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4th Annual Private Wealth Management Summit

Opal Financial Group

Opportunities for Investment Managers and Family Offices in the U.S. Virgin Islands

Marjorie Rawls Roberts, Esq.

Marriott Frenchman’s Reef, U.S. Virgin Islands

May 13, 2004

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An Overview of the Economic Development Program

U.S. Unincorporated Territory Acquired by U.S. from Denmark in 1917 Uses U.S. Currency and No Exchange

Controls Part of U.S. Court System – Two Federal

District Court Judges and Within the Third Circuit Court of Appeals

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United States Virgin Islands

Five Banks - Bank of St. Croix, V.I. Community Bank, First Bank of Puerto Rico, Banco Popular, Bank of Nova Scotia (all FDIC or CDIC Insured)

Federally Chartered Land-Grant University – University of the Virgin Islands – with Campuses on St. Croix and St. Thomas

St. John – 2/3rds National Park

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Tax System

USVI Uses Internal Revenue Code under “Mirror” System Whereby USVI Substituted for “United States”

USVI Residents file One Form 1040 with the Bureau of Internal Revenue, regardless of source of income-may be changed pending legislation

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Tax System Cont.’d

USVI Corporations File Form 1120 with the BIR and Foreign Corporations (Including US Corporations) File Form 1120F with the BIR

USVI is Foreign to the US for Corporate Tax Purposes, so the rules for Controlled Foreign Corporations, Passive Foreign Investment Companies, and Foreign Personal Holding Companies Apply

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United States Virgin Islands

Offers Economic Development Incentives to Targeted Businesses

Authorized by the U.S. Congress under Section 934 of the Internal Revenue Code of 1986 (IRC)

USVI can reduce or remit so much of the tax liability incurred to the USVI “as is attributable to income derived from sources within the Virgin Islands or income effectively connected with the conduct of a trade or business within the Virgin Islands.”

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United States Virgin Islands

IRS Not Yet Issued Regulations Defining what are “sources within the Virgin Islands or effectively connected with the conduct of a trade or business within the Virgin Islands.”

Under IRC, income connected with services performed in the USVI is sourced in the USVI

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United States Virgin Islands

Under Federal Umbrella, USVI Has Enacted a Number of Economic Incentive Programs– Economic Development Program– Farmers & Fishermen Act– Affordable Housing– Enterprise Zones

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USVI Economic Development Program

Administered by Economic Development Commission, a Division of the Economic Development Authority

Recommends Grants of Benefits to Businesses to Governor

Businesses Selected to Diversify Economy; Create Good Jobs; Provide More Customers for Local Businesses

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USVI Economic Development Program

Targeted Businesses– Service Businesses Serving Clients Outside the

USVI– Hotels and Other Tourism Related Businesses– Manufacturing and Assembly, Especially Jewelry

and Watches– Transportation– Marine Related Businesses– Others

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Service Businesses – Category IIA

In 2001, Legislation was Amended to Focus on Service Businesses

Category IIA Added to Statute (Section 708(a), Chapter 12, Title 29, VIC)

Reflected Legislature’s and Executive’s Goal of Encouraging Investment Managers and Other Service Businesses to Relocate to USVI

Previously investment managers applied under “old” generic category of “economic or management consulting services.”

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Service Businesses – Category IIA

The Following Service Businesses Are Eligible:– Investment Managers and Advisors– Research and Development– Business and Management Consultants– Software Developers– E-Commerce Businesses– Call Centers– High Tech Businesses– International Public Relations Firms– International Trading and Distribution– Any Other Businesses Serving Clients Outside the Virgin Islands

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USVI Economic Development Program

Employment Requirements– Hire at least 10 People, 80 % of Whom Must be USVI

Residents for at least a year– After third year of operations, 20 % of management,

supervisory, and/or technical positions must be filled by USVI residents

– Must Each Work at Least 32 Hours a Week– Must Provide Health Care and Retirement Benefits– Must Provide Vacation and Sick Leave– Must Provide Management Training Program

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USVI Economic Development Program

Capital Investment Requirements– Must Invest at Least $100,000– Must Specify Period of Investment– Must use Local Providers If Available– Must Meet Stringent Local Purchase Requirements– Generally Must Make Charitable Contributions,

although not statutory– Internships are important

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USVI Economic Development Program

Benefits– Available for 15 years in Frederiksted District of St. Croix – Available for 10 years in Eastern Half of St. Croix, St. Thomas,

St. John, Water Island– Renewable for 10-year Period upon Application– 90 Percent Reduction in Otherwise Applicable Income Tax

Rate for Beneficiary (if Taxable)– Also Applies to Allocations or Dividends to Investors who are

Bona Fide USVI Residents On Their Personal Form 1040s (The USVI does not impose ‘local’ income tax)

– Other Income of Investors is Taxable at Regular Federal Rates

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USVI Economic Development Program

USVI Residency Owners of Business Must be Bona Fide Residents of USVI to

Enjoy Benefits on Their Personal Returns How is Residency Determined?

– IRC Section 932 Sets out Rules for USVI Resident Filings– Facts and Circumstances Test – Substantial Presence Test – IRS Working on Regulations on Territorial Residency– Until Such Regulations, Look to Standards in “Old” Section

871 and 911 Tests and Cases

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USVI Economic Development Program

How is Residency Determined (Continued)– Full-Time Residence Available for Resident’s Exclusive Use (Not

Time-Share or Home in Villa Rental Program)– Voters Registration and Drivers License (Three Months Test in

Driver’s License Handbook)– Regular Time in USVI– Closer Connection to USVI than Anywhere Else – Church, Clubs,

Civic Participation, Medical, Other Investments, Family, Other Factors– Advise IRS – Form 8822– Although Clients Outside USVI, Must Perform as Many Services for

Clients as Possible Inside USVI

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USVI Economic Development Program

Substantial Presence Test– Amendment 3143 to S. 1637, as passed by US

Senate on May 11, 2004 provides “bona fide resident' means a person who satisfies a test, determined by the Secretary, similar to the substantial presence test under section 7701(b)(3) with respect to Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, or the Virgin Islands, as the case may be.'‘

– Additional legislative changes expected prior to enactment.

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USVI Economic Development Program

Substantial Presence Test (cont.)– Individual has substantial presence in the USVI if

“present in the USVI on at least 31 days during the calendar year and sum of the number of days on which such individual was present in the US during the current year and 2 preceding calendar tears…equals or exceeds 183 days.”

– Uses a weighted average, such that residency established at 122 days per year, over a three+ year period.

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USVI Economic Development Program

Additional Benefits– Gross Receipts Tax Exemption- otherwise 4%– Property Tax Exemption- otherwise .75% of value– Customs Duty and Excise Tax Benefits

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Application to Investment Managers

Possibility of Relocation of Business and Owners Application Submitted to EDC 8-9 Public Hearings Each Year Executive Session Governor’s Review and Formal Approval Certificate – Commencement of Benefits (Binding

Contract) Must Provide Physical and Mailing Address and

Telephone and Fax Numbers to Request Certificate

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Benefits – Five Years to Activate Different Benefits -- Different Dates IRS Filing – Gift and Estate Tax Benefits IRS Filing – Social Security and Self Employment

Taxes

Application to Investment Managers

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Other U.S. Virgin Islands Tax Benefits

Exempt International Insurance Companies Estate and Gift Tax Benefits for People Born or

Naturalized in a US Territory Exempt Companies – Tax-Free Holding

Companies for Non-US Owners Research and Technology Park

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Tax Facts

USVI Not Covered by US Tax Treaties Covered by US Treaties of Friendship, Commerce &

Navigation and Bilateral Investment Treaties Special Competent Authority Procedure for Territorial-

IRS Disputes – Rev. Proc. 89-8, 1989-1 CB 778 Tax Implementation Agreement – Feb. 24, 1987 –

Governs Exchange of Information Between USVI and US

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Facts for Investment Managers

Securities and Exchange Commission and Commodity Futures Trading Commission – Authority Over USVI

Registered Investment Advisors and Broker-Dealers – Subject to Oversight from SEC Miami Office

USVI has no “Blue Sky” Laws (but lots of blue sky) and no local investment advisor registration laws

Business License Categories – Investment Advisory Service ($200), Investment Brokerage ($400), Business and Management Consultant ($300)

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Securities Law Issues

Uniform Securities Act-still pending before committee. A hearing date has not yet been set in regard to this matter.

This Act would require filing a notice and consent to service of process with the USVI Lt. Gov. or his designee.

$200 for the initial notice fee and $100 annually

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Telecommunications in the USVI

Undersea Cables– Global Crossing– AT & T

DSL (Wireless and wired)– Mostly used by businesses

Dial-up Modem– Most widely used form of telecommunications for

residences.

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For More Information Contact:

Marjorie Roberts, Esq. Marjorie Rawls Roberts, P.C. One Hibiscus Alley St. Thomas, USVI 00802 Jorie@MarjorieRobertsPC.com (340) 776-7235 (Telephone) (340) 776-7951 (Fax)