirements that are based on the location. For example, benefits are available for museums, art galleries and cultural businesses in Christiansted, St. Croix, and experiential tourism and arts and restaurants in the Garden Street-Upstreet area in Charlotte Amalie, St. Thomas. Businesses that promote the USVI’s history and culture in Frederiksted, St. Croix, also qualify for benefits.
To qualify under the EZC Program, an applicant must (among other things) make a minimum capital investment of USD10,000 and employ a minimum of two full-time USVI resident employees. The application process requires submission of a detailed application including a description of the history and current condition of the property within the Enterprise Zone and details of the construction or rehabilitation efforts to be undertaken. Applications are considered by the EZC commissioners and upon approval, benefits are available for a five-year period.
Research and Technology Park Program
The Research and Technology Park (“RTPark”) Program seeks to support the USVI’s expanding technology and knowledge-based sectors in order to promote the growth, development, and diversification of the USVI economy. In addition, the RTPark works to broaden the capabilities of the University of the Virgin Islands (UVI) by providing UVI with financial support and training opportunities for UVI students, and by creating a supportive research environment that combines the resources of UVI with those of the public sector and private industry. The RTPark Program does not have a specific “tourism” focus but it is ideal for businesses engaged in health fields, marine science, and sustainability, especially where technological resources are critical elements. Also, there are logical tie-ins between certain knowledge-based businesses and tourism in areas such as coral research and restoration. Furthermore, the RTPark is in the process of developing a Tech Village in St. Croix near UVI’s campus there, which will be a $50 million project with 60 units for residential housing, 18 acres for farming, a solar microgrid, and 300-person conference room, 12,000 square feet of commercial space, and a teaching hotel with 120 rooms.
Oversight of the RTPark Program is vested in the seven-member RTPark Board of Directors (the “Board”) which by statute includes the chairman of the UVI Board of Trustees and the president of UVI.
In most cases, an applicant, through a legal representative, negotiates the terms of the applicant’s tenancy with the RTPark’s executive director. Negotiations include:
the amount of the one-time entry fee paid by the applicant which is typically at least USD50,000 and up to USD100,000 depending on the size of the applicant;
the applicant’s obligation to pay annual management fees to the RTPark, typically between 2% and 4% of the applicant’s gross income;
the structuring of a charitable donation to UVI that can include scholarships, internships, faculty support, funds for specific programmes, and in-kind contributions of time (typically with annual caps); and
the percentage of equity interest to be awarded to the RTPark, which can be non-voting and have different distribution rights to those of the other owners.
Once negotiations have been finalised, a term sheet is entered into between the applicant (referred to under the RTPark Program as a “Protected Cell”) and the RTPark and this provides the basis for the formal application that covers the applicant and its owners. The final terms are ultimately memorialised in the Protected Cell’s Park Tenant Agreement, which serves as the operative document defining the relationship between the Protected Cell and the RTPark. Each RTPark application requires an application fee and a background-check.
Benefits under the RTPark Program are initially available for 15 years and can be renewed for an initial renewal period of ten years, followed by subsequent renewal periods of five years subject to Board approval. As with the benefits under the EDC Program, the RTPark offers a 90% tax credit for the business and for dividends or allocations paid to direct and indirect owners of beneficiaries if the owners are bona fide residents of the USVI. Such income must be from USVI sources or effectively connected with conducting a USVI trade or business. For a corporate Protected Cell, the reduction results in an effective tax rate of approximately 2.31% on eligible income.
No withholding tax is imposed on payments to US corporations or US individual residents. Furthermore, RTPark beneficiaries with foreign corporate owners are exempt from withholding tax on interest payments and enjoy a reduced withholding rate of 4.4% on dividend and royalty payments overseas (while the withholding rate on non-resident individuals is 4%). Other benefits under the RTPark Program mirror those available under the EDC Program.
Opportunity Zones and New Market Tax Credits – federal benefits for USVI investments
Several US federal programmes are available for investors in the USVI. The Tax Cuts and Jobs Act, passed in December 2017, established the Opportunity Zone Program which provides immediate and long-term tax advantages to US investors in Opportunity Zones. The Opportunity Zone Program was created to encourage private investment in economically distressed neighbourhoods by offering investors access to new capital gains tax incentives in exchange for placing qualified investments in Opportunity Zone communities. Investors can defer capital gains taxes on earnings from many types of investments up to 2027, can reduce taxes on the capital gain invested into an Opportunity Fund by 10%, and can gain permanent exclusion from capital gains taxation on Opportunity Fund investments held for at least ten years. The USVI has fourteen designated Opportunity Zones incorporating half of St. Croix, including the cities of Christiansted and Frederiksted, and significant portions of St. Thomas, including the capital city of Charlotte Amalie and Water Island. The critical element to participate in this programme is the selection of a site that fits within one of the multiple designated zones.
The USVI is also eligible for the New Markets Tax Credit, established in 2000. New Market Tax Credits provide capital to community development entities and in exchange, investors are awarded credits against their federal tax obligations. Investors can claim allotted tax credits up to a total of 30% of the project.
Other tax credits, such as the income tax credit for preserving historic properties, and income tax credits for owners of certain newly constructed or substantially rehabilitated low-income rental housing projects, are also available in the USVI.
It should be noted that in some cases investors can combine investments under multiple programmes, such as combining an investment under the Opportunity Zone Program with an investment that qualifies for the Economic Development Program or the Enterprise Zone Program. However, since the USVI is considered foreign to the USA for many tax purposes, it is critical to carefully structure investments in the USVI by non-USVI bona fide residents to avoid having the USVI investment be structured as a controlled foreign corporation.
Marine benefits
In order to expand its marine tourism sector, the USVI has enacted certain tax exemptions beyond those also available under the four USVI incentive programmes previously discussed. For example, the USVI has exempted all boats, boat engines, and boat parts from USVI excise taxes and customs duties. Also, passengers on charter yachts and other boats are not subject to the USVI’s hotel room tax, which is imposed at a rate of 12.5% of the gross room rate or rental paid by every hotel guest in the USVI. Finally, the USVI’s 5% gross receipts tax is only imposed on receipts from USVI sources, so the payments for any boat that is chartered in the USVI but that also spends time in the British Virgin Islands or Puerto Rican waters or at sea are allocated between time spent in the USVI waters and time spent elsewhere, with only the USVI source payments being taxable.
Entity selection and business licensing requirements
The USVI provides many options when choosing to form a legal entity within the jurisdiction. These include corporations, limited liability companies, and partnerships, including general partnerships, limited partnerships, limited liability limited partnerships, limited liability partnerships, and trusts. The USVI has adopted the Uniform Limited Liability Company Act, and formation and governance of an LLC is similar to that imposed in the 50 states and the District of Columbia. Apart from general partnerships, which are formed simply by agreement of the partners, and trusts, all entities are formed through filings with the USVI Office of the Lieutenant Governor, Division of Corporations & Trademarks. Federal law, including the Securities Act of 1933 and the Securities Exchange Act of 1934, apply in the USVI. Additionally, the USVI has adopted the Uniform Securities Act for territorial-level securities regulations. As mentioned, careful consideration should be taken when structuring business operations in the USVI, including the choice of entity, along with tax elections available under the Code. All USVI entities receive employer identification numbers from the IRS.
Business licences are issued by the Department of Licensing and Consumer Affairs (DLCA) and are required to engage in business in the USVI. The DLCA provides a general business licence that can be used to register with the Department of Labor and to set up a bank account, but a business must request a licence that specifies its specific business activities as soon as feasible since licences are effective upon the issuance date, rather than the application date.
Residency requirements
Many of the USVI economic incentives and related programmes provide personal tax benefits for bona fide USVI residents on their allocations or dividends. To be a bona fide USVI resident, a person must meet one of five alternative physical presence tests each year, have a closer connection to the USVI than any other location, and have a USVI tax home. The most-used “physical presence” test involves being in the USVI for all or part of 183 days in a given year; however, individuals who travel frequently can satisfy the physical presence test by spending no more than 90 days in the USA each year or by not having a significant connection to the USA at any time during the year (such as having a home or children located in the USA). The establishment of a “closer connection” involves such factors as having a home, filing returns as a USVI resident, obtaining a USVI driver’s licence, registering to vote and voting in the USVI, and having a USVI bank account, although no single factor is determinative. A “tax home” is an individual’s principal place of business. In most cases, the individual must be a bona fide resident of the USVI for the entire year to get benefits on their income from the benefited business.
