Virgin Islands Income Tax Rules and Filing

The U.S. Virgin Islands (USVI) is a U.S. territory with a distinct income tax system administered by its Bureau of Internal Revenue (BIR). Individuals with financial ties to the islands, whether through residency or by earning income there, must navigate a specific set of rules that differ from federal and state filing requirements.

Understanding the USVI Mirror Code

The foundation of the Virgin Islands’ tax system is the “mirror code.” This means the USVI’s income tax law is a direct reflection of the U.S. Internal Revenue Code (IRC). In practice, the text of the IRC is adopted as local law, with the name “Virgin Islands” substituted for “United States” wherever it appears. This structure results in tax regulations, deductions, and credits that are largely identical to those used for federal income tax purposes.

The primary difference is the recipient of the tax revenue. Instead of being paid to the U.S. Treasury, the income taxes of USVI residents and taxes on USVI-source income are paid directly to the Treasury of the U.S. Virgin Islands. This system ensures that while the rules are familiar to those accustomed to the U.S. system, the financial obligation is directed locally to support the territory’s government and services.

Establishing Bona Fide USVI Residency

Determining whether an individual is a bona fide resident of the USVI dictates their filing obligations. To be considered a bona fide resident for a tax year, an individual must satisfy three distinct tests established under the American Jobs Creation Act of 2004. These tests evaluate a person’s physical presence, tax home, and personal connections to the territory.

Presence Test

The first requirement is the presence test, which is a measure of time spent in the territory. An individual meets this test by being present in the U.S. Virgin Islands for at least 183 days during the tax year.

Tax Home Test

The second component is the tax home test, which focuses on the individual’s principal place of business. Under this test, a person’s tax home must be in the U.S. Virgin Islands. A tax home is the entire city or general area of one’s main post of duty, regardless of where the family home is maintained. If someone does not have a regular or main place of business due to the nature of their work, their tax home may be the place where they regularly live. This test prevents individuals from claiming residency while their primary economic and professional activities are centered elsewhere.

Closer Connection Test

The final requirement is the closer connection test, which examines an individual’s personal and economic ties. A person must demonstrate a closer connection to the U.S. Virgin Islands than to the United States or any foreign country. The BIR and IRS evaluate various factors, including:

• The location of one’s permanent home, family, and personal belongings
• The jurisdiction that issued the individual’s driver’s license
• Where they are registered to vote
• Where they conduct their banking

Required Tax Forms and Information

The forms required and the income reported differ significantly for bona fide residents compared to non-residents who earn income from the territory. Both groups must use specific forms to properly report their income and calculate their tax liability to the correct jurisdiction.

Bona Fide Residents

An individual who meets the criteria for being a bona fide resident of the USVI has a single filing obligation. They must file Form 1040, the standard U.S. Individual Income Tax Return, directly with the USVI Bureau of Internal Revenue. On this return, the resident must report their worldwide income, regardless of where it was earned. By filing properly with the USVI, a bona fide resident satisfies their U.S. income tax obligation for the year.

Non-Residents with USVI Income

U.S. citizens or residents who are not bona fide residents of the USVI but earn income from the territory must file with both the IRS and the USVI Bureau of Internal Revenue. Their primary return is Form 1040, filed with the IRS, on which they report their worldwide income. To handle the taxes on their USVI-source income, they must complete Form 8689, Allocation of Individual Income Tax to the U.S. Virgin Islands. This form calculates the portion of their total U.S. tax liability that is attributable to their USVI income. The filer then pays this allocated amount to the USVI government, claims it as a credit on their U.S. return, and sends a signed copy of their complete U.S. tax return to the USVI BIR.

The Filing Process

Returns and payments for the USVI should be sent to the Virgin Islands Bureau of Internal Revenue at 6115 Estate Smith Bay, Suite 225, St. Thomas, VI 00802. Taxpayers who owe taxes to the USVI can make payments via check or money order payable to the “Bureau of Internal Revenue.” Non-residents file their primary Form 1040, including Form 8689, with the appropriate IRS service center based on their U.S. address. After submission, filers can expect the USVI BIR to process their copied return within a timeframe similar to the IRS, though specific periods may vary, and confirmation of receipt is not automatic.

Economic Development Commission Tax Incentives

The U.S. Virgin Islands offers significant tax incentives through its Economic Development Commission (EDC) Program. The program’s goal is to attract investment and stimulate economic growth and employment within the territory by providing tax benefits to businesses and their owners who establish or expand operations in the USVI and receive approval from the EDC.

Businesses that qualify for the EDC Program can receive a tax credit of up to 90% on their corporate and personal income tax liabilities. The benefits often extend beyond income taxes, potentially including a 100% exemption from gross receipts taxes, property taxes, and excise taxes on raw materials and components brought into the USVI for business purposes. To be eligible, businesses must meet specific criteria, including making a minimum capital investment in the territory and hiring a required number of USVI residents. The program is targeted at specific industries, including manufacturing, tourism, financial services, and technology.