Usvi Legislation - Bill No. 25 (2004.09.07)

DRAFT 9/7/04 –6:00 P.M. BILL NO. 25 THE TWENTY-FIFTH LEGISLATURE OF THE VIRGIN ISLANDS OF THE UNITED STATES REGULAR SESSION 2004 To amend Title 29 Chapter 12, Virgin Islands Code, to both preserve the existing law concerning the definition of Residency for Economic Development Commission (“EDC”) beneficiaries by creating new specific objective criteria to establish Residency for EDC beneficiaries; and also to clarify the definition of Income Effectively Connected to a United States Virgin Islands Trade or Business for the purpose of filing income tax returns in the Territory and becoming eligible to become a beneficiary under the EDC Program; and to amend certain requirements for all EDC beneficiaries. -0BE IT ENACTED BY THE LEGISLATURE OF THE VIRGIN ISLANDS: Whereas, the Territory of the United States Virgin Islands enjoys attributes of sovereignty similar to that of a state, including citizenship in the United States, the right of self government and determination of its own laws pertaining to the rights, attributes and determination of the residency of the citizens of this Territory as according to the authorizations and privileges found in the Revised Organic Act of 1954 as Amended; Whereas, the Territory of the United States Virgin Islands in addition to the Taxing Laws of the United States is subject to unique and peculiar circumstances; Whereas, in spite of the United States citizenship held by the residents of the Territory, the United States Supreme Court in an infamous series of cases known as the Insular Cases, handed down around the turn of the century, declared the inhabitants of the insular territories of the United States, referred to as “alien races and savages” Down v. Bidwell 182 US244 (1901) to be less entitled to the protections of the laws and constitution of the United States than U.S. Citizens residing elsewhere,” Whereas, the Insular Cases have been described as creating a previously unknown, obscure overtly discriminatory doctrine, (invented by the same Supreme Court that upheld the concept of Separate but Equal), solely for the Insular territories based solely on “racial and ethnic prejudice that violate the very essence and foundation of our system of

government as embodied in the Declaration of Independence…” Ballentine v. United States of America (DCVI) 2001 WL 124571; Whereas, this Legislature categorically rejects the findings, rationale and underlying motivation of the Insular Cases as lacking in legal and moral authority, as being contrary to the Constitution of the United States in letter and spirit, and as naturally indefensible as all other formalized types of ethnic discrimination; Whereas, a series of constitutional rights cases handed down by the Supreme Court of the United States, i.e. United States v. Guest 383 U.S 745 (1966), and Dunn v. Blumstein 405 US 330 (1972) have held that freedom of travel within the United States and its possessions is a basic right under the constitution and have suggested that any standards which are unreasonably or rigidly applied to determine residency and which unduly interferes with the rights of United States citizens is unconstitutional particularly if any such standard relies upon a different treatment of citizens traveling from one jurisdiction in the United States to another; Whereas, since the Naval Appropriation Act of 1922 the U.S. income tax laws have been applied to the U.S. Virgin Islands in a mirror fashion, such that the current U.S. Internal Revenue Code of 1986, as amended (“Code”) applies to the Virgin Islands as if enacted by this Legislature, commonly referred to as the Mirror Code; Whereas, Section 932(c) of the Code provides that an individual (whether a U.S. citizen or legal resident) who is a bona fide resident of the Virgin Islands at the close of the taxable year, or files a joint return for the taxable year with such an individual, shall file a U.S. income tax return with and pay income tax exclusively to the Virgin Islands, and not to the United States; Whereas, the Internal Revenue Service of the United States has taken the position, in a memorandum released on August 26, 2003, that it does not need to cover over the portion of taxes collected from a US Virgin Islands taxpayer to the Bureau of Internal Revenue, and that position has the potential to create serious cash flow, accounting and collection issues for the US Virgin Islands in part because of uncertainty associated with the definition of legal residence in the US Virgin Islands; Whereas, the language contained in amendment SA 3143 to Senate Bill S-1637 currently before the United States Senate which references the United States Treasury’s treatment of foreign nationals in the United States is highly prejudicial and discriminatory and reminiscent of the separate but equal treatment rejected by Brown vs. The Board of Education some 30 years ago, and the sub-human references made to the peoples of the insular Territories in the Insular Cases;

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[Whereas, the Legislature of the United States Virgin Islands holds and believes that it is the inalienable and constitutional and natural right of the United States Citizens residing in this Territory to determine the means, manner and circumstances by which an individual is deemed to be a resident for any purpose;] Whereas, pursuant to the Tax Reform Act of 1986, the Territory of the United States Virgin Islands specifically elected to have its residents continue to be taxed under the mirror code for taxation and has been granted special rights, duties and exceptions pursuant to the Laws of the United States pertaining to taxation for the purposes of encouraging economic development to wit, sections 932(c) and 934 of the Code; Whereas, U.S. Treasury Regulations (Reg. § 1.871-2 through -5) provide in relevant part that the determination whether a U.S. citizen is a bona fide resident of the United States Virgin Islands within the meaning of Section 932(c) of the Code is based upon such individual’s intentions with regard to the length and nature of his stay in the United States Virgin Islands, taking into account all of the relevant facts and circumstances; Whereas, U.S. Treasury Regulations (Reg. § 301.7701(b)-(1)(d)) provide in relevant part that the determination of whether an alien (otherwise initially determined to be a U.S. resident under Section 7701(b)(1)(A) of the Code) is a bona fide resident of the United States Virgin Islands within the meaning of Section 932(c) of the Code, is made under the substantial presence test set forth in Section 7701(b)(3) of the Code, and that if such alien is also a resident of the United States under Section 7701(b)(3) of the Code, then the factors under the closer connection exception set forth in Treasury Regulations (Reg. § 301.7701(b)-(2)(d)(1)) shall apply to decide whether the alien shall be deemed a resident either of the United States Virgin Islands or the United States, but not both; Whereas, Section 934(b) of the Code authorizes the United States Virgin Islands to reduce or remit taxes otherwise imposed under the Mirror Code on “income derived from sources within the United States Virgin Islands: and “income effectively connected with the conduct of a trade or business within the United States Virgin Islands” in order to promote the economic development and general welfare of the United States Virgin Islands. Whereas, the Legislature of the United States Virgin Islands established pursuant to this Congressionally delegated power the Economic Development Commission (“EDC”) to administer a tax incentive program to promote the economic development and general welfare of the United States Virgin Islands (the “EDC Program”) Whereas, the Legislature of the United States United States Virgin Islands believes that the EDC Program is critical to the economic and social welfare of the United States Virgin Islands by creating jobs for existing residents, stimulating economic activity through the purchase of the consumer staples, durable goods, professional services and

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real estate as well as the payment annually to the United States Virgin Islands Bureau of Internal Revenue of over $_____ million in income taxes by EDC beneficiaries, virtually none of which will continue to occur but for a viable EDC Program; Whereas, pursuant to Section 1277 of the Tax Reform Act of 1986, in 1987 the Government of the United States Virgin Islands and the Government of the United States entered into a Tax Implementation Agreement (“Agreement”) to give effect to Section 934(b) of the Code, authorizing the United States Virgin Islands to reduce or remit taxes otherwise imposed under the Mirror Code on U.S.V.I. source income or income effectively connected with the conduct of a trade or business within the United States Virgin Islands; Whereas, Article 7 (§ 3) of the Agreement provides that the respective Governments agree that whether a person qualifies as a bona fide resident of the United States Virgin Islands under Section 932 of the Code shall be determined under the then applicable regulations promulgated by the U.S. Treasury; and Article (§§ 1, 2) of the Agreement provides that it shall remain in force until terminated by one of the respective Governments, and that the Agreement may be amended or modified only by mutual consent of such Governments; and such Agreement has not been modified or amended since entering into force, and currently remains in full force and effect; Whereas, the Secretary of the Treasury and the Internal Revenue Service of the United States have created uncertainty with respect to the EDC Program concerning the eligibility of certain categories of EDC beneficiaries by announcing in IRS Notice 200445 issued in June 2004 that it intends to challenge the tax benefits received by certain beneficiaries under the EDC Program by seeking civil and criminal penalties against EDC beneficiaries who in the view of the IRS have purportedly not met the criteria to establish bona fide residency in the United States Virgin Islands and/or have income that is not derived from sources within the United States Virgin Islands or effectively connected to a United States Virgin Islands trade or business, notwithstanding that such IRS positions are based on unclear and even conflicting authorities; Whereas, the Tax Reform Act of 1986 required the Secretary of the Treasury to issue regulations defining “income derived from sources with the United States Virgin Islands” under Section 934(b) of the IRC and notwithstanding the uncertain legal effect of IRS Notice 2004-45, and the substantial negative effect such IRS Notice and other public actions taken during the preceding seventeen months by the IRS have had and will have on the future viability of certain important sectors of the EDC Program, no laws have been enacted by the U.S. Congress and no regulations have been promulgated by the U.S. Treasury that have provided definitive guidance with respect to such EDC Program issues since the passage of the Tax Reform Act of 1986, Whereas, in the absence of any such current laws or regulations, and until such legislative and regulatory actions are taken by the U.S. Congress and Treasury Department, the Legislature, as an expression of the will of the United States Virgin Islands people and its

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government and to provide interim guidance to EDC beneficiaries and the Bureau of Internal Revenue of the United States Virgin Islands for purposes of preserving and enhancing the EDC Program, hereby clarifies the EDC Program qualifications for bona fide residency in the United States Virgin Islands and the definition of income that is United States Virgin Islands sourced and/or is effectively connected to a United States Virgin Islands trade or business, and further the Legislature hereby resolves for purposes of preserving the integrity of the EDC Program to provide additional resources and funding for the Bureau of Internal Revenue to hire and train staff in the proper enforcement of the laws and regulations applicable to the EDC Program, Whereas, the Legislature acknowledges the ultimate authority of the U.S. Congress and U.S. Department of the Treasury to enact laws and promulgate regulations, respectively, to establish as to the EDC Program the qualifications for residency and the requirements for income to be deemed United States Virgin Islands sourced and/or effectively connected to a United States Virgin Islands trade or business, and Whereas, the intent of this Legislature is not to amend, modify or terminate the Agreement, or any of its provisions, including but not limited to Article 7(§ 3), but to clarify the definition of natural person entitled to apply for and receive certain tax reductions benefits under the United States Virgin Islands Code (Title 29, Chapter 12, Subchapter IV, § 713b) pursuant to the program administered by the Economic Development Commission; and to strengthen the administration of the EDC program by including new standards with respect to the ownership and scope of business operations of EDC beneficiaries for whom EDC benefits have been approved.

NOW THEREFORE: Be it enacted by the Legislature of the United States Virgin Islands: Section 1: Bona Fide Resident of the United States Virgin Islands: Section 708(b) of Chapter 12, Subchapter III of Title 29 of the United States Virgin Islands Code is hereby amended by designating existing Section 708(b) as subsection (1) thereof, and adding new subsections (2) through (16) after newly designated Section 708(b)(1) as follows: “(2) For purposes of the preceding paragraph, (i) in the case of a natural person who is a U.S. citizen, whether such person is a bona fide resident of the United States Virgin Islands shall be determined under Section 932 of the Code and U.S. Treasury Regulations §§ 1.934-1 and 1.872-1 through 5, and (ii) in the case of a natural person who is not a U.S. citizen but is a legal resident of the United States, whether such person is a bona fide resident of the United States Virgin Islands shall be determined under Section 932 of the Code and U.S. Treasury Regulations § 301.7701(b)-(1)(d).

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(3) The determination of whether a natural person is a bona fide resident of the United States Virgin Islands for purposes of subparagraph (2) shall take into account such amendments or changes as may occur from time to time in applicable law, including any amendment of or modification to the Tax Implementation Agreement between the United States Virgin Islands and the United States, amendatory or superseding legislative enactments by the U.S. Congress, U.S. Treasury Regulations, or controlling judicial precedent, or a combination thereof.” (4) Alternative Methods and Criteria for Establishing Residency: In the alternative, until the effective date of any applicable laws relating to residency are enacted by the U.S. Congress and any duly promulgated regulations are issued by the U.S. Treasury Department, a natural person may establish bona fide residency in the United States Virgin Islands by meeting the requirements of either subsection (4) (a), (4) (b) or (4) (c) which status of residency shall be conclusive both retroactively as of the year such a natural person determines to establish residency under subsections (4) (a), (4) (b) or (4) (c) and prospectively. In addition, for any years prior to the years that such natural person became a bona fide resident pursuant to subsections (4) (a), (4) (b) or (4) (c), such natural person shall also be deemed to have been a bona fide resident for any years in which such natural person by clear and convincing evidence was in good faith compliance with the facts and circumstances residency requirements in effect from time to time, except where inconsistent findings and determinations are made pursuant to subsections (7) and (8). (a) A natural person may establish bona fide residency in the United States Virgin Islands as of any current or prior year in which such natural person determines to establish residency: (1) by filing a copy of a deed, lease or other evidence of having acquired as of such year a permanent place of residence in the Territory; (2) by providing clear and convincing evidence that as of such year such person has been physically present and maintaining a standard of living not inferior to that person’s customary prior style of living elsewhere and coincident with such person’s present capacity in the United States Virgin Islands for 183 days or more, which number of days includes any days of arrival and days of departure to and from the United States Virgin Islands and which days need not be consecutive, during the first calendar year in which residency is being sought to be established under this subsection; (3) by filing an affidavit under penalty of perjury with the Bureau of Internal Revenue indicating that as of such year the United States Virgin Islands was such person’s primary place of United States residence and that such person has not primarily resided subsequently in any other state, district, commonwealth or territory of the United States; and (4) by acquiring as of such year at least two of the following: a valid United States Virgin Islands driver’s license issued by the motor vehicle division of the United States Virgin

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Islands, a voter’s registration card issued by the United States Virgin Islands Board of Elections or such other proof acceptable to the Bureau. (b) A natural person may establish bona fide residency in the United States Virgin Islands as of any current or prior year in which such natural person determines to establish residency: (1) by filing a copy of a deed or other evidence of having acquired as of such year a permanent place of residence in the Territory; (2) by providing clear and convincing evidence that, beginning as of such year for three consecutive years, such person has been physically present and maintaining a standard of living not inferior to that person’s customary prior style of living elsewhere and coincident with such person’s present capacity in the United States Virgin Islands for 122 days or more on average for each of such three years, which number of days includes any days of arrival and days of departure to and from the United States Virgin Islands as well as any days, not to exceed 22 in number for any individual year of such three year period, spent outside the United States Virgin Islands traveling directly to and from, and meeting with the current clients or customers of such EDC beneficiary at such clients’ or customers’ place of business, which days need not be consecutive during any such calendar year for which residency is being sought to be established; (3) by filing an affidavit under penalty of perjury with the Bureau of Internal Revenue indicating that as of such year the Virgin Islands was such person’s primary place of United States residence and that such person has not primarily resided subsequently in any other state, district, commonwealth or territory of the United States; and (4) by acquiring as of such year at least two of the following: a valid United States Virgin Islands driver’s license issued by the motor vehicle division of the United States Virgin Islands, a voter’s registration card issued by the Board of Elections or such other proof acceptable to the department. (c) A natural person who does not meet the minimum number of days requirements of physical presence in the United States Virgin Islands as provided in either subsection (4) (a) or (4) (b) above may establish bona fide residency in the United States Virgin Islands for any year by providing clear and convincing proof to the Director of the Bureau of Internal Revenue that such natural person had a closer connection as of such year to the United States Virgin Islands than to the United States. For purposes of establishing bona fide residency in the United States Virgin Islands under this subsection by establishing such closer connection, a natural person shall file a statement with the Director setting forth that a preponderance of the following factors have been achieved by such natural person. Upon a finding of the Director by clear and convincing evidence that such preponderance of the below-listed factors have been achieved with respect to such natural person, the

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Director shall issue a certificate to such natural person evidencing such finding of bona fide residency as of such year. 1.

2.

3. 4. 5.

6.

7. 8. 9. 10. 11.

12. 13. 14.

15. 16. 17. 18. 19.

20.

Establishment of a permanent residence in the US Virgin Islands with the stated intent to remain permanently a resident there indefinitely. Proof of purchase of a permanent home in the US Virgin Islands commensurate with such person’s customary lifestyle and coincident with such person’s present capacity; Pets in the permanent home in the US Virgin Islands; Filing personal income tax returns in the US Virgin Islands with the Bureau of Internal Revenue. Proof that such person has maintained residence in the Territory for at least 122 days in the year prior to the tax year in question and maintains no other comparable residence in the United States; Documentation establishing bona fide domicile in the US Virgin Islands is not temporary or merely incidental to a temporary residence in the United States Virgin Islands Assimilation of the beneficiary in the US Virgin Islands social, cultural and economic environment; US Virgin Islands voter registration; US Virgin Islands vehicle registration; US Virgin Islands driver’s license; Primary business and personal bank accounts in the Territory; Proof of membership in or affiliation with community, civic or territorial organizations or significant connections to the Territory; Proof of former domicile in US Virgin Islands and maintenance of significant connections while absent; Proof of reliance upon US Virgin Islands sources of support; Proof of admissions to a licensed practicing profession in US Virgin Islands, including membership in professional organizations; Full-time, Non-temporary permanent employment in US Virgin Islands, (e.g. W-2 forms, letter from employer); Purchase of substantial US Virgin Islands real property; Full-time permanent self employment in the US Virgin Islands; Proof of Acceptance of Permanent Employment in US Virgin Islands; Family ties in US Virgin Islands and physical presence of immediate family members (spouse, children or parents) in US Virgin Islands; Permanent relationship with healthcare providers in US Virgin Islands;

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21. 22. 23. 24. 25. 26. 27. 28. 29.

Investment in independent businesses present in the US Virgin Islands; Possession of a US Virgin Islands firearm license; Permanent access to private means of transportation in US Virgin Islands; Permanent mailing address in US Virgin Islands; US Virgin Islands Incorporation; Transcripts from US Virgin Islands schools for multiple years; Proof of Homestead Exemption; Absence of substantial evidence of a legal primary residence in some other United States locality; Any other factors peculiar to the individual which satisfactorily explain such person’s absence from the United States Virgin Islands and which tend to establish the necessary intent to make and maintain the US Virgin Islands as the permanent home and that the individual is a bona fide US Virgin Islands resident, including the age and general circumstances of the individual;

(5) Conclusive Establishment of Residency of Former EDC Beneficiaries: The status of residency shall also be conclusive for former EDC beneficiaries for any years in which such EDC beneficiaries by clear and convincing evidence had attempted good faith compliance with the facts and circumstances residency requirements then in effect from time to time in the absence of any inconsistent factors set forth in subsection (7) and (8).

(6) Additional Categories of Residents: (a) The following class of natural persons shall also be considered residents of the territory for purposes of this Chapter; individuals married to legal United States Virgin Islands residents who intend to make United States Virgin Islands their permanent home and who relinquish their legal ties to any other state; a dependent child whose parents are divorced, separated, or otherwise living apart, will be considered a United States Virgin Island resident if either parent is a legal resident of United States Virgin Islands, and that parent has custody of the child and claims the child on their Virgin Islands income tax return. (b) The law allows non-U.S. citizens such as lawful permanent residents, who otherwise meet the legal residency requirements, set forth herein to be eligible to establish US Virgin Islands residency for EDC purposes. Provided that the non-U.S. citizen has proof of his or her permanent immigration status, he may be classified as a US Virgin Islands resident 6 months from the time he establishes legal US residence and 4 months from the time he purchases a US Virgin Islands home, obtains a US Virgin

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Islands driver’s license, etc. It is not necessary to wait 12 months from the date he becomes an eligible alien (e.g., the date of the resident alien card (1-551) is issued). Following is a list of nonimmigrant categories eligible to establish US Virgin Islands residency for EDC purposes. Individuals in nonimmigrant visa categories not listed herein shall be considered ineligible to establish US Virgin Islands residency for EDC purposes. Visa categories and INS classifications: 1. Visa category 5 – Treaty trader or investor. 2. Visa category 3 – Representative of international organization. 3. Visa category H-4 Only if spouse or child of alien classified H-1. Visa category K - Fiancé, fiancée, or a child of a United States citizen(s). 4. Visa category L Intra-company transferee (including spouse or child). Visa category N Parent or child of alien accord special immigrant status. 5. Visa Category O-2 Workers of extraordinary ability in the sciences, arts, education, business, or athletics. 6. Visa category O-3 Only if spouse or child of O-1 alien. 7. Non-U.S. citizens who fall within the following categories shall also be considered eligible to establish US Virgin Islands residency for EDC purposes. 8. Citizens of Micronesian. 9. Citizens of the Marshall Islands. (7) Indicia of Non-Residency: (a) The following indicia will be considered inconsistent with a natural person’s status as a US Virgin Islands resident under subsections (4) (a), (4) (b) or (4) (c) above. 1. Exclusively out-of-USVI emergency addressee or contact numbers. 2. Exclusively out-of-USVI bank accounts. 3. Maintenance of an out-of-USVI primary home address or primary residence. 4. Failure to maintain a permanent mailing address in the U.S. Virgin Islands. 5. Maintenance of an abode in the U.S. Virgin Islands which is plainly inferior to the person’s customary style of living and present capacity. 6. Current driver’s license issued under the authority of some other state, district, commonwealth or territory of the United States.

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7. Current voter’s registration issued under the authority of some other state, district, commonwealth or territory of the United States. 8. Residency statement is materially incomplete or incorrectly completed, or individual has voluntarily declared another United States jurisdiction as primary residence.

(b) “Permanent Employment and Permanent Self-employment” as used in subsections (4) (c) 15 and 17 means employment which is entered into without expectation that it will end after a certain duration (e.g., following a few weeks, months or the summer). For employment to be used as evidence of establishing residence for tuition purposes in U.S. Virgin Islands on a date certain, the employment must be permanent. (8) Loss of Bona Fide Residency (a) A person may lose his standing as a bona fide resident of the U.S. Virgin Islands if, after having established bona fide residency pursuant to subsections (4) (a), (4) (b) or (4) (c), such person takes one or more of the following actions: 1. Such individual voluntarily declares himself to be a resident of another state, district, commonwealth or territory of the United States. 2. Such individual loses his permanent residence in the Virgin Islands and does not replace it with another within 120 days, or before that time purchases another elsewhere; 3. Such individual is found by a court of competent jurisdiction located in the U.S. Virgin Islands to be a non-resident; 4. Such individual has taken other overt, clear and convincing affirmative actions which show an intention to become a resident of another U.S. jurisdiction or to revoke residency in the U.S. Virgin Islands. (9) Revocation of Residency/Presumption of Residency: (a) Where factors listed in subsections (7) and (8) which are inconsistent with the US Virgin Islands residency status are identified, the Director of BIR mission will contact such natural person and advise such person that such person may be classified as a nonresident. The person may respond and produce supplemental evidence in respect of their claim to U.S. Virgin Islands residency for tax purposes. The BIR shall retain copies of the documentation for a period of 3 years provided that such copies are maintained in a secure and confidential manner. Thereafter, a checklist or

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record of documentation submitted shall be retained with the file for audit or a period of not less than 5 years. (b) The Director shall look to judicial interpretations of Section 932(c) of the Code for guidance on decisions of revocation of residency and shall give such persons a fair and reasonable opportunity to rebut any presumptions raised by their actions. For all purposes related to taxation, it shall be presumed that after bona fide U.S. Virgin Islands residency has attached to any person pursuant to subsections (4) (a), (4) (b) or (4) (c), such person intends to retain United States Virgin Islands residency unless a contrary intention is proven by clear and convincing evidence involving the factors set forth in subsections (7) and (8) which are inconsistent with permanent residency in the US Virgin Islands.

(10) It is the express intent of the Legislature of the Virgin Islands that the EDC and Director of BIR shall construe the standards applicable to the determination whether a natural person is a bona fide resident of the Virgin Islands in a manner favorable to a finding of bona fide residency in the Virgin Islands, provided such finding is consistent with and to the maximum extent permitted by applicable law.

(11) Limitation on Benefits: A corporation, partnership, limited liability company, trust or similar entity may not exceed ten (10) shareholders, partners, owners, members or beneficiaries without the specific approval of the Economic Development Commission after review of the applicant’s business plan or amended business plan, and an EDC licensee may not add in excess of such number any new shareholders, partners, owners, members or beneficiaries without the prior approval of each by the Economic Development Commission. Such corporation, partnership, limited liability company, trust or similar entity shall include in its initial or supplemental application the names of all shareholders, partners, owners or beneficiaries. (12) The limitations set forth in Subsection 708(b) (11) shall not apply to any current EDC licensees and their shareholders, partners, owners, members or beneficiaries which on the effective date of this legislation have more than ten (10) such shareholders, partners, owners, members or beneficiaries; provided, however, that in no event shall any current EDC licensee have a total number of shareholders, partners, owners, members or beneficiaries in excess of twenty-five (25) without the prior approval of each by the EDC. (13) The EDC may approve additional shareholders, partners, owners, members or beneficiaries for any EDC licensee in excess of such numbers permitted under Subsections 708(b) (11) and (12) upon findings after review

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of the applicant’s business plan or amended business plan that such additional shareholders, partners, owners, members or beneficiaries: 1. Are engaged in similar lines of businesses as other shareholders, partners, owners, members or beneficiaries of such EDC license, or 2. Have certain special skills or capabilities that create business synergies or efficiencies with such EDC licensee or its shareholders, partners, owners, members or beneficiaries, (14) Any approval by the EDC of an increase in the number of shareholders, partners, owners, members or beneficiaries, for any such entity shall be conditioned upon such entity meeting certain additional requirements of capital, charitable contributions and ratio of employee to shareholders, partners, owners, members or beneficiaries as prescribed by regulations duly promulgated by the EDC. (15) Any entity that has in excess of twenty-five (25) shareholders, partners, owners, members or beneficiaries as of the effective date of this legislation shall have twenty-four (24) months from such effective date to reorganize, re-structure or file an application with the EDC to comply with the requirements of the EDC Program and this legislation, or forfeit the tax abatement benefits received under the EDC Program as of the end of such twenty-four (24) month period. (16) The principal place of business for any natural person or any entity approved for benefits by the Economic Development Commission shall be in the United States Virgin Islands.” Section 2: United States Virgin Islands Sourced and Effectively Connected Income: Title 29, Chapter 12 Sub-chapter III Virgin Islands Code is hereby amended by adding a new Section 708(c) and subsection 708(c)(1) to read as follows: (1) Income of EDC Licensees, which licensees for purposes of this legislation includes partners and members of any EDC partnership and Limited Liability Company, respectively, and shareholders of any EDC corporation, from Contractual Services Performed for current Clients or Customers outside the United States Virgin Islands shall be deemed Sourced in the United States Virgin Islands or Effectively Connected with a United States Virgin Islands Trade or Business as follows. (a) Where income of an EDC licensee is earned from personal services performed in more than one location, such income is deemed under the following facts and circumstances to be wholly sourced in the U.S. Virgin Islands or apportioned wholly to United States Virgin Island sources and

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not other sources, provided the EDC licensee, itself, or by and through its employees and agents, performs considerable, continuous, and regular services in the U.S. Virgin Islands in addition to the services performed without the U.S. Virgin Islands. (b) Items of income, gain, loss, or deduction earned or incurred by an EDC licensee shall be deemed to be effectively connected with the conduct of a trade or business in the U.S. Virgin Islands Code as that phrase is used in Section §934(b)(1) of the Internal Revenue Code provided (1) the income, gain, loss, or deduction is derived from assets used or held for use in the conduct of such trade or business; or (2) the activities of such trade or business were a material factor in the realization of the income, gain, loss, or deduction. In making these determinations, due regard shall be given to whether or not such asset or such income, gain, loss, or deduction was accounted for through such trade or business, and no regard shall be given to whether or not the income, gain, loss, or deduction is sourced in the U.S. Virgin Islands or without the U.S. Virgin Islands. (c) The following are considered to be material factors in the realization of the income, gain, loss, or deduction: 1. The solicitation, negotiation, or performance in the U.S. Virgin Islands of activities required to arrange a lease, license, or sale or exchange of property not located in the U.S. Virgin Islands from which rents, royalties, gains, or losses from intangible property not located in the U.S. Virgin Islands will be derived, by a U.S. Virgin Islands trade or business, is a material factor in realizing those rents, royalties, gain, or losses from intangible property not located in the U.S. Virgin Islands. 2. The participation in soliciting, negotiating, or performing of other activities required to arrange the issuance, acquisition, sale or exchange of property from which dividends, interest, gains or losses from the sale of stocks or securities is derived or the performance of significant services in connection with such issuance, acquisition, sale or exchange, by a U.S. Virgin Islands trade or business which actively participates in those activities or performs those services, is a material factor in realizing those dividends, interest, gains or losses or service income. 3. The investment in the funds or accounts that it manages in order to develop a track record, fund a general partnership interest, or attract or retain outside investors from which dividends, interest, and gains or losses will be derived, by a U.S. Virgin Islands trade or business conducting an investment management business, is a material factor in realizing those dividends, interest, and gains or losses.

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4. The performance in the U.S. Virgin Islands of activities that are described in its duly executed Industrial Development Certificate from which income for those designated services will be derived, by a U.S. Virgin Islands trade or business conducting the business of owning and operating a designated service business, is a material factor in realizing the income derived from those services even if some of those services are performed in the U.S. or otherwise without the U.S. Virgin Islands by employees or agents of the EDC Beneficiary traveling to meet with the persons to whom the EDC Beneficiary provides those designated services. (d) The following is not considered to be material factors in the realization of the income, gain, loss, or deduction: 1. The conducting of activities that do not provide a significant contribution to the realization of the income, gain, loss, or deductions derived by a U.S. Virgin Islands trade or business is not a material factor in the realization of that income, gain, loss, or deduction.

Section 3: Miscellaneous: Section 713b(e) of Chapter 12, Subchapter IV of Title 29 of the Virgin Islands Code is amended by deleting the period after the first sentence and adding the following: “and who have been approved for such tax reductions by the Economic Development Commission.” Section 718(a) of Chapter 12, Subchapter V of Title 29 of the Virgin Islands Code is amended by adding new Subsections (1) and (2) as follows and renumbering existing subsections (1) through (4) as paragraphs (3) through (6) accordingly. “(1)

In the case of a corporation, partnership, limited liability company, trust or similar entity, the names and addresses of all shareholders, partners, owners, members or beneficiaries.

(2)

The line or lines of businesses for which benefits have been granted.”

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BILL SUMMARY (Synopsis) Overview: This legislation is intended to address the issues raised in IRS Notice 2004-45 by clarifying the standards relating to United States Virgin Islands residency and United States Virgin Islands sourced or effectively connected income for purposes of providing guidance to EDC beneficiaries, natural persons and the Bureau of Internal Revenue with respect to such issues until the U.S. Congress and U.S. Treasury Department, which have ultimate authority as to these issues, develop applicable laws and regulations. In addition, this legislation also imposes certain limitations on EDC licensees relating to the number of shareholders, partners, owners, members or beneficiaries that licensees may have without specific prior approval of the EDC subject to certain grandfather rights of certain EDC beneficiaries exceeding such limitations as of the effective date of this legislation. Section 1. Residency in the United States Virgin Islands must be established before a natural person is eligible to qualify for an EDC credit. Clear and enforceable standards for determining residency are therefore vital to preserving and enhancing the EDC program and addressing the issues raised in IRS Notice 2004-45. Subsections 708 (b) (2) and (3) preserve the facts and circumstances residency test at all times as a valid means of establishing residency in the United States Virgin Islands until the effective date of any applicable laws relating to residency are enacted by the U.S. Congress and any duly promulgated regulations are issued by the U.S. Treasury Department. Likewise, until the effective date of any applicable laws relating to residency are enacted by the U.S. Congress and any duly promulgated regulations are issued by the U.S. Treasury Department, subsection 708 (b)(4) creates alternative criteria for establishing residency in the United States Virgin Islands by meeting the requirements of either subsection 708(b) (4) (a), (4) (b) or (4) (c) pursuant to which residency shall be deemed conclusive prospectively and retroactively as of the year such natural person determined to establish residency under subsection (4). Moreover, prior to establishing residency under subsection (4), a person shall also be deemed to be a resident if such beneficiary produces clear and convincing evidence that such person was in good faith compliance with the facts and circumstances residency test then in effect unless contrary evidence pursuant to subsections 708(b) (7) and (8) existed at such time. Subsections 708(b) (4) (a), (4) (b) or (4) (c) each set forth specific alternative criteria to the ongoing facts and circumstances test for establishing USVI residency. Establishing residency pursuant to subsection 708 (b)(4) shall be considered conclusive and, therefore once achieved, a safe harbor for all qualifying natural persons unless clear and

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convincing evidence is developed that is inconsistent with permanent residency in the United States Virgin Islands pursuant to subsections 708(b) (7) and (8). Subsections 708(b) (4) (a) and (4) (b) set forth, among other factors, as criteria for residency, a prescribed number of days during any calendar year in which natural person must be physically present in the United States Virgin Islands. Such days need not be consecutive or complete days and days of arrival or departure from United States Virgin Islands are included for purposes of calculating the required number of days of physical presence. Subsection (4) (a) requires the minimum of 122 days of physical presence in the United States Virgin Islands on average over three years to meet the physical presence requirements. However, during any calendar year of such three year period, a maximum of 22 days may be spent by a person EDC beneficiary traveling to and meeting with his current clients and customers outside the United States Virgin Islands, which number of days shall be included for purposes of calculating the required number of days of physical presence. In addition, until the effective date of any applicable laws relating to residency are enacted by the U.S. Congress and any duly promulgated regulations are issued by the U.S. Treasury Department, subsection (4) (c) provides alternative criteria for establishing residency in the United States Virgin Islands by permitting a person to submit a Statement to the Director of the Bureau of Internal Revenue containing clear and convincing evidence that such person has a closer connection to the United States Virgin Islands than to the United States as of the year such natural person seeks to establish residency in the United States Virgin Islands. Such clear and convincing evidence shall consist of a finding by the Director of the Bureau of Internal Revenue that a natural person has achieved a preponderance of the factors enumerated in subsection 708(b)(4)(c) 1-29. Subsection (708(b)(6)) provides additional categories of United States Virgin Islands residents which include spouses and dependent custodial children of individuals who are residents of the United States Virgin Islands as well as non-U.S. citizens who are lawful, permanent inhabitants of the United States Virgin Islands who meet the requirements of United States Virgin Islands residency for EDC purposes and who meet the Visa categories and INS classifications enumerated therein. Subsections 708(b)(7), (8) and (9) set forth certain indicia of non-residency in the United States Virgin Islands and the process and standard of review by which such indicia are to be considered by the Director for purposes of reviewing and revoking such residency status. Subsection (9) provides that with respect to taxation related purposes, any natural person establishing residency pursuant to subsection 708(b) (2) and (4) shall be presumed to intend to retain United States Virgin Islands residency unless clear and convincing evidence Director to exist. In order to preserve the purposes for which the EDC Program was created, new standards and limitations with respect to the ownership and scope of business operations are adopted for EDC beneficiaries for whom EDC benefits are granted

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by the EDC. Nonetheless, because certain existing licensees may already exceed these new limitations, certain grandfather rights are created in recognition of the substantial economic commitments and benefits such EDC licensees have already provided and will continue to provide to the USVI under the EDC Program. Subsection 708(b)(11) establishes a limitation of ten (10) on EDC licensees as to the number of their shareholders, partners, owners, members or beneficiaries that they may have without prior approval by the EDC subject nevertheless to certain “grandfather” rights that current EDC licensees will have to continue to expand but not to exceed twenty-five (25) of such shareholders, partners, owners, members or beneficiaries under subsection 708 (b) (12). Subsection 708(b)(12) establishes certain grandfather rights for existing EDC licensees that exceed the limitation of ten (10) as to the number of shareholders, partners, owners, members or beneficiaries such EDC licensees may have as of the effective date of this legislation by exempting them from such limitations up to twenty-five (25) without the prior approval of the EDC. Subsections 708(b)(13) and (14) establish criteria by which the EDC may approve additional shareholders, partners, owners, members or beneficiaries of EDC Licensees over and above the stated limitations applicable to new and current EDC licensees, and authorizes the EDC to adopt regulations relating to such criteria. Subsection 708(b)(16) establishes a timeframe of twenty-four (24) months by which an entity that has more than twenty-five (25) shareholders, partners, owners, members or beneficiaries may come into compliance to avoid forfeiture of future tax benefits under the EDC Program. Section 2. In order for a natural person to qualify for an EDC credit, the natural person, in addition to being a resident of the U.S. Virgin Islands, must have income that is either “sourced” in the U.S. Virgin Islands or “effectively connected with the conduct of a trade or business” in the U.S. Virgin Islands. The Treasury Department of the U.S. was directed to issue regulations regarding the meanings of these terms; but those regulations have not been issued. This section of the bill will clarify the meaning of those terms, particularly in regard to EDC licensees in the Designated Service Provider category. Subsection 708(c) (1)(a) first clarifies the source rule for income received for services that are provided both in the U.S. Virgin Islands and elsewhere. EDC licensees are, by U.S. Virgin Islands’ law, required to provide designated services only to customers and clients outside of the U.S. Virgin Islands. Subsection 708(c)(1)(a) provides that where an EDC licensee performs considerable, continuous, and regular services in the U.S. Virgin Islands, all income it earns for its services is sourced in the U.S. Virgin Islands, even if the individuals providing those services on its behalf do not perform all of their services in the U.S. Virgin Islands.

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Subsection 708(c) (1)(b) then clarifies the “effectively connected” rule for income earned by an EDC licensee, where that income might have a source other than the U.S. Virgin Islands. In light of the legislative purposes of Code Section 934(b) and its use of the term, the Legislature believes that the term should have a broad definition similar to its ordinary meaning and the meaning set out in Code Section 864(c)(2). Subsection 708(c) (1)(b), therefore, contains language identical to that contained in Code Section 864(c) (2), providing that income is “effectively connected” if the income is derived from assets used or held for use in the conduct of a trade or business or if the activities of the trade or business were a material factor in the realization of the income. Subsection 708(c)(1)(b) also specifically negates the sourcing limitations placed “effectively connected” income by Code Section 864(c)(4), providing that income may be “effectively connected” without regard to its source. Subsection 708(c)(1)(c) provides examples of the types of activities that will fit within the definition of “effectively connected” and Subsection 708(c)(1)(d) provides a description of the type of activities that will not fit within the definition.

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