Federal and local laws establish several types of tax-exempt corporations to bolster the United States Virgin Islands' financial services industry. Bankers, accountants, lawyers and other specialists in the United States Virgin Islands are well trained and well equipped to support operations of tax-exempt companies. The USVI is home to about a dozen corporate management firms.

    An overseas investor who does not want to relocate or establish manufacturing operations in the United States Virgin Islands can obtain US flag protection for non-US investments by using a USVI exempt company. Benefits include protection from expropriation in countries with which the United States has 47 treaties of friendship, navigation and commerce and 21 bilateral investment treaties.

Here are two illustrations:

    A Hong Kong investor planning to buy assets in Bangladesh could structure the investment through a USVI exempt company to gain protections offered by the US bilateral investment treaty with Bangladesh.

    A Taiwanese investor planning to invest in the Peoples Republic of China now may do so through a Hong Kong company, because Taiwanese law does not permit direct investment in China. But in 1997, when Hong Kong becomes part of China, the Taiwanese investor must find a different avenue. An investment through a United States Virgin Islands exempt company meets the requirements of Taiwanese law. Even though no investment treaty is in force between the United States and China, many investors may feel more comfortable structuring the investment through US flag jurisdiction than other offshore mechanisms.

    USVI exempt companies pay no taxes on income from outside the United States and the United States Virgin Islands and on USVI source income such as dividends and interest. An exempt company may maintain an account in a USVI bank to invest proceeds from its international operations and receive tax-free interest income from its deposits.

    Shareholders are exempt from withholding taxes on dividends, as are creditors receiving interest payments. Unlike stock from a company incorporated in one of the 50 states, stock held by a nonresident alien individual in a USVI exempt company is nor subject to US estate or gift taxes nor to local inheritance taxes.

    The only USVI tax that an exempt company pays is an annual franchise tax of $1,000 US.

    To qualify as a USVI exempt company, a firm cannot engage actively in trade or business in the United States or United States Virgin Islands (except, as noted below. for USVI exempt insurers, mutual funds and banks). US and USVI individuals may own up to only 10 percent of an exempt company's stock. Each company must elect to be an exempt company at the time of its incorporation, usually by so stating in its articles of incorporation filed with the Office of the Lieutenant Governor. Qualifying companies can receive a 20-year contract offered by the USVI government.

Foreign Sales Corporations

     Through a US tax incentive to encourage exporting of US-made products, a US company can reduce its tax bill by establishing a Foreign Sales Corporation (FSC) in the United States Virgin Islands. Approximately 3,000 companies with USVI-based FSCs are paying 15-30 percent less tax on their profits from exports.

    An FSC may be established in a US possession outside the US Customs Zone (such as the United States Virgin Islands) or in certain foreign countries. The United States Virgin Islands has become successful in becoming a base for FSCs for numerous reasons. For example, the United States Virgin Islands offers US flag protection, significant tax benefits, US currency and has English as the official language. Approximately 75 percent of the currently active FSCs are located in the United States Virgin Islands.

    An FSC provides a tax advantage for many profitable US C corporations that export products manufactured in the United States. (A product is deemed manufactured in the United States if no more than 50 percent of its fair market value comes from imported components.)

    In the United States Virgin Islands, an FSC takes only one day to be incorporated through the Corporations Division of the Office of the Lieutenant Governor.

    The FSC is subject to an annual franchise tax and an annual license fee but is otherwise exempt from USVI income taxes and other taxes on its foreign trading gross receipts. The franchise tax for a small FSC, with up to $5 million in foreign trading gross receipts, is $400 or $900 annually, The cost of the annual license fee is $100.

    To ensure that the FSC has a substantial role in export transactions, an FSC (other than a small FSC) must meet certain foreign economic process requirements. The FSC or its agent must participate outside the United States in the solicitation, negotiation or contracting of an export transaction. Also, the FSC must incur specific percentages of export transaction costs for activities that the FSC or its agent performs outside the United States. Writing in the November/December 1995 issue of Today's CPA, two experts in FSC formation and taxation write that "although they appear to require a substantive foreign presence, these rules can usually be met with relative ease."

   The FSC experts -- Marjorie Rawls Roberts of Globalvest Management Company LP and Jeffrey C. LeSage of KPMG Peat Marwick LLP -- concluded that "using an FSC to reduce US income taxes on income from export sales can result in significant tax savings for American export companies, especially in light of [the 19931 hike in the top corporate income tax rate. The number of businesses that can benefit from an FSC is expected to increase as regional and global trade agreements reduce trade barriers, and even medium or small US businesses find themselves competing in the global marketplace."