Guide
How taxes work in the U.S. Virgin Islands
The territory runs the federal income tax code as its own law, through its own revenue bureau, and adds taxes the federal system has no version of. Here is where your return goes, what decides that, and what the territory collects for itself.
The mirror code: the federal code, run as local law
The Virgin Islands never wrote an income tax code of its own. It uses the federal one, with its own name written in.
Congress made the U.S. income tax laws apply here, and what is collected stays in the territory’s treasury. Practitioners call it the mirror code: read “Virgin Islands” wherever the federal code says “United States.”
The brackets, deductions, depreciation rules and forms all carry over; the jurisdiction changes. The agency is the Virgin Islands Bureau of Internal Revenue, not the IRS. A corporation is domestic if incorporated here, so one formed in a state is foreign. A provision is not mirrored where mirroring would produce a clearly wrong result.
Two things sit outside the mirror: the territory’s own 10% surtax on a Virgin Islands corporation’s liability, and the estate tax, which is not mirrored and stays federal, administered by the IRS.
Who files where
The first question on any Virgin Islands return is whether you were a bona fide resident of the territory for the entire year.
- Bona fide resident, all year
- Form 1040 and Form 1040INFO go to the Bureau only, reporting worldwide income. That income is excluded from your U.S. gross income once all of it is reported, its sources identified, and the territory paid in full.
- Not a resident, income from here
- You file in both places. Your Virgin Islands tax is your U.S. tax times the territory’s share of your adjusted gross income, computed on Form 8689 and paid to the Bureau directly.
- Not a resident, no income from here
- The territory is not involved. Owning a place you visit is not the same as having income sourced here; check rather than assume.
- Corporations
- A Virgin Islands corporation files Form 1120 with the Bureau on its worldwide income and pays the 10% surtax. A mainland corporation with income effectively connected here files Form 1120-F.
On a joint return, residency follows the spouse with the greater adjusted gross income. The facts of your year decide residency; it is not an election.
Bona fide residency and its three tests
Bona fide residency is a defined status under IRC § 937, not a mailing address, and three tests must all hold for the same year.
Presence
Presence is counted in days, and meeting any one of five alternatives satisfies the test:
- 183 days or more in the Virgin Islands during the year
- 549 days or more across the year and the two before it, with at least 60 days in each
- 90 days or fewer in the United States during the year
- U.S. earned income under the code’s small-amount threshold, and more days here than in the United States
- No significant connection to the United States during the year
- Tax home
- Your tax home generally must not be outside the territory during the year. Students, government officials and seafarers have their own rules.
- Closer connection
- Your connections must be closer to the territory than to the United States. A U.S. territory is not a foreign country here, so the foreign-residence rules you may know do not apply.
Form 8898 goes to the IRS when bona fide residency begins and again when it ends. The year of a move has its own rules, so if a move is on the table, have the conversation that year.
Your withholding goes to the Bureau, not the IRS
Mainland systems get this wrong more than anything else about the territory. Income tax withheld from a bona fide resident’s wages belongs to the territory and is remitted to the Bureau of Internal Revenue; social security and Medicare on Virgin Islands wages go to the IRS.
Every employed resident’s paycheck splits between two agencies, and mainland payroll platforms generally route all of it to the IRS. The error surfaces later in a reconciliation, and it is fixable. The payroll page covers the routing rules.
Taxes the territory levies on its own account
Written in the Virgin Islands code rather than mirrored, these tend to surprise a business arriving from the mainland.
- Gross receipts tax
- 5% of gross receipts, profitable year or not, with no deduction for goods, materials, labor or any other expense. Most businesses file Form 720 V.I. with the Bureau monthly, by the 30th of the following month. Under $225,000 a year, the first $9,000 of each month is exempt and Form 720-B may be filed annually. More in the full guide.
- Excise tax
- On articles manufactured in or brought into the territory for business use, sale or processing. The base is invoice value plus a 5% markup, and the rate depends on the article. Form 721 V.I.
- Hotel room tax
- 12.5% of the gross room rate on stays under 90 days, collected from the guest by the hotelkeeper and remitted monthly on Form 722 V.I.
- Real property tax
- Billed annually on assessed value, at a millage rate set by classification: residential, commercial, unimproved or condominium.
- Customs duty
- 6% on goods arriving from outside U.S. sovereignty, administered by U.S. Customs and Border Protection, not the Bureau.
- Stamp tax
- Due when real property changes hands, graded by value and charged on the purchase price or the assessed value, whichever is higher.
Tax benefits, and the filing they do not remove
The territory’s tax benefits are real and competitive, and they come with conditions. The two main programs, the Economic Development Commission (EDC) and the Research and Technology Park (RTPark), each carry a full gross receipts tax exemption plus income and property tax reductions. The EDC package is the broadest, adding excise relief and a reduced customs rate on raw materials and components. Other programs cover St. Croix’s south shore and the film, music and hotel sectors.
A grant does not end the filing. An EDC beneficiary still files Form 720 monthly, marked EDC Beneficiary – Exempt under the program’s own exemption code. EDC benefits also require the owners to be bona fide residents under the same § 937 test, so the two subjects go together in practice.
Despite a common assumption, duty-free and tourist retail has no gross receipts exemption of its own: a retailer without a grant pays the full 5%. See EDC and RTPark compliance.
Where we come in
We work primarily in the U.S. Virgin Islands, from St. Thomas, for clients across St. Thomas, St. John and St. Croix. We settle the filing posture first, then handle the returns that follow from it.
Settle which returns you owe, and to whom.
We work out whether you were a bona fide resident for the year, where your income came from and which filings follow, then prepare them. Bring your last few years and we’ll go through them with you.