U. S. Virgin Islands Tax Incentive Program; Economic Development Commission

The U.S. Virgin Islands (USVI) Economic Development Commission (EDC) program is one of the more attractive tax incentive programs available to businesses and individuals within the United States. Sanctioned by the U.S. Congress and administered by the Virgin Islands Economic Development Authority (USVIEDA), the program aims to boost the local economy by encouraging businesses to relocate to or expand within the territory in exchange for massive tax reductions and exemptions.

Approved companies, generally focusing on manufacturing, technology, financial services, and high-end services, can operate in a low-tax environment for 10 to 30 years, depending on their location in St. Croix, St. Thomas, or St. John.

Key Tax Benefits of the EDC Program

Beneficiaries of the EDC program receive a comprehensive package of tax advantages, including:

• 90% Reduction in Corporate Income Tax: The effective corporate income tax rate is reduced to between 2% and 4%. The 90% reduction applies only to qualifying USVI‑source income, not worldwide income, and the baseline rate depends on entity structure and the mirror code calculation.
• 90% Reduction in Personal Income Tax: Bona fide resident owners pay 90% less income tax on distributions (dividends) from the business.  The reduction applies to dividends or pass‑through income from the approved activity only, and requires strict compliance with IRC §§ 932, 934, and 937.
• 100% Exemption from Gross Receipts Tax: Total exemption from the 5% tax on gross business receipts.  These exemptions are not automatic and are limited to assets and transactions directly tied to the approved business activity.
• 100% Exemption from Business Property Tax: No property tax on assets used for the approved business.  These exemptions are not automatic and are limited to assets and transactions directly tied to the approved business activity.
• 100% Exemption from Excise Tax: Exemptions on items imported for use in the business.  These exemptions are not automatic and are limited to assets and transactions directly tied to the approved business activity.
• Reduced Customs Duty: Lowered from the standard 6% to 1% on raw materials/components.

Qualification Requirements

To qualify for these benefits, a business must go through an application process and meet strict requirements aimed at benefiting the local USVI community:

1. Minimum Investment: A minimum of $100,000 in capital investment is required (excluding inventory), which typically includes build-out costs, furniture, and technology.
2. Local Hiring: Generally, companies must employ a minimum of 10 full-time residents of the USVI. Category IV Designated Service Businesses (e.g., financial services) may qualify with a minimum of 5 full-time employees.  Employees must generally have resided in the USVI for at least one year prior to being hired.
3. Residency: At least 80% of employees must be USVI residents.
4. Physical Presence: The business must maintain a physical office in the USVI.  Virtual offices, co‑working desks without staff, or “mailbox offices” are explicitly insufficient and are a frequent cause of application denial.
5. Sector Eligibility: The business must fall within authorized categories, such as manufacturing, high-technology, call centers, financial services, or consulting, or be otherwise approved by the Commission.
6. Contributions: Beneficiaries must make annual contributions (minimum $3,000) to the Territorial Scholarship Fund and engage in charitable donations or public education support.  Though the exact amount and structure may vary by category and agreement.
7. Compliance and Audit Risk: EDC companies are subject to:

Annual compliance filings
Periodic audits
Claw‑back of benefits for non‑compliance

Residency Requirements

To qualify for personal income tax benefits through the U.S. Virgin Islands (USVI) Economic Development Commission (EDC), an individual must be a bona fide resident of the USVI for the entire taxable year.

The residency requirements consist of a three-part test mandated by Section 937 of the Internal Revenue Code:

1. Physical Presence Test 

You must satisfy at least one of the following five conditions during the tax year:

• 183-Day Rule: Spend at least 183 days in the USVI during the year.
• Three-Year Average: Spend a total of 549 days in the USVI over a three-year period (current year and two preceding years), with at least 60 days in the USVI during each of those years.
• 90-Day Limit: Spend no more than 90 days in the United States during the taxable year.
• Earned Income Limit: Have no more than $3,000 in U.S. earned income and spend more days in the USVI than in the U.S..
• No Significant Connection: Have no “significant connection” to the U.S. (e.g., no permanent home or minor child residing there). 

2. Tax Home Test

• Your “tax home”—the principal place of business or employment—must be located in the USVI for the entire taxable year.
• You cannot have a tax home outside of the USVI during any part of that year. 

3. Closer Connection Test

• You must demonstrate a “closer connection” to the USVI than to the United States or any foreign country.
• Factors used to evaluate this connection include the location of your permanent home, your family, personal belongings (cars, jewelry), and where you conduct personal banking and voting. 

Additional “Resident” Definitions for EDC Businesses
If you are an EDC beneficiary (business owner) hiring employees, “residents” for hiring requirement purposes must meet specific local criteria:

• Be a U.S. citizen domiciled in the USVI for one year or more prior to hiring.
• Or be a USVI school attendee for at least six years, a graduate of a local high school/university, and a registered USVI voter.
• Or be a lawful permanent resident alien domiciled in the USVI for at least one year

FAQs

1. Who qualifies as a bona fide USVI resident?
   A bona fide resident is someone who meets one of five physical presence tests each year, maintains a closer connection to the USVI than any other location, and has their “tax home” in the USVI.
2. How long do the tax benefits last?
   The benefits are granted for a term of 10 to 30 years, depending on the location of the business within the islands. Currently, 30-year benefits are available to encourage investment in the western end of St. Croix (Frederiksted), while other areas typically receive 10 to 20 years.
3. Can service businesses apply?
4. Yes. Category IV Designated Service Businesses, including investment managers, tech developers, business consultants, and call centers, are highly welcomed, provided they meet the minimum 5-employee requirement.  Category IV businesses face higher scrutiny on economic substance and export orientation, especially for financial and consulting firms.
5. What are the costs associated with the program?
6. In addition to the investment, beneficiaries pay a one-time activation fee and an annual compliance fee, ranging from $1,500 to $9,500 based on the business category.  Fees do not include legal, accounting, immigration, or audit costs, which can be significant during application and annual compliance.
7. What is the difference between EDC and the RTPark?
8. The RTPark (Research & Technology Park) focuses specifically on technology, e-commerce, and knowledge-based businesses, partnering with the University of the Virgin Islands. While it offers similar 90% tax reductions, it often features lower employment minimums and deeper partnerships with the university. 

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The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.