Oliver Wendell Holmes, Jr. once remarked, “I like to pay taxes. With them, I buy civilization.” Fair enough. But there are limits. The top U.S. federal tax rate for individuals at the end of 2015 was 39.6 percent. Depending on what state and city you live in, you can see significant additional bills on top of that. Living in Manhattan, for example, can add nearly another 13 percent.
Now, a U.S. passport may be the most valuable possession in the world. The world’s strongest nation is also perhaps its freest, and citizens enjoy benefits of life, liberty, and the pursuit of happiness not found anywhere else. Add in first-class infrastructure, a corruption-free government, the globe’s mightiest military, and the dynamism and youth prevalent in the cultural and economic capital of the world, and very few would willingly give up their privileges as citizens. Significantly lowering your tax rate means, in many cases, unattractive tradeoffs like moving somewhere much less desirable. But there is a solution that nicely splits the difference between these options, allowing you to enjoy all the benefits of U.S. residence at a significant tax advantage — assuming that you derive most of your income from the ownership of a business and are willing to relocate to the U.S. Virgin Islands.
Best known for pristine beaches, green palms, and a vibrant, multiethnic culture (and tragically underknown for the heroic role it played in attempting to save European Jews during World War II, which our publisher Richard Hurowitz documented in this Wall Street Journal op-ed ), the U.S. territory is famously friendly. And that friendliness, which forms a main prop of the island group’s PR strategy, seems to have informed its local theories of taxation as well. The Virgin Islands has since the early 1970s offered an incentives program to individuals looking to relocate. The jewel in the crown of this program is a 90 percent reduction in the individual income tax rate. You read that right: 90 percent. According to estimates from the islands’ Economic Development Authority (EDA), which administers the program, eligible individuals can see net effective tax rates of as low as 3.37 percent. This sounds too good to be true. But we assure you, it is not — it’s black-letter tax law. And while the EDA program predates the harsh economic imperatives currently facing the islands, it seems custom-built to help them weather the storm. The islands’ economy, which is heavily dependent on tourism, is a relatively minuscule $4.2 billion. It suffered a 22 percent contraction on the heels of the global financial collapse, one it has yet to recover from. This shrinkage was compounded by the loss, in 2012, of the islands’ single largest tax-paying entity, an oil refinery operated in a joint venture with the Hess Corporation and Venezuela’s national petroleum company. The islands’ troubles are not all internal, however. One of their biggest partners in the region, Puerto Rico, has been sinking deeper and deeper into financial turmoil, looking more and more like it will never climb out from under its massive debt overhang barring a bankruptcy and restructuring — neither of which would be good news for USVI. Given the fact that the Cayman Islands, at the other end of the Caribbean Sea, were playing host to almost $1.4 trillion in offshore funds in June of 2015, the tax regime — which, again, enjoys the blessing of the U.S. federal government — looks like a very logical tool to bring in the kind of small-staff, high-dollar businesses that have made Cayman synonymous with discreet financial services.
So how do you gain access to all that the Virgin Islands have to offer here? The personal rate chop is offered only to owners and partners of businesses eligible under the EDA’s incentives program. It also applies only to income earned from that eligible business. For a firm to be eligible, the EDA requires it to make investment of $100,000, exclusive of inventory, in “an industry or business that advances the economic well-being of the USVI.” This may summon up the image of a cash-stuffed briefcase left in a sweltering office park for a kleptocratic middleman, but because this is a fully legal tax regime, it’s far more likely to cut down on bribery and sub rosa dealing than it is to encourage it. The business also has to provide full-time employment for 10 Virgin Islands residents of one year’s standing or longer. This means, effectively, opening a small office or branch somewhere in the islands 12 to 15 months before you, as a business owner, plan to start enjoying your vastly lower tax rates. For financial services firms, this requirement is set even lower: they need to provide such employment for five residents.
Again, the impetus to compete with other Caribbean centers of offshore financial power seems clearly threaded through the program as a whole. And it comes with a host of other advantages. The first is a reduction in the corporate tax rate to match the individual rate: a 90 percent cut. There are also full exemptions on all excise taxes, all business property taxes, and the gross receipts tax, as well tax breaks on certain IP developed in-territory and sold to non-U.S. markets. And this all as noted comes wrapped up with amazing jurisdictional advantages: a dollar-denominated economy covered by the full protection of the U.S. legal system located with easy air access to the U.S., South America, and Europe. The territory even enjoys an exemption from the Jones Act, which otherwise requires freight moving between U.S. ports to be carried on U.S.-flag vessels.
For individuals wanting to put themselves under this umbrella of incentives, there are further eligibility requirements. The highest hurdle there is achieving bona fide resident status in the USVI, which means spending 183 days per year there — though the territory is currently working on a 30-day travel exemption to that requirement. Individuals are also subject to vetting by the EDA’s application board once they have achieved bona fide resident status to make sure everything is on the up-and-up.
So while the upfront costs are significant they are hardly insuperable. Especially in the case of hedge funds, for whom the program seems to have been specifically designed. And there’s one other crucial detail. If you own or rent a seafront property as a place of business, you are legally required to provide an easement so that would-be sunbathers and swimmers can access the beach. For a 90-percent, across-the-board reduction in your tax bill, that seems like a reasonable tradeoff.