USVI EXEMPT COMPANIES MEMORANDUM Subject: United States Virgin Islands Exempt Companies as Investment Vehicles From: William L. Blum, Esq.' The United States Virgin Islands Exempt Company The United States Virgin Islands is an unincorporated territory of the United States located in the Caribbean Sea near the island of Puerto Rico. Even though it is not a state of the United States, most U.S. federal laws apply in the United States Virgin Islands. While the federal tax law applies in the United States Virgin Islands, it is not administered by the Internal Revenue Service. Rather, it applies as separate local tax code known as the "mirror system" and it is exclusively administered by the local Virgin Islands Bureau of Internal Revenue ("BIR"). In 1986, the U.S. Congress granted the U.S. Virgin Islands legislature authority to allow the establishment of tax free companies in the territory. Implementing legislation was immediately enacted to provide for a tax- free entity known as a U.S. Virgin Islands exempt company. A U.S. Virgin Islands exempt company pays no U.S. or U.S. Virgin Islands taxes of any kind with respect to income earned anywhere in the world (other than in the United States or the U.S. Virgin Islands) except for a $1,000 annual franchise fee to the U.S. Virgin Islands government. Also, the stock of such a company is not subject to any U.S. federal or U.S. Virgin Islands estate, gift, or inheritance taxes if the donor/decedent is a non-resident non-citizen of the United States. For most U.S. source passive income earned by a U.S. Virgin Islands exempt company, such as dividends, most types of interest, royalties, and the like, the United States would impose a 30% withholding tax at the source. This is the same rate as would be imposed with respect to payments of such income made to companies incorporated in other countries with which the United States has no tax treaty. The U.S. Virgin Islands imposes no such withholding tax on pa