USVI Legislation - Bill No. 25 (2004.09.07)

8/14/2019 USVI Legislation - Bill No. 25 (2004.09.07)

1/19

DRAFT

9/7/04 6:00 P.M.

BILL NO. 25

THE TWENTY-FIFTH LEGISLATURE OF THE VIRGIN ISLANDS

OF THE UNITED STATES

REGULAR SESSION

2004

To amend Title 29 Chapter 12, Virgin Islands Code, to both preserve the existing lawconcerning the definition of Residency for Economic Development Commission(EDC) beneficiaries by creating new specific objective criteria to establish Residency

for EDC beneficiaries; and also to clarify the definition of Income Effectively Connectedto a United States Virgin Islands Trade or Business for the purpose of filing income taxreturns in the Territory and becoming eligible to become a beneficiary under the EDCProgram; and to amend certain requirementsfor all EDC beneficiaries.

-0-

BE IT ENACTED BY THE LEGISLATURE OF THE VIRGIN ISLANDS:

Whereas, the Territory of the United States Virgin Islands enjoys attributes ofsovereignty similar to that of a state, including citizenship in the United States, the rightof self government and determination of its own laws pertaining to the rights, attributesand determination of the residency of the citizens of this Territory as according to theauthorizations and privileges found in the Revised Organic Act of 1954 as Amended;

Whereas, the Territory of the United States Virgin Islands in addition to the Taxing Lawsof the United States is subject to unique and peculiar circumstances;

Whereas, in spite of the United States citizenship held by the residents of the Territory,the United States Supreme Court in an infamous series of cases known as the InsularCases, handed down around the turn of the century, declared the inhabitants of the insularterritories of the United States, referred to as alien races and savages Down v. Bidwell182 US244 (1901) to be less entitled to the protections of the laws and constitution of theUnited States than U.S. Citizens residing elsewhere,

Whereas, the Insular Cases have been described as creating a previously unknown,obscure overtly discriminatory doctrine, (invented by the same Supreme Court that up-held the concept of Separate but Equal), solely for the Insular territories based solely onracial and ethnic prejudice that violate the very essence and foundation of our system of


2/19

2

government as embodied in the Declaration of Independence Ballentine v. UnitedStates of America (DCVI) 2001 WL 124571;

Whereas, this Legislature categorically rejects the findings, rationale and underlyingmotivation of the Insular Cases as lacking in legal and moral authority, as being contrary

to the Constitution of the United States in letter and spirit, and as naturally indefensible asall other formalized types of ethnic discrimination;

Whereas, a series of constitutional rights cases handed down by the Supreme Court of theUnited States, i.e. United States v. Guest 383 U.S 745 (1966), and Dunn v. Blumstein405 US 330 (1972) have held that freedom of travel within the United States and itspossessions is a basic right under the constitution and have suggested that any standardswhich are unreasonably or rigidly applied to determine residency and which undulyinterferes with the rights of United States citizens is unconstitutional particularly if anysuch standard relies upon a different treatment of citizens traveling from one jurisdictionin the United States to another;

Whereas, since the Naval Appropriation Act of 1922 the U.S. income tax laws have

been applied to the U.S. Virgin Islands in a mirror fashion, such that the current

U.S. Internal Revenue Code of 1986, as amended (Code) applies to the Virgin

Islands as if enacted by this Legislature, commonly referred to as the Mirror Code;

Whereas, Section 932(c) of the Code provides that an individual (whether a U.S.

citizen or legal resident) who is a bona fide resident of the Virgin Islands at the close

of the taxable year, or files a joint return for the taxable year with such an

individual, shall file a U.S. income tax return with and pay income tax exclusively to

the Virgin Islands, and not to the United States;

Whereas, the Internal Revenue Service of the United States has taken the position, in amemorandum released on August 26, 2003, that it does not need to cover over the portionof taxes collected from a US Virgin Islands taxpayer to the Bureau of Internal Revenue,and that position has the potential to create serious cash flow, accounting and collectionissues for the US Virgin Islands in part because of uncertainty associated with thedefinition of legal residence in the US Virgin Islands;

Whereas, the language contained in amendment SA 3143 to Senate Bill S-1637 currentlybefore the United States Senate which references the United States Treasurys treatmentof foreign nationals in the United States is highly prejudicial and discriminatory andreminiscent of the separate but equal treatment rejected by Brown vs. The Board ofEducation some 30 years ago, and the sub-human references made to the peoples of theinsular Territories in the Insular Cases;


3/19

3

[Whereas, the Legislature of the United States Virgin Islands holds and believes that it isthe inalienable and constitutional and natural right of the United States Citizens residingin this Territory to determine the means, manner and circumstances by which anindividual is deemed to be a resident for any purpose;]

Whereas, pursuant to the Tax Reform Act of 1986, the Territory of the United StatesVirgin Islands specifically elected to have its residents continue to be taxed under themirror code for taxation and has been granted special rights, duties and exceptionspursuant to the Laws of the United States pertaining to taxation for the purposes ofencouraging economic development to wit, sections 932(c) and 934 of the Code;

Whereas, U.S. Treasury Regulations (Reg. 1.871-2 through -5) provide in relevant

part that the determination whether a U.S. citizen is a bona fide resident of the

United States Virgin Islands within the meaning of Section 932(c) of the Code is

based upon such individuals intentions with regard to the length and nature of his

stay in the United States Virgin Islands, taking into account all of the relevant facts

and circumstances;

Whereas, U.S. Treasury Regulations (Reg. 301.7701(b)-(1)(d)) provide in relevant

part that the determination of whether an alien (otherwise initially determined to be

a U.S. resident under Section 7701(b)(1)(A) of the Code) is a bona fide resident of

the United States Virgin Islands within the meaning of Section 932(c) of the Code, is

made under the substantial presence test set forth in Section 7701(b)(3) of the Code,

and that if such alien is also a resident of the United States under Section 7701(b)(3)

of the Code, then the factors under the closer connection exception set forth in

Treasury Regulations (Reg. 301.7701(b)-(2)(d)(1)) shall apply to decide whether

the alien shall be deemed a resident either of the United States Virgin Islands or the

United States, but not both;

Whereas, Section 934(b) of the Code authorizes the United States Virgin Islands to

reduce or remit taxes otherwise imposed under the Mirror Code on income derived

from sources within the United States Virgin Islands: and income effectively

connected with the conduct of a trade or business within the United States Virgin

Islands in order to promote the economic development and general welfare of the

United States Virgin Islands.

Whereas, the Legislature of the United States Virgin Islands established pursuant to

this Congressionally delegated power the Economic Development Commission

(EDC) to administer a tax incentive program to promote the economic

development and general welfare of the United States Virgin Islands (the EDC

Program)

Whereas, the Legislature of the United States United States Virgin Islands believes thatthe EDC Program is critical to the economic and social welfare of the United StatesVirgin Islands by creating jobs for existing residents, stimulating economic activitythrough the purchase of the consumer staples, durable goods, professional services and


4/19

4

real estate as well as the payment annually to the United States Virgin Islands Bureau ofInternal Revenue of over $_____ million in income taxes by EDC beneficiaries, virtuallynone of which will continue to occur but for a viable EDC Program;

Whereas, pursuant to Section 1277 of the Tax Reform Act of 1986, in 1987 the

Government of the United States Virgin Islands and the Government of the UnitedStates entered into a Tax Implementation Agreement (Agreement) to give effect

to Section 934(b) of the Code, authorizing the United States Virgin Islands to reduce

or remit taxes otherwise imposed under the Mirror Code on U.S.V.I. source income

or income effectively connected with the conduct of a trade or business within the

United States Virgin Islands;

Whereas, Article 7 ( 3) of the Agreement provides that the respective Governments

agree that whether a person qualifies as a bona fide resident of the United States

Virgin Islands under Section 932 of the Code shall be determined under the then

applicable regulations promulgated by the U.S. Treasury; and Article ( 1, 2) of the

Agreement provides that it shall remain in force until terminated by one of therespective Governments, and that the Agreement may be amended or modified only

by mutual consent of such Governments; and such Agreement has not been

modified or amended since entering into force, and currently remains in full force

and effect;

Whereas, the Secretary of the Treasury and the Internal Revenue Service of the UnitedStates have created uncertainty with respect to the EDC Program concerning theeligibility of certain categories of EDC beneficiaries by announcing in IRS Notice 2004-45 issued in June 2004 that it intends to challenge the tax benefits received by certainbeneficiaries under the EDC Program by seeking civil and criminal penalties againstEDC beneficiaries who in the view of the IRS have purportedly not met the criteria toestablish bona fide residency in the United States Virgin Islands and/or have income thatis not derived from sources within the United States Virgin Islands or effectivelyconnected to a United States Virgin Islands trade or business, notwithstanding that suchIRS positions are based on unclear and even conflicting authorities;

Whereas, the Tax Reform Act of 1986 required the Secretary of the Treasury to

issue regulations defining income derived from sources with the United States

Virgin Islands under Section 934(b) of the IRC and notwithstanding the uncertainlegal effect of IRS Notice 2004-45, and the substantial negative effect such IRS Noticeand other public actions taken during the preceding seventeen months by the IRS havehad and will have on the future viability of certain important sectors of the EDC Program,no laws have been enacted by the U.S. Congress and no regulations have beenpromulgated by the U.S. Treasury that have provided definitive guidance with respect tosuch EDC Program issues since the passage of the Tax Reform Act of 1986,

Whereas, in the absence of any such current laws or regulations, and until such legislativeand regulatory actions are taken by the U.S. Congress and Treasury Department, theLegislature, as an expression of the will of the United States Virgin Islands people and its


5/19

5

government and to provide interim guidance to EDC beneficiaries and the Bureau ofInternal Revenue of the United States Virgin Islands for purposes of preserving andenhancing the EDC Program, hereby clarifies the EDC Program qualifications for bonafide residency in the United States Virgin Islands and the definition of income that isUnited States Virgin Islands sourced and/or is effectively connected to a United States

Virgin Islands trade or business, and further the Legislature hereby resolves for purposesof preserving the integrity of the EDC Program to provide additional resources andfunding for the Bureau of Internal Revenue to hire and train staff in the properenforcement of the laws and regulations applicable to the EDC Program,

Whereas, the Legislature acknowledges the ultimate authority of the U.S. Congress andU.S. Department of the Treasury to enact laws and promulgate regulations, respectively,to establish as to the EDC Program the qualifications for residency and the requirementsfor income to be deemed United States Virgin Islands sourced and/or effectivelyconnected to a United States Virgin Islands trade or business, and

Whereas, the intent of this Legislature is not to amend, modify or terminate theAgreement, or any of its provisions, including but not limited to Article 7( 3), but to

clarify the definition of natural person entitled to apply for and receive certain tax

reductions benefits under the United States Virgin Islands Code (Title 29, Chapter

12, Subchapter IV, 713b) pursuant to the program administered by the Economic

Development Commission; and to strengthen the administration of the EDC

program by including new standards with respect to the ownership and scope of

business operations of EDC beneficiaries for whom EDC benefits have been

approved.

NOW THEREFORE: Be it enacted by the Legislature of the United States VirginIslands:

Section 1: Bona Fide Resident of the United States Virgin Islands: Section708(b) of Chapter 12, Subchapter III of Title 29 of the United States Virgin

Islands Code is hereby amended by designating existing Section 708(b) as

subsection (1) thereof, and adding new subsections (2) through (16) after newly

designated Section 708(b)(1) as follows:

(2) For purposes of the preceding paragraph, (i) in the case of a natural

person who is a U.S. citizen, whether such person is a bona fide resident of

the United States Virgin Islands shall be determined under Section 932 of the

Code and U.S. Treasury Regulations 1.934-1 and 1.872-1 through 5, and

(ii) in the case of a natural person who is not a U.S. citizen but is a legal

resident of the United States, whether such person is a bona fide resident of

the United States Virgin Islands shall be determined under Section 932 of the

Code and U.S. Treasury Regulations 301.7701(b)-(1)(d).


6/19

6

(3) The determination of whether a natural person is a bona fide resident of

the United States Virgin Islands for purposes of subparagraph (2) shall take

into account such amendments or changes as may occur from time to time in

applicable law, including any amendment of or modification to the Tax

Implementation Agreement between the United States Virgin Islands and the

United States, amendatory or superseding legislative enactments by the U.S.Congress, U.S. Treasury Regulations, or controlling judicial precedent, or a

combination thereof.

(4) Alternative Methods and Criteria for Establishing Residency: In thealternative, until the effective date of any applicable laws relating to residencyare enacted by the U.S. Congress and any duly promulgated regulations are

issued by the U.S. Treasury Department, a natural person may establish bonafide residency in the United States Virgin Islands by meeting the requirements ofeither subsection (4) (a), (4) (b) or (4) (c) which status of residency shall beconclusive both retroactively as of the year such a natural person determines to

establish residency under subsections (4) (a), (4) (b) or (4) (c) and prospectively.In addition, for any years prior to the years that such natural person became abona fide resident pursuant to subsections (4) (a), (4) (b) or (4) (c), such naturalperson shall also be deemed to have been a bona fide resident for any years inwhich such natural person by clear and convincing evidence was in good faithcompliance with the facts and circumstances residency requirements in effectfrom time to time, except where inconsistent findings and determinations aremade pursuant to subsections (7) and (8).

(a) A natural person may establish bona fide residency in the United StatesVirgin Islands as of any current or prior year in which such naturalperson determines to establish residency: (1) by filing a copy of a deed,lease or other evidence of having acquired as of such year a permanentplace of residence in the Territory; (2) by providing clear and convincingevidence that as of such year such person has been physically present andmaintaining a standard of living not inferior to that persons customaryprior style of living elsewhere and coincident with such persons presentcapacity in the United States Virgin Islands for 183 days or more, whichnumber of days includes any days of arrival and days of departure to andfrom the United States Virgin Islands and which days need not beconsecutive, during the first calendar year in which residency is beingsought to be established under this subsection; (3) by filing an affidavitunder penalty of perjury with the Bureau of Internal Revenue indicatingthat as of such year the United States Virgin Islands was such personsprimary place of United States residence and that such person has notprimarily resided subsequently in any other state, district, commonwealthor territory of the United States; and (4) by acquiring as of such year atleast two of the following: a valid United States Virgin Islands driverslicense issued by the motor vehicle division of the United States Virgin


7/19

7

Islands, a voters registration card issued by the United States VirginIslands Board of Elections or such other proof acceptable to the Bureau.

(b) A natural person may establish bona fide residency in the United StatesVirgin Islands as of any current or prior year in which such natural

person determines to establish residency: (1) by filing a copy of a deed orother evidence of having acquired as of such year a permanent place ofresidence in the Territory; (2) by providing clear and convincing evidencethat, beginning as of such year for three consecutive years, such personhas been physically present and maintaining a standard of living notinferior to that persons customary prior style of living elsewhere andcoincident with such persons present capacity in the United States VirginIslands for 122 days or more on average for each of such three years,which number of days includes any days of arrival and days of departureto and from the United States Virgin Islands as well as any days, not toexceed 22 in number for any individual year of such three year period,

spent outside the United States Virgin Islands traveling directly to andfrom, and meeting with the current clients or customers of such EDCbeneficiary at such clients or customers place of business, which daysneed not be consecutive during any such calendar year for whichresidency is being sought to be established; (3) by filing an affidavitunder penalty of perjury with the Bureau of Internal Revenue indicatingthat as of such year the Virgin Islands was such persons primary place ofUnited States residence and that such person has not primarily residedsubsequently in any other state, district, commonwealth or territory of theUnited States; and (4) by acquiring as of such year at least two of thefollowing: a valid United States Virgin Islands drivers license issued bythe motor vehicle division of the United States Virgin Islands, a votersregistration card issued by the Board of Elections or such other proofacceptable to the department.

(c) A natural person who does not meet the minimum number of daysrequirements of physical presence in the United States Virgin Islands asprovided in either subsection (4)(a) or (4) (b) above may establish bonafide residency in the United States Virgin Islands for any year byproviding clear and convincing proof to the Director of the Bureau ofInternal Revenue that such natural person had a closer connection as ofsuch year to the United States Virgin Islands than to the United States.For purposes of establishing bona fide residency in the United StatesVirgin Islands under this subsection by establishing such closerconnection, a natural person shall file a statement with the Directorsetting forth that a preponderance of the following factors have beenachieved by such natural person. Upon a finding of the Director by clearand convincing evidence that such preponderance of the below-listedfactors have been achieved with respect to such natural person, the


8/19

8

Director shall issue a certificate to such natural person evidencing suchfinding of bona fide residency as of such year.

1. Establishment of a permanent residence in the US Virgin Islandswith the stated intent to remain permanently a resident there

indefinitely.2. Proof of purchase of a permanent home in the US Virgin Islandscommensurate with such persons customary lifestyle andcoincident with such persons present capacity;

3. Pets in the permanent home in the US Virgin Islands;4. Filing personal income tax returns in the US Virgin Islands with

the Bureau of Internal Revenue.5. Proof that such person has maintained residence in the Territory

for at least 122 days in the year prior to the tax year in questionand maintains no other comparable residence in the UnitedStates;

6.

Documentation establishing bona fide domicile in the USVirgin Islands is not temporary or merely incidental to atemporary residence in the United States Virgin IslandsAssimilation of the beneficiary in the US Virgin Islands social,cultural and economic environment;

7. US Virgin Islands voter registration;8. US Virgin Islands vehicle registration;9. US Virgin Islands drivers license;10. Primary business and personal bank accounts in the Territory;11. Proof of membership in or affiliation with community, civic or

territorial organizations or significant connections to theTerritory;

12. Proof of former domicile in US Virgin Islands and maintenanceof significant connections while absent;

13. Proof of reliance upon US Virgin Islands sources of support;14. Proof of admissions to a licensed practicing profession in US

Virgin Islands, including membership in professionalorganizations;

15. Full-time, Non-temporary permanent employment in US VirginIslands, (e.g. W-2 forms, letter from employer);

16. Purchase of substantial US Virgin Islands real property;17. Full-time permanent self employment in the US Virgin Islands;18. Proof of Acceptance of Permanent Employment in US Virgin

Islands;19. Family ties in US Virgin Islands and physical presence of

immediate family members (spouse, children or parents) in USVirgin Islands;

20. Permanent relationship with healthcare providers in US VirginIslands;


9/19

9

21. Investment in independent businesses present in the US VirginIslands;

22. Possession of a US Virgin Islands firearm license;23. Permanent access to private means of transportation in US Virgin

Islands;

24.

Permanent mailing address in US Virgin Islands;25. US Virgin Islands Incorporation;26. Transcripts from US Virgin Islands schools for multiple years;27. Proof of Homestead Exemption;28. Absence of substantial evidence of a legal primary residence in

some other United States locality;29. Any other factors peculiar to the individual which satisfactorily

explain such persons absence from the United States VirginIslands and which tend to establish the necessary intent to makeand maintain the US Virgin Islands as the permanent home andthat the individual is a bona fide US Virgin Islands resident,

including the age and general circumstances of the individual;

(5) Conclusive Establishment of Residency of Former EDC Beneficiaries: Thestatus of residency shall also be conclusive for former EDC beneficiaries for anyyears in which such EDC beneficiaries by clear and convincing evidence hadattempted good faith compliance with the facts and circumstances residencyrequirements then in effect from time to time in the absence of any inconsistentfactors set forth in subsection (7) and (8).

(6) Additional Categories of Residents:

(a) The following class ofnatural persons shall also be considered residentsof the territory for purposes of this Chapter; individuals married to legalUnited States Virgin Islands residents who intend to make United StatesVirgin Islands their permanent home and who relinquish their legal ties toany other state; a dependent child whose parents are divorced, separated,or otherwise living apart, will be considered a United States Virgin Islandresident if either parent is a legal resident of United States Virgin Islands,and that parent has custody of the child and claims the child on theirVirgin Islands income tax return.

(b) The law allows non-U.S. citizens such as lawful permanent residents, whootherwise meet the legal residency requirements, set forth herein to beeligible to establish US Virgin Islands residency for EDC purposes.Provided that the non-U.S. citizen has proof of his or her permanentimmigration status, he may be classified as a US Virgin Islands resident 6months from the time he establishes legal US residence and 4 months fromthe time he purchases a US Virgin Islands home, obtains a US Virgin


10/19

10

Islands drivers license, etc. It is not necessary to wait 12 months from thedate he becomes an eligible alien (e.g., the date of the resident alien card(1-551) is issued). Following is a list of nonimmigrant categories eligibleto establish US Virgin Islands residency for EDC purposes. Individuals innonimmigrant visa categories not listed herein shall be considered

ineligible to establish US Virgin Islands residency for EDC purposes.

Visa categories and INS classifications:

1. Visa category 5 Treaty trader or investor.2. Visa category 3 Representative of international organization.3. Visa category H-4 Only if spouse or child of alien classified H-1.

Visa category K - Fianc, fiance, or a child of a United Statescitizen(s).

4. Visa category L Intra-company transferee (including spouse orchild).

Visa category N Parent or child of alien accord special immigrantstatus.5. Visa Category O-2 Workers of extraordinary ability in the

sciences, arts, education, business, or athletics.6. Visa category O-3 Only if spouse or child of O-1 alien.7. Non-U.S. citizens who fall within the following categories shall

also be considered eligible to establish US Virgin Islands residencyfor EDC purposes.

8. Citizens of Micronesian.9. Citizens of the Marshall Islands.

(7) Indicia of Non-Residency:

(a) The following indicia will be considered inconsistent with a naturalpersons status as a US Virgin Islands resident under subsections (4) (a),(4) (b) or (4) (c) above.

1. Exclusively out-of-USVI emergency addressee or contactnumbers.

2. Exclusively out-of-USVI bank accounts.3. Maintenance of an out-of-USVI primary home address or primary

residence.4. Failure to maintain a permanent mailing address in the U.S. Virgin

Islands.

5. Maintenance of an abode in the U.S. Virgin Islands which isplainly inferior to the persons customary style of living andpresent capacity.

6. Current drivers license issued under the authority of some otherstate, district, commonwealth or territory of the United States.


11/19

11

7. Current voters registration issued under the authority of someother state, district, commonwealth or territory of the UnitedStates.

8. Residency statement is materially incomplete or incorrectlycompleted, or individual has voluntarily declared another United

States jurisdiction as primary residence.

(b) Permanent Employment and Permanent Self-employment as used insubsections (4) (c) 15 and 17 means employment which is entered intowithout expectation that it will end after a certain duration (e.g., followinga few weeks, months or the summer). For employment to be used asevidence of establishing residence for tuition purposes in U.S. VirginIslands on a date certain, the employment must be permanent.

(8) Loss of Bona Fide Residency

(a)A person may lose his standing as a bona fide resident of the U.S. VirginIslands if, after having established bona fide residency pursuant tosubsections (4) (a), (4) (b) or (4) (c), such person takes one or more ofthe following actions:

1. Such individual voluntarily declares himself to be a resident ofanother state, district, commonwealth or territory of the UnitedStates.

2. Such individual loses his permanent residence in the VirginIslands and does not replace it with another within 120 days, orbefore that time purchases another elsewhere;

3. Such individual is found by a court of competent jurisdictionlocated in the U.S. Virgin Islands to be a non-resident;

4. Such individual has taken other overt, clear and convincingaffirmative actions which show an intention to become aresident of another U.S. jurisdiction or to revoke residency inthe U.S. Virgin Islands.

(9) Revocation of Residency/Presumption of Residency:

(a) Where factors listed in subsections (7) and (8) which are inconsistent withthe US Virgin Islands residency status are identified, the Director of BIRmission will contact such natural person and advise such person thatsuch person may be classified as a nonresident. The person may respondand produce supplemental evidence in respect of their claim to U.S. VirginIslands residency for tax purposes. The BIR shall retain copies of thedocumentation for a period of 3 years provided that such copies aremaintained in a secure and confidential manner. Thereafter, a checklist or


12/19

12

record of documentation submitted shall be retained with the file for auditor a period of not less than 5 years.

(b) The Director shall look to judicial interpretations of Section 932(c) ofthe Code for guidance on decisions of revocation of residency and shall

give such persons a fair and reasonable opportunity to rebut anypresumptions raised by their actions. For all purposes related to taxation,it shall be presumed that after bona fide U.S. Virgin Islands residency hasattached to any person pursuant to subsections (4) (a), (4) (b) or (4) (c),such person intends to retain United States Virgin Islands residencyunless a contrary intention is proven by clear and convincing evidenceinvolving the factors set forth in subsections (7) and (8) which areinconsistent with permanent residency in the US Virgin Islands.

(10) It is the express intent of the Legislature of the Virgin Islands that theEDC and Director of BIR shall construe the standards applicable to the

determination whether a natural person is a bona fide resident of the Virgin

Islands in a manner favorable to a finding of bona fide residency in the

Virgin Islands, provided such finding is consistent with and to the maximum

extent permitted by applicable law.

(11) Limitation on Benefits: A corporation, partnership, limited liability

company, trust or similar entity may not exceed ten (10) shareholders,

partners, owners, members or beneficiaries without the specific approval of

the Economic Development Commission after review of the applicants

business plan or amended business plan, and an EDC licensee may not add in

excess of such number any new shareholders, partners, owners, members or

beneficiaries without the prior approval of each by the Economic

Development Commission. Such corporation, partnership, limited liability

company, trust or similar entity shall include in its initial or supplemental

application the names of all shareholders, partners, owners or beneficiaries.

(12) The limitations set forth in Subsection 708(b) (11) shall not apply to any

current EDC licensees and their shareholders, partners, owners, members or

beneficiaries which on the effective date of this legislation have more than ten

(10) such shareholders, partners, owners, members or beneficiaries;

provided, however, that in no event shall any current EDC licensee have a

total number of shareholders, partners, owners, members or beneficiaries in

excess of twenty-five (25) without the prior approval of each by the EDC.

(13) The EDC may approve additional shareholders, partners, owners,

members or beneficiaries for any EDC licensee in excess of such numbers

permitted under Subsections 708(b) (11) and (12) upon findings after review


13/19

13

of the applicants business plan or amended business plan that such

additional shareholders, partners, owners, members or beneficiaries:

1. Are engaged in similar lines of businesses as other shareholders,

partners, owners, members or beneficiaries of such EDC license,

or

2. Have certain special skills or capabilities that create business

synergies or efficiencies with such EDC licensee or its

shareholders, partners, owners, members or beneficiaries,

(14) Any approval by the EDC of an increase in the number of

shareholders, partners, owners, members or beneficiaries, for any such entity

shall be conditioned upon such entity meeting certain additional

requirements of capital, charitable contributions and ratio of employee to

shareholders, partners, owners, members or beneficiaries as prescribed by

regulations duly promulgated by the EDC.

(15) Any entity that has in excess of twenty-five (25) shareholders,

partners, owners, members or beneficiaries as of the effective date of this

legislation shall have twenty-four (24) months from such effective date to re-

organize, re-structure or file an application with the EDC to comply with the

requirements of the EDC Program and this legislation, or forfeit the tax

abatement benefits received under the EDC Program as of the end of such

twenty-four (24) month period.

(16) The principal place of business for any natural person or any

entity approved for benefits by the Economic Development Commission

shall be in the United States Virgin Islands.

Section 2: United States Virgin Islands Sourced and Effectively Connected Income:

Title 29, Chapter 12 Sub-chapter III Virgin Islands Code is hereby amended by adding anew Section 708(c) and subsection 708(c)(1) to read as follows:

(1) Income of EDC Licensees, which licensees for purposes of this legislationincludespartners and members of any EDC partnership and Limited LiabilityCompany, respectively, and shareholders of any EDC corporation, fromContractual Services Performed for current Clients or Customers outside the UnitedStates Virgin Islands shall be deemed Sourced in the United States Virgin Islandsor Effectively Connected with a United States Virgin Islands Trade or Business asfollows.

(a) Where income of an EDC licensee is earned from personal servicesperformed in more than one location, such income is deemed under thefollowing facts and circumstances to be wholly sourced in the U.S. VirginIslands or apportioned wholly to United States Virgin Island sources and


14/19

14

not other sources, provided the EDC licensee, itself, or by and through itsemployees and agents, performs considerable, continuous, and regularservices in the U.S. Virgin Islands in addition to the services performedwithout the U.S. Virgin Islands.

(b) Items of income, gain, loss, or deduction earned or incurred by an EDClicensee shall be deemed to be effectively connected with the conduct of atrade or business in the U.S. Virgin Islands Code as that phrase is used inSection 934(b)(1) of the Internal Revenue Code provided (1) the income,gain, loss, or deduction is derived from assets used or held for use in theconduct of such trade or business; or (2) the activities of such trade orbusiness were a material factor in the realization of the income, gain, loss,or deduction. In making these determinations, due regard shall be given towhether or not such asset or such income, gain, loss, or deduction wasaccounted for through such trade or business, and no regard shall be givento whether or not the income, gain, loss, or deduction is sourced in the

U.S. Virgin Islands or without the U.S. Virgin Islands.

(c) The following are considered to be material factors in the realization of theincome, gain, loss, or deduction:

1. The solicitation, negotiation, or performance in the U.S. VirginIslands of activities required to arrange a lease, license, or sale orexchange of property not located in the U.S. Virgin Islands fromwhich rents, royalties, gains, or losses from intangible property notlocated in the U.S. Virgin Islands will be derived, by a U.S. VirginIslands trade or business, is a material factor in realizing those rents,royalties, gain, or losses from intangible property not located in theU.S. Virgin Islands.

2. The participation in soliciting, negotiating, or performing of otheractivities required to arrange the issuance, acquisition, sale orexchange of property from which dividends, interest, gains or lossesfrom the sale of stocks or securities is derived or the performance ofsignificant services in connection with such issuance, acquisition, saleor exchange, by a U.S. Virgin Islands trade or business which activelyparticipates in those activities or performs those services, is a materialfactor in realizing those dividends, interest, gains or losses or serviceincome.

3. The investment in the funds or accounts that it manages in order todevelop a track record, fund a general partnership interest, or attract orretain outside investors from which dividends, interest, and gains orlosses will be derived, by a U.S. Virgin Islands trade or businessconducting an investment management business, is a material factor inrealizing those dividends, interest, and gains or losses.


15/19

15

4. The performance in the U.S. Virgin Islands of activities that aredescribed in its duly executed Industrial Development Certificatefrom which income for those designated services will be derived, by aU.S. Virgin Islands trade or business conducting the business of

owning and operating a designated service business, is a materialfactor in realizing the income derived from those services even if someof those services are performed in the U.S. or otherwise without theU.S. Virgin Islands by employees or agents of the EDC Beneficiarytraveling to meet with the persons to whom the EDC Beneficiaryprovides those designated services.

(d) The following is not considered to be material factors in the realization ofthe income, gain, loss, or deduction:

1. The conducting of activities that do not provide a significant

contribution to the realization of the income, gain, loss, or deductionsderived by a U.S. Virgin Islands trade or business is not a materialfactor in the realization of that income, gain, loss, or deduction.

Section 3: Miscellaneous: Section 713b(e) of Chapter 12, Subchapter IV of

Title 29 of the Virgin Islands Code is amended by deleting the period after the

first sentence and adding the following:

and who have been approved for such tax reductions by the Economic

Development Commission.

Section 718(a) of Chapter 12, Subchapter V of Title 29 of the Virgin

Islands Code is amended by adding new Subsections (1) and (2) as follows

and renumbering existing subsections (1) through (4) as paragraphs (3)

through (6) accordingly.

(1) In the case of a corporation, partnership, limited liability

company, trust or similar entity, the names and addresses of all

shareholders, partners, owners, members or beneficiaries.

(2) The line or lines of businesses for which benefits have been

granted.


16/19

16

BILL SUMMARY(Synopsis)

Overview:

This legislation is intended to address the issues raised in IRS Notice 2004-45 byclarifying the standards relating to United States Virgin Islands residency and UnitedStates Virgin Islands sourced or effectively connected income for purposes of providingguidance to EDC beneficiaries, natural persons and the Bureau of Internal Revenue withrespect to such issues until the U.S. Congress and U.S. Treasury Department, which haveultimate authority as to these issues, develop applicable laws and regulations. Inaddition, this legislation also imposes certain limitations on EDC licensees relating

to the number of shareholders, partners, owners, members or beneficiaries that

licensees may have without specific prior approval of the EDC subject to certain

grandfather rights of certain EDC beneficiaries exceeding such limitations as of the

effective date of this legislation.

Section 1.Residency in the United States Virgin Islands must be established before a naturalperson is eligible to qualify for an EDC credit. Clear and enforceable standards fordetermining residency are therefore vital to preserving and enhancing the EDC programand addressing the issues raised in IRS Notice 2004-45.

Subsections708 (b) (2) and (3) preserve the facts and circumstances residency test at alltimes as a valid means of establishing residency in the United States Virgin Islands untilthe effective date of any applicable laws relating to residency are enacted by the U.S.Congress and any duly promulgated regulations are issued by the U.S. TreasuryDepartment.

Likewise, until the effective date of any applicable laws relating to residency are enactedby the U.S. Congress and any duly promulgated regulations are issued by the U.S.Treasury Department, subsection 708 (b)(4) creates alternative criteria for establishingresidency in the United States Virgin Islands by meeting the requirements of eithersubsection 708(b) (4) (a), (4) (b) or (4) (c) pursuant to which residency shall be deemedconclusive prospectively and retroactively as of the year such natural person determinedto establish residency under subsection (4). Moreover, prior to establishing residencyunder subsection (4), a person shall also be deemed to be a resident if such beneficiaryproduces clear and convincing evidence that such person was in good faith compliancewith the facts and circumstances residency test then in effect unless contrary evidencepursuant to subsections 708(b) (7) and (8) existed at such time.

Subsections 708(b) (4) (a), (4) (b) or (4) (c) each set forth specific alternative criteria tothe ongoing facts and circumstances test for establishing USVI residency. Establishingresidency pursuant to subsection 708 (b)(4) shall be considered conclusive and, thereforeonce achieved, a safe harbor for all qualifying natural persons unless clear and


17/19

17

convincing evidence is developed that is inconsistent with permanent residency in theUnited States Virgin Islands pursuant to subsections 708(b) (7) and (8).

Subsections 708(b) (4) (a) and (4) (b) set forth, among other factors, as criteria forresidency, a prescribed number of days during any calendar year in which natural

person must be physically present in the United States Virgin Islands. Such days neednot be consecutive or complete days and days of arrival or departure from United StatesVirgin Islands are included for purposes of calculating the required number of days ofphysical presence. Subsection (4) (a) requires the minimum of 122 days of physicalpresence in the United States Virgin Islands on average over three years to meet thephysical presence requirements. However, during any calendar year of such three yearperiod, a maximum of 22 days may be spent by aperson EDC beneficiary traveling toand meeting with his current clients and customers outside the United States VirginIslands, which number of days shall be included for purposes of calculating the requirednumber of days of physical presence.

In addition, until the effective date of any applicable laws relating to residency areenacted by the U.S. Congress and any duly promulgated regulations are issued by theU.S. Treasury Department, subsection (4) (c) provides alternative criteria for establishingresidency in the United States Virgin Islands by permitting a person to submit aStatement to the Director of the Bureau of Internal Revenue containing clear andconvincing evidence that such person has a closer connection to the United States VirginIslands than to the United States as of the year such natural person seeks to establishresidency in the United States Virgin Islands. Such clear and convincing evidence shallconsist of a finding by the Director of the Bureau of Internal Revenue that a naturalperson has achieved a preponderance of the factors enumerated in subsection708(b)(4)(c) 1-29.

Subsection (708(b)(6)) provides additional categories of United States Virgin Islandsresidents which include spouses and dependent custodial children of individuals who areresidents of the United States Virgin Islands as well as non-U.S. citizens who are lawful,permanent inhabitants of the United States Virgin Islands who meet the requirements ofUnited States Virgin Islands residency for EDC purposes and who meet the Visacategories and INS classifications enumerated therein.

Subsections 708(b)(7), (8) and (9) set forth certain indicia of non-residency in the UnitedStates Virgin Islands and the process and standard of review by which such indicia are tobe considered by the Director for purposes of reviewing and revoking such residencystatus. Subsection (9) provides that with respect to taxation related purposes, any naturalperson establishing residency pursuant to subsection 708(b) (2) and (4) shall bepresumed to intend to retain United States Virgin Islands residency unless clear andconvincing evidence Director to exist.

In order to preserve the purposes for which the EDC Program was created, new

standards and limitations with respect to the ownership and scope of business

operations are adopted for EDC beneficiaries for whom EDC benefits are granted


18/19

18

by the EDC. Nonetheless, because certain existing licensees may already exceed

these new limitations, certain grandfather rights are created in recognition of the

substantial economic commitments and benefits such EDC licensees have already

provided and will continue to provide to the USVI under the EDC Program.

Subsection 708(b)(11)establishes a limitation of ten (10) on EDC licensees as to thenumber of their shareholders, partners, owners, members or beneficiaries that theymay have without prior approval by the EDC subject nevertheless to certain

grandfather rights that current EDC licensees will have to continue to expand but

not to exceed twenty-five (25) of such shareholders, partners, owners, members or

beneficiaries under subsection 708 (b) (12).

Subsection 708(b)(12) establishes certain grandfather rights for existing EDC

licensees that exceed the limitation of ten (10) as to the number of shareholders,

partners, owners, members or beneficiaries such EDC licensees may have as of the

effective date of this legislation by exempting them from such limitations up to

twenty-five (25) without the prior approval of the EDC.

Subsections 708(b)(13) and (14) establish criteria by which the EDC may approve

additional shareholders, partners, owners, members or beneficiaries of EDC

Licensees over and above the stated limitations applicable to new and current EDC

licensees, and authorizes the EDC to adopt regulations relating to such criteria.

Subsection 708(b)(16) establishes a timeframe of twenty-four (24) months by which

an entity that has more than twenty-five (25) shareholders, partners, owners,

members or beneficiaries may come into compliance to avoid forfeiture of future tax

benefits under the EDC Program.

Section 2.In order for a natural person to qualify for an EDC credit, the natural person, inaddition to being a resident of the U.S. Virgin Islands, must have income that is eithersourced in the U.S. Virgin Islands or effectively connected with the conduct of a tradeor business in the U.S. Virgin Islands. The Treasury Department of the U.S. wasdirected to issue regulations regarding the meanings of these terms; but those regulationshave not been issued. This section of the bill will clarify the meaning of those terms,particularly in regard to EDC licensees in the Designated Service Provider category.

Subsection 708(c) (1)(a) first clarifies the source rule for income received for servicesthat are provided both in the U.S. Virgin Islands and elsewhere. EDC licensees are, byU.S. Virgin Islands law, required to provide designated services only to customers andclients outside of the U.S. Virgin Islands. Subsection 708(c)(1)(a) provides that where anEDC licensee performs considerable, continuous, and regular services in the U.S. VirginIslands, all income it earns for its services is sourced in the U.S. Virgin Islands, even ifthe individuals providing those services on its behalf do not perform all of their servicesin the U.S. Virgin Islands.


19/19

19

Subsection 708(c) (1)(b) then clarifies the effectively connected rule for income earnedby an EDC licensee, where that income might have a source other than the U.S. VirginIslands. In light of the legislative purposes of Code Section 934(b) and its use of the term,the Legislature believes that the term should have a broad definition similar to itsordinary meaning and the meaning set out in Code Section 864(c)(2). Subsection 708(c)

(1)(b), therefore, contains language identical to that contained in Code Section 864(c) (2),providing that income is effectively connected if the income is derived from assetsused or held for use in the conduct of a trade or business or if the activities of the trade orbusiness were a material factor in the realization of the income. Subsection 708(c)(1)(b)also specifically negates the sourcing limitations placed effectively connected incomeby Code Section 864(c)(4), providing that income may be effectively connectedwithout regard to its source.

Subsection 708(c)(1)(c) provides examples of the types of activities that will fit withinthe definition of effectively connected and Subsection 708(c)(1)(d) provides adescription of the type of activities that will not fit within the definition.

Documents

USVI Legislation - Bill No. 25 (2004.09.07)