The United States Virgin Islands (“USVI”) is an unincorporated territory of the United States. But that doesn’t mean that they’re subject to exactly the same laws as in the United States—especially when it comes to taxes.
The Mirror Code
As a territory, the U.S. Congress is empowered to “make all needful Rules and Regulations respecting” the USVI. As far as taxes go, Congress requires that the USVI impose an income tax that “mirrors” the U.S. federal income tax found in United States Code, Title 26 (also known as the “Internal Revenue Code” or “IRC”). Because of this requirement, USVI’s income tax law is commonly called a “mirror code.” One of the basic principles used in the application of the “mirror code” is the substitution principle, according to which “Virgin Islands” generally is substituted for “United States” wherever that phrase appears in the IRC.
Under the IRC, the United States taxes citizens and residents on their worldwide income and nonresident aliens on income from sources within the United States or that is effectively connected with the conduct of a United States trade or business. For these purposes, the United States includes only the States and the District of Columbia.
The USVI applies similar rules to its residents and nonresident aliens under the mirror code.
Non-Bona Fide Residents
A U.S. citizen or resident who isn’t a bona fide resident of the USVI during the entire taxable year and who has income derived from USVI sources or effectively connected with a trade or business within the USVI is required to file income tax returns in the taxable years with both the United States and the USVI. The income taxes that such a person is required to pay to the USVI is determined by multiplying the income taxes imposed under the IRC by the “applicable percentage,” which means the percentage that USVI adjusted gross income bears to adjusted gross income. USVI gross income is adjusted gross income determined by only taking into account income from USVI sources and deductions allocable to that income.
Bona Fide Residents