Under certain circumstances, a bona fide resident of the USVI may be eligible for certain tax incentive programs that provide substantial tax savings. Sometimes, the savings could as much as 90% of the taxpayer's tax liability before becoming a USVI resident.

However, some promoters are selling a scheme that the IRS has stated they will challenge whenever they encounter it. The key to the difference between a legitimate tax incentive for those who establish a business in the USVI and those who simply participate in a scheme is that it is necessary to become an actual permanent resident of the USVI in order to enjoy the tax benefits. Also, the income generated from the investment in the USVI must be from within the USVI and not from the continental U.S.

One variation of the scheme involves an employee leasing arrangement, which may be regarded by the IRS as substantially similar to a "listed transaction" which must be disclosed on a tax return in order to avoid certain penalties. For more details see
Disclosure requirements for reportable transactions and
IRS Notice 2003-22

The American Jobs Creation Act of 2004 includes new definitions of a resident of the U.S. possessions and the source of income.  These changes were anacted to a large extent in response to the types of schemes that were being promoted -- as described further in the articles below.

To be a resident of the USVI, a US taxpayer must establish a permanent tax home in the USVI and must be present in the USVI at least 183 days per year.  A person's tax home is in the vicinity of where his business is located and where he normally returns , even though his family may reside elsewhere.  The Jobs Act also changed the source of income rulew with respect to income earned from within a U.S. possession. Further details about these requirements are in tax code sections 937, 931(d), 932, 934(b)(4), 935, 957(c) and 6688

For further details see the following web sites.

US Treasury Press Release (JS-1743)
Treasury Warns Against Abusive (USVI) Tax Reduction Scheme

IRS Notice 2004-45
Meritless Position Based on Sections 932( c) and 934(b)

Caribbean Net News
"U.S. Treasury Warns Against USVI Tax Reduction Scheme"

Roth & Co. Article on ETI Bill and USVI Tax Scheme
ETI Repeal Attacks Virgin Islands Tax Scheme

USVI Web Site by Wm. L. Blum, Esq.
A discussion of tax incentives for USVI business investment -- has not been updated to reflect provisions of the AJCA-04  and http://www.usvi.net/usvi/tax.html

USVI Tax Incentives by Richard P. Bourne-Vanneck, Esq.
A discussion of tax incentives for companies and USVI resident investors

US Treasury Press Release
US and USVI Sign Tax Exchange Agreement

Information Technology Association (March 2002)
USVI To Join OECD Tax Initiative