Do US Virgin Islands Pay Income Taxes?

The U.S. Virgin Islands (USVI) has a distinct tax system that, while rooted in United States tax law, functions separately. Individuals and entities in the USVI are subject to income tax, but for most residents, these taxes are paid to the USVI government’s treasury, not the U.S. Department of the Treasury. An individual’s residency status during the tax year determines whether they pay taxes to the USVI or the U.S.

The USVI Mirror Code Tax System

The foundation of the USVI’s tax structure is the “mirror code.” Authorized by Section 932 of the U.S. Internal Revenue Code, this system permits the territory to adopt federal income tax laws as its own local tax code. This means the income tax rates, brackets, deductions, and credits in the USVI are identical to those for taxpayers filing with the U.S. Internal Revenue Service (IRS).

The system operates through a substitution principle: wherever the U.S. Internal Revenue Code refers to the “United States,” the words “U.S. Virgin Islands” are swapped in for local tax purposes. This creates a parallel but separate tax administration. Consequently, the tax is a territorial one, assessed and collected by the USVI’s own tax agency, the Virgin Islands Bureau of Internal Revenue (BIR).

Determining Bona Fide USVI Residency for Tax Purposes

To be considered a “bona fide resident” of the USVI for a given tax year, an individual must satisfy three specific conditions: the presence test, the tax home test, and the closer connection test. Meeting these criteria dictates their tax filing obligation.

The presence test measures physical location. An individual meets this requirement by being physically present in the U.S. Virgin Islands for at least 183 days during the tax year. Failure to meet this minimum threshold disqualifies an individual from claiming bona fide residency for that year.

An individual must also satisfy the tax home test. A “tax home” is the general area of an individual’s main place of business, employment, or post of duty, regardless of where they maintain their family home. For USVI residency, an individual’s tax home must be located within the USVI for the entire tax year. If someone does not have a regular place of business, their tax home may be considered the place where they regularly live.

The final requirement is the closer connection test, which examines an individual’s personal and economic ties. An individual must demonstrate that they do not have a closer connection to the United States or any foreign country than they do to the U.S. Virgin Islands. Factors considered in this analysis include:

• The location of one’s permanent home
• The location of family and personal belongings
• Where an individual banks
• Where an individual is registered to vote
• Where an individual holds a driver’s license

Tax Filing for Bona Fide USVI Residents

Once an individual qualifies as a bona fide resident of the U.S. Virgin Islands, they file a single annual income tax return, Form 1040, exclusively with the Virgin Islands Bureau of Internal Revenue (BIR). This single filing satisfies their tax obligation for the year, as paying taxes to the USVI on all income relieves them of parallel income tax liability to the United States.

Bona fide USVI residents must report their worldwide income to the BIR. This means that income from sources outside the USVI, whether from the mainland U.S. or a foreign country, must be included on the Form 1040. To handle this, residents must also complete and attach Form 1040-INFO, “Non-Virgin Islands Source Income of Virgin Islands Residents,” to their return.

An exception to the rule of filing only with the BIR involves self-employment taxes. While income taxes are paid to the USVI, Social Security and Medicare taxes for self-employed individuals are owed to the U.S. Treasury. Bona fide residents with self-employment income must file Form 1040-SS, “U.S. Self-Employment Tax Return,” with the IRS to report their net earnings from self-employment and pay the corresponding taxes.

Tax Filing for U.S. Citizens and Residents with USVI Income

The tax filing process differs for U.S. citizens or residents who earn income from the USVI but do not meet the bona fide resident criteria. These individuals have filing obligations to both the IRS and the USVI’s Bureau of Internal Revenue (BIR). Their primary tax return, Form 1040, must be filed with the IRS, reporting their worldwide income.

The mechanism for allocating income is Form 8689, Allocation of Individual Income Tax to the U.S. Virgin Islands. This form must be completed and attached to the U.S. Form 1040 that is filed with the IRS.

Form 8689 calculates the portion of the individual’s total U.S. tax liability attributable to their USVI-source income. The form uses a ratio of the taxpayer’s adjusted gross income from USVI sources to their total adjusted gross income. The resulting tax amount is then paid directly to the USVI’s BIR.

The taxpayer pays the remaining balance of their U.S. tax liability to the U.S. Treasury. This dual-filing and payment system ensures the USVI receives tax revenue from its economic activity while the individual avoids double taxation. A copy of the federal return and its attachments must also be filed with the BIR.