By William L. Blum, Esq.
The U.S. Virgin Islands offers a number of different limited liability entities including the corporation, the limited liability company (LLC), the limited liability partnership (LLP), and the limited liability limited partnership (LLLP). In addition, both the corporation and the LLC may be formed as “exempt companies” which are not subject to tax in the USVI if they meet certain ownership and income source conditions. This brief will provide basic information on the two most popular entities, the corporation and LLC. It will also briefly describe the USVI tax exempt company and the exemption of USVI companies from international reporting requirements.
Corporations in the USVI are based on the standard Delaware model. In fact, the USVI corporation law is based on a prior version of the Delaware corporate law. A USVI corporation is formed by three incorporators who elect the corporation’s directors. There must be a minimum of one director for every shareholder of the corporation if there are three or fewer shareholders; otherwise the minimum number of directors is three. All directors must be individuals and they may reside anywhere. Nominee directors are permitted. A USVI corporation is also required to have three officers: a president (who must be a director), a secretary (who must not be the same person as the president), and a treasurer. The impact of these requirements is that at least two individuals must serve as corporate officers and directors even where there is only one shareholder; a typical pattern is for one person (often the shareholder) to serve as director, president, and treasurer, with a second person serving as secretary.
The minimum capitalization for a USVI corporation is $1,000 and a “standard” capitalization for a closely held corporation is 1,000 shares of no par value stock, both authorized and issued, with a stated value of $1.00 per share.
A standard set of documentation for a USVI corporation is articles of incorporation (these are filed with the government to form the company and are subject to public inspection), by-laws, and minutes or resolutions of the incorporators and board of directors. Where there are two or more shareholders, there may often also be a shareholder’s agreement. Corporations are required to hold meetings of shareholders at least annually.
Corporate reporting obligations for corporations include filing an annual report containing basic information, including the identities of officers and directors (but not shareholders), and an annual franchise tax return with attached simplified financial statements. The reports must be accompanied by payment of the annual franchise tax and are due June 30 of each year. If the corporation is an exempt company, only one report is required and financial statements are not required. An annual income tax return needs to be filed by a USVI corporation with the USVI Bureau of Internal Revenue; however, this requirement generally does not apply to corporations which elect to be treated as USVI exempt companies.
USVI Limited Liability Companies
The USVI adopted the Uniform Limited Liability Company Act in 1998. Therefore, a USVI LLC is very similar to those formed in other U.S. jurisdictions such as Delaware or Nevada. An LLC is formed by a single organizer who is required to file Articles of Organization with the government. An LLC may be governed either by its members (one or more individuals who own the LLC) or by one or more managers appointed by the members. Typically the members will enter into an operating agreement with the company which sets forth in detail all of the regulations by which the company is to be governed. The initial members and managers are also named in the operating agreement.
Most LLCs are operated by managers. Managers may be individuals or entities, including nominee managers. Optionally, an LLC may appoint officers who may have roles in operating the company.
Meetings of managers and meetings of members are optional.
An LLC must file an annual report every June 30 which contains basic information about the company and which must be accompanied by an annual fee. The report must include the names of any managers, but does not name the members (owners).
An LLC may file an election to be treated as a corporation for tax purposes. In the absence of an election, the members are taxed on the LLC’s profits; however if an election is filed, then the LLC itself is liable for any tax on its profits. There is an exception, however, for an LLC that elects treatment as an exempt company, since exempt companies are generally not subject to tax and have no tax return filing requirement.
USVI Exempt Companies
Either a USVI corporation or a USVI LLC may elect to be treated as a USVI exempt company by including a statement to that effect in its articles. If the exempt company is owned 90% or more by non-U.S., non-USVI persons, then it is eligible for tax free treatment on all of its income except any such income from U.S. or USVI sources. A USVI exempt company may not conduct business in the USVI, although it may do so elsewhere.
An exempt company must file a simplified annual report and pay a flat annual franchise tax of $1,000. The report and payment is due on June 30 of each year. No income tax returns are required so long as the exempt company does not have U.S. or USVI source income. Beneficial ownership of exempt companies is not required to be made public.
Tax Treaties, FATCA and CRS
The USVI has a separate income tax regime from the United States and its taxes are administered by the local USVI Bureau of Internal Revenue and not by the federal IRS. As a result, the USVI is not included under any U.S. tax treaties or Tax Exchange of Information Agreements (TIEAs) with other countries and it has no such treaties or agreements of its own. Similarly, FATCA (the federal Foreign Account Tax Compliance Act) does not apply to USVI companies or financial institutions so the automatic reporting to foreign governments required under FATCA does not apply to USVI companies or accounts. Likewise, neither the United States nor the USVI have adopted the Common Reporting Standards (CRS) of the OECD and therefore no reporting of accounts or beneficial ownership of companies is required in that context either.
For non-U.S. persons seeking an offshore holding entity that has a 100% tax exemption, and that is not subject to reporting to foreign governments, a USVI exempt company is a good option. The exempt company may take the form of a corporation or an LLC. A corporation might be selected because of the well-developed corporate law under which it operates or where there is a desire for a traditional corporate entity with stock certificates and with directors and officers who have well defined roles. An LLC on the other hand is a more modern entity with more flexibility in corporate governance. It also has the advantage of being permitted to be operated by a corporate manager, thus eliminating the need for any individuals to take direct roles in representing or operating the company.
Solomon Blum Heymann LLP, and its affiliated corporate services provider, Arbor International Services Ltd., specialize in creating and administering offshore and domestic structures for foreign individuals and companies, as well as U.S. citizens. Their principals are attorneys with decades of experience in the USVI and other popular domestic and offshore jurisdictions including Delaware, the Cayman, Islands, and the British Virgin Islands.
William L. Blum, Esq., is a New York and U.S. Virgin Islands-based tax and business lawyer with particular expertise in international taxation. His practice emphasizes domestic and offshore tax matters and structures, as well as estate and asset protection planning. He served as counsel to the Governor of the U.S. Virgin Islands, and is the leading expert on the USVI’s status as a tax haven for non-U.S. persons. Mr. Blum has written articles for CCH, BNA and Euromoney on tax issues in the U.S. as well as the USVI, and he drafted numerous USVI regulations and statutes that relate to tax exemptions, including the USVI exempt company law.
Arbor International Services Limited (“Arbor”), a British Virgin Islands company, provides company fiduciary, regulatory and tax compliance services in the British Virgin Islands, Cayman Islands, Nevis, U.S. Virgin Islands, Delaware and a number of other U.S. and international jurisdictions. Arbor focuses its services on multi-jurisdictional trust and company management, and tax compliance, including assisting clients with the requirements of FATCA and the CRS. Through its licensed trust company in the U.S. Virgin Islands, Arbor offers trustee services. It also offers Delaware formation and registered agent services through its Delaware company, Arbor Delaware Services LLC.
Arbor provides services to clients in the British Virgin Islands, Cayman Islands, Nevis and other jurisdictions through qualified service providers established and licensed in the relevant jurisdictions.