Tax Code Tweak: New Bill Clarifies Rules for Virgin Islands Residents and Corporations, Starting 2025

The "Territorial Tax Parity and Fairness Act" makes a key change to the tax rules for people and companies in the U.S. Virgin Islands. Basically, it updates Section 957(c) of the Internal Revenue Code to clear up who counts as a "United States person" for tax purposes over there.

Island Income

The main point of this bill is to say that if you're a bona fide resident of the Virgin Islands, and you get dividend income from a Virgin Islands company, that income is treated as coming from the Virgin Islands (according to section 934(b)(1) of the tax code). Because of that, for certain tax calculations, you wouldn't be considered a "United States person." This matters because it affects how certain taxes are calculated for Virgin Islands corporations.

Real-World Rollout

This change kicks in for tax years starting after December 31, 2024. So, for a company whose tax year starts January 1, 2025, this new rule would apply. For individuals, it applies to the tax year that includes the end of that company's tax year. For example, if a Virgin Islands corporation's tax year ends on June 30, 2026, the rule would apply to an individual's 2026 tax return.

• Example: Imagine a local business owner in St. Thomas who's a bona fide resident and gets dividends from their Virgin Islands-based company. Under this new rule, that dividend income is officially considered Virgin Islands-sourced, which could simplify their tax situation.

The Bottom Line

This seems like a pretty technical update, mainly aiming to clean up the tax code for Virgin Islands residents and corporations. It likely makes tax compliance easier for folks who meet the "bona fide resident" test and get dividends from local companies. It provides clarity on how their income is treated, potentially reducing headaches when it comes to figuring out taxes. The 'bona fide' requirement is important, this isn't something you can fake to get tax breaks.