THE TAX FREE ENTITY UNDER THE U.S. FLAG: A UNITED STATES VIRGIN ISLANDS EXEMPT COMPANY By William L. Blum, Esq. It will come as a surprise to many practitioners that the Internal Revenue Code provides an international tax planning tool with one very unusual feature: a corporate entity which enjoys all the non-tax advantages of incorporation in a United States jurisdiction, but without any federal or local income tax. The entity, known as a United States Virgin Islands exempt company, was authorized by the 1986 amendments to Section 934(b) of the Internal Revenue Code. Implementing legislation was thereafter adopted by the Legislature of the Virgin Islands. This article discusses generally how territorial tax policy is formulated, the historical and policy background of the exempt company provisions, their technical application and requirements, and their practical application as a tax planning mechanism for selected non-United States owners. I. Historical, Policy and Legislative Background Formulation of Territorial Policy and Territorial Tax Policy The United States has sovereignty over several offshore areas located in the Eastern Caribbean and in both the North and South Pacific Ocean. These offshore areas are usually referred to as territories or possessions. The most economically and politically important of these territories are Puerto Rico, the U.S. Virgin Islands, Guam, the Commonwealth of the Northern Mariana Islands, and American Samoa. Under the U.S. Constitution, Congress is responsible for enacting laws regarding the territories. For the most part, Congress has provided for each of the above territories to be self-governing: each has authority to elect its own governor and legislature; and each has the authority to enact its own laws except in the few areas where Congress has withheld, and retained for itself, such authority. Although rarely exercised, Congress also retains its Constitutional power to invalidate laws enacted by te