U.S. Virgin Islands

Virgin Islands employers set up retirement plans under the Internal Revenue Code as the Virgin Islands apply it: the U.S. income tax laws are in force there by statute, read with the Virgin Islands in place of the United States, and every provision on employee benefits is mirrored.^1,2,3 The employer pays in, and employees may too, as in a U.S. plan.

A foreign trust: the Virgin Islands courts are not U.S. courts for the court test.

A foreign trust. A trust is domestic only if a U.S. court can exercise primary supervision over it and U.S. persons control its substantial decisions, and the courts of a territory are not courts within the United States for that test,^4,5 so a trust supervised by the Virgin Islands courts is a foreign trust. The IRS says that because its trust is foreign, a Virgin Islands plan is not a qualified plan under §401(a), which requires a trust created or organized in the United States.^6,7

§402(b) only for a plan that fails §401(a); otherwise its participants are taxed as in a qualified plan.

A plan that would be qualified but for its trust's location is treated, for §402, as if its trust were exempt, so its participants are taxed as in a qualified plan and §402(b) does not apply;^8,9 that is the trust §404(a)(4) describes.¹⁰ A plan that fails §401(a) in other ways is a §402(b) employees' trust: your employer's contributions are U.S. income to you as they vest, you are not treated as owner of the part they fund, and once your own contributions exceed your employer's you are treated as owner of the part yours fund, if the grantor trust rules are otherwise met.^11,12,13,14 A bona fide resident of the Virgin Islands who reports all income to the Virgin Islands, and pays the tax there, leaves that income out of U.S. gross income.¹⁵

Proposed regulations: none for a bona fide resident who relies on them. Rev. Proc. 2020-17: not settled.

If you are a bona fide resident of the Virgin Islands and rely on the 2024 proposed regulations, which you may do now if you apply them in full and consistently with related persons,¹⁶ sections 6048(a) to (c) do not apply to a trust located in a mirror code possession to the extent the person who must report, you or, at your death, your executor, is a bona fide resident there.¹⁷ The Virgin Islands are a mirror code possession: the income tax there is the U.S. income tax, read with the Virgin Islands in place of the United States.^18,19 A trust is located there if a court there can exercise primary supervision over it and one or more bona fide residents control all its substantial decisions,²⁰ and a bona fide resident is someone present there at least 183 days in the year, with no tax home or closer connection elsewhere.²¹ The app asks both questions when you rely on the proposed regulations. The IRS's examination manual says bona fide residents of the Virgin Islands are not subject to IRS reporting requirements apart from any residual tax,²² but it is not a ruling. Without relying, the cautious course is to keep filing: the proposal would not need this exception if section 6048 did not already reach bona fide residents.¹⁷

Otherwise only Rev. Proc. 2020-17 could exempt the plan, for an eligible individual,^23,24 and it covers trusts established under the laws of a foreign jurisdiction.²⁵

Whether a U.S. territory is a foreign jurisdiction is not settled, and no IRS guidance answers it. For it: the revenue procedure is written for trusts that are foreign for U.S. tax purposes, which a territory's trusts are;^25,5 the Code treats a company organized under a territory's law as foreign, because only the States and the District of Columbia are the United States, and the Joint Committee on Taxation says entities organized there are generally foreign persons;^26,27,28 the IRS's examination manual says the territories are generally treated as foreign for U.S. tax purposes unless the Code says otherwise;²⁹ and the Form 8938 reporting the revenue procedure gives as a reason for the exemption counts an account at a territory's financial institution as a foreign asset.^30,31 Against it: the revenue procedure and the 2024 preamble explain the exemption by the restrictions imposed under the laws of the country where the trust is established,^32,33 and a territory is not a country. The Code names foreign countries and U.S. possessions separately, and Treasury defines a foreign country as territory under another government's sovereignty.^34,35 The FBAR rules count the territories as part of the United States,³⁶ and a bona fide resident of a territory leaves accounts at its own institutions off Form 8938,³⁷ so the duplicate reporting the revenue procedure relies on may not exist for them. The 2024 proposal deals with territory trusts in an exception of their own, by the filer's residence and only for some territories.¹⁷ The proposed regulations' exemption for retirement and savings trusts uses the same words as the revenue procedure, so the same doubt applies to it.³⁸ Until the IRS says, the cautious course is not to rely on either exemption for a trust in a U.S. territory, and to report it in full.

No treaty: the Virgin Islands are a U.S. territory.

No treaty: the United States has no income tax treaty with its own territories, and federal tax rules apply to them in a way different from both the States and foreign countries.³⁹ The IRS has a tax coordination agreement with each of the five territories, which resolves inconsistent treatment between the two tax systems;⁴⁰ no guidance says one changes Forms 3520 and 3520-A.

No Part I. Part II only for a plan that fails §401(a). Cautious course: Part III for payouts.

No Part I: transfers to a trust described in §402(b) or §404(a)(4) are excepted, and a Virgin Islands plan's trust is one or the other.^41,10 No Part II or Form 3520-A for a plan that meets §401(a) apart from its trust's location: §679 does not apply to transfers to it, and its participants are taxed as in a qualified plan.^42,43,9 For a plan that fails §401(a), Part II and Form 3520-A each year once your own contributions exceed your employer's.^14,44 Payouts go on Part III unless the plan is a §402(b) trust and you report them as compensation, so the cautious course for a plan that meets §401(a) is to report its payouts on Part III.^45,46,47 No Form 4970: payouts from an employees' trust are not taxed under the trust distribution rules.⁴⁸

A bona fide resident of the Virgin Islands who relies on the proposed regulations files none of these for a trust located there.¹⁷ FBAR (FinCEN Form 114) and Form 8938 are separate, and an exemption from Forms 3520 and 3520-A does not remove them.^49,50

GERS is the defined benefit pension plan for all Virgin Islands government employees and retirees, nearly 19,000 participants in 2021.⁵¹ It is run by an administrator and a board under Virgin Islands statute, and the employees and the government both pay in at rates the statute sets.^52,53 It is badly underfunded: it held about 10 percent of what it needed in 2021, before added funding from a rum excise tax in 2022.⁵⁴

A foreign trust if its fund is a trust; no IRS guidance.

If GERS's fund is a trust for U.S. purposes, an arrangement in which trustees hold property for beneficiaries,⁵⁵ it is a foreign trust: it is set up under Virgin Islands law and supervised by Virgin Islands courts, and a court within a territory is not a court within the United States.⁵ No IRS guidance addresses whether GERS is a trust, and this guide's review has not read its statute; a fund that is not a trust is not reported on Forms 3520 and 3520-A.⁵⁶

As for the employer plans above: §402(b) only if it fails §401(a).

As in the employer plans block above: if GERS meets §401(a) apart from its trust's location, its participants are taxed as in a qualified plan;⁸ if not, it is a §402(b) trust, and once your own contributions exceed the government's you are treated as owner of the part yours fund, if the grantor trust rules are otherwise met.^11,14 In a defined benefit plan the employer's contribution for you may not be known, and the regulations then work it out by actuarial methods.⁵⁷

As for the employer plans above.

As in the employer plans block above: a bona fide resident who relies on the proposed regulations reports nothing for a trust located in the Virgin Islands,¹⁷ and Rev. Proc. 2020-17 is not settled for a territory.²⁵

No treaty: the Virgin Islands are a U.S. territory.

No treaty: the United States has no income tax treaty with its own territories.³⁹

No Part I. Part II only if it is a §402(b) trust. Cautious course: Part III for payouts.

No Part I: no contribution to a plan trust described in §402(b) or §404(a)(4) is a Part I event.⁴¹ If GERS's fund is a trust, Part II and Form 3520-A apply only if it is a §402(b) trust and your contributions exceed the government's;^14,44 payouts go on Part III on the cautious course, unless it is a §402(b) trust and you report them as compensation.^45,46 No Form 4970: payouts from an employees' trust are not taxed under the trust distribution rules.⁴⁸ A bona fide resident who relies on the proposed regulations files none of these for a trust located in the Virgin Islands.¹⁷ FBAR (FinCEN Form 114) and Form 8938 are separate, and an exemption from Forms 3520 and 3520-A does not remove them.^49,50

Because the Code is mirrored, an individual retirement account under Virgin Islands law is the U.S. kind, a trust created or organized in the United States for an individual's exclusive benefit, read with the Virgin Islands in place of the United States.^58,2 Only the individual pays in. No IRS guidance addresses these accounts.

Read as a foreign trust: a trust created in the Virgin Islands, not the United States.

We read such an account as a foreign trust. Under the mirror code it is a trust created or organized in the Virgin Islands,² so it is not a U.S. IRA, which must be a trust created or organized in the United States,⁵⁸ and a trust supervised by the Virgin Islands courts fails the court test.⁵ An IRA with a U.S. trustee under U.S. law is a U.S. IRA and is not reported on these forms.

Does not apply: only you pay in.

§402(b) reaches only an employer's contributions to an employees' trust,¹¹ so it does not apply to an account only you pay into.

Proposed regulations: none for a bona fide resident who relies on them. Rev. Proc. 2020-17: not settled.

If you are a bona fide resident of the Virgin Islands and rely on the proposed regulations, nothing is reported for an account located there, as the employer plans block above explains.^17,16 Otherwise only Rev. Proc. 2020-17 could apply, and whether it reaches a territory is not settled.²⁵

No treaty: the Virgin Islands are a U.S. territory.

No treaty: the United States has no income tax treaty with its own territories.³⁹

Full reporting, unless you are a bona fide resident who relies on the proposed regulations.

On our reading, you are treated as owner of the account, because its income is held for you,^59,42 so Part II and Form 3520-A are due each year,⁴⁴ each contribution is a Part I transfer,⁵⁶ and payouts go on Part III.⁴⁵ Part I also applies at your death as a U.S. citizen or resident, if any part of the account is then treated as owned by you or is in your gross estate: your executor reports it, whether or not the executor is a U.S. person.⁶⁰ If the trustee does not file Form 3520-A, you attach a substitute to your Form 3520.⁶¹ No Form 4970: the account's income is taxed to you each year as its owner.⁶² A bona fide resident who relies on the proposed regulations files none of these for an account located in the Virgin Islands; the exception reaches the report of your death only if your executor, who makes it, is a bona fide resident there too.¹⁷ FBAR (FinCEN Form 114) and Form 8938 are separate, and an exemption from Forms 3520 and 3520-A does not remove them.^49,50

A trust set up under Virgin Islands law, during someone's life or by their will, in which a trustee holds investments or a business for family members.⁵⁵ If the trustee mainly runs a business for profit rather than holding property for the family, U.S. law may classify the arrangement as a business entity rather than a trust.⁶³

A foreign trust: the Virgin Islands courts are not U.S. courts for the court test.

An ordinary trust where the trustee holds property for the beneficiaries.⁵⁵ A trust is domestic only if a U.S. court can exercise primary supervision over it and U.S. persons control its substantial decisions, and the courts of a territory are not courts within the United States for that test,^4,5 so a trust supervised by the Virgin Islands courts is a foreign trust.

A U.S. person who funds it is owner when it has a U.S. beneficiary; a foreign settlor only in two narrow cases.

Who is treated as owner decides who files Part II and Form 3520-A. A U.S. person who transfers property to the trust is treated as owner of the part it funds for any year in which the trust has a U.S. beneficiary,⁴² and a U.S. citizen living in the Virgin Islands is a U.S. person, as is any family member who is a U.S. citizen or resident.⁶⁴ Someone who funds the trust while not a U.S. resident and becomes one within 5 years is treated, for this rule and for Part I, as transferring that part of the trust on the day their U.S. residency starts.⁶⁵ A settlor who is not a U.S. person is treated as owner only if they can revoke the trust alone or with the consent of a related or subordinate party subservient to them, or if only they or their spouse can receive distributions during their life.⁶⁶ Otherwise, unless another grantor trust rule makes a U.S. person owner,⁵⁹ no one is owner, and the trust is taxed as a separate, non-grantor trust.⁶⁷

A trust has a U.S. beneficiary for the transferor rule if anyone has discretion to pay or benefit any person, unless its terms identify the class who may benefit and none of them is a U.S. person that year,⁶⁸ even if nothing is paid to a U.S. person that year;⁶⁹ a power to amend the trust to benefit a U.S. person counts, and so does a letter of wishes or other understanding that points to benefiting one, even one that says it is only a suggestion.⁷⁰ Where a U.S. person funds the trust, the IRS may treat it as having a U.S. beneficiary unless that person shows it has none.⁷¹ A beneficiary who first became a U.S. person more than 5 years after the transfer is not counted,⁷² and a transferor whose trust gains a U.S. beneficiary is taxed that year on the income the trust kept for that part to the end of the year before, as an accumulation distribution with the interest charge.^73,74 A settlor who is not a U.S. person keeps the revocable-trust exception for a year only if they can take the property back alone, or with the consent of a related or subordinate party subservient to them, for at least 183 days of it; a power that needs anyone else's consent, such as an independent trustee's or protector's, does not count.^75,76 Once the exception fails for a year it is lost for good.⁷⁷ Separately, a portion already treated as owned under §676, or under §677 other than its life insurance rule, on September 19, 1995 keeps that owner for the property it held that day, for as long as it stays so treated.⁷⁸ A U.S. settlor of a trust with no U.S. beneficiary can still be owner under another rule, for example by keeping a power to take the property back,⁷⁹ and a U.S. beneficiary who alone can take the property is owner of it.^80,66

When a settlor who was not a U.S. person dies, the revocable-trust and spouse-only exceptions end for that settlor's portion, because the person left with the power, even a surviving spouse, is not its grantor;⁸¹ a U.S. person who alone can take the property, or a U.S. person who funded the trust, can still be owner, and otherwise the portion is taxed as a non-grantor trust.^80,42,67 When a portion stops being owned by a U.S. person, the owner is treated, for the gain rule, as transferring it to a foreign trust that day.⁸² At death the gain is excused only if the trust's basis in the property is then reset to its value at death under section 1014(a), as where the owner could still revoke the trust;⁸³ otherwise the owner is treated as transferring it immediately before death and recognizes the gain.⁸⁴

No treaty: the Virgin Islands are a U.S. territory.

No treaty: the United States has no income tax treaty with its own territories.³⁹

As for any foreign trust, unless a bona fide resident relies on the proposed regulations.

A U.S. person who transfers property to the trust files Part I for that year.⁵⁶ A transfer to a foreign trust is treated as a sale, and you recognize any gain on what you transfer;⁸⁵ a transfer is not, to the extent anyone is treated as owning the part it funds.⁸⁶ Part I also applies on the death of a U.S. citizen or resident who was treated as owner of any part of the trust, or whose gross estate includes part of it, and to property that passes to the trust by reason of a U.S. person's death; the executor reports it, whether or not the executor is a U.S. person.⁶⁰ The gain rule does not apply to property that passes to the trust by reason of a U.S. person's death, if its basis in that property is set under section 1014(a).⁸³ A U.S. owner files Part II and makes sure Form 3520-A is filed, or files a substitute, each year.^44,61 A U.S. beneficiary who receives a distribution files Part III for that year.⁴⁵ A distribution from a non-grantor trust that carries out income the trust kept in earlier years is an accumulation distribution, taxed with an interest charge on Form 4970.⁸⁷ Form 4970 can also apply to a transferor taxed when the trust gains a U.S. beneficiary, as the owner step says.⁷⁴ Owing no U.S. tax on the trust's income does not remove any of these: transfers and distributions are reportable whether or not they have U.S. income tax consequences.⁸⁸ Rev. Proc. 2020-17 does not apply: it covers only retirement trusts and medical, disability, or educational savings trusts.⁸⁹

A distribution is any gratuitous transfer from the trust, whether or not it is a grantor trust and whether or not you are named as a beneficiary, including a credit card bill it pays or guarantees and a check written on its account.⁹⁰ On the proposed rules, a payment from a company the trust owns to a U.S. person who is a grantor, owner or beneficiary of the trust, or related to one, is treated as a distribution from the trust, unless that person shows it is properly attributable to their own interest in the company.^91,16 A loan of cash or marketable securities, or use of trust property, to you or a related U.S. person goes on Part III whether or not it is taxable;⁹² it is treated as a distribution for income tax, except a loan made on a qualified obligation (a written loan in U.S. dollars, for 5 years or less, at an interest rate tied to the federal rate, for which you extend the IRS's time to assess and that you report each year) or use you pay the fair market value for within a reasonable time,^93,94,95,96 and where a U.S. person funded the trust, the loan instead makes it a grantor trust, and it still goes on Part III.⁹⁷

If you are the U.S. owner of the part that pays you, you complete only lines 24 and 27, and the rest of this paragraph does not apply to you.⁹⁸ Otherwise, with a complete Foreign Grantor Trust Beneficiary Statement you treat a payment as coming from the owner, so a gift from the owner is not your income;⁹⁹ without one, the default method applies even to a distribution from a grantor trust.¹⁰⁰ From a non-grantor trust you may use the actual method if you have a Foreign Nongrantor Trust Beneficiary Statement,¹⁰¹ and without one the default method applies: the part of this year's distributions above 1.25 times the average of the three years before is an accumulation distribution, taxed on Form 4970 with an interest charge figured on Form 3520's Schedule C, and the rest is ordinary income,^102,87,103 and once you use the default method you must keep using it in later years, except that in the year the trust ends you may use the actual method if you have the statement.¹⁰⁴ In the trust's first year as a foreign trust, you stop Part III once you have entered how many years it has been foreign, so no accumulation distribution is figured that year.¹⁰⁵ The statute treats the whole distribution as an accumulation distribution where adequate records are not given;¹⁰⁶ the default method is the IRS's relief from that, open if you can give the trust's distributions for the three years before,¹⁰⁷ and where there were none, it too makes the whole distribution an accumulation distribution.¹⁰² A foreign trust's distributable net income, the income its distributions carry out, includes its capital gains,¹⁰⁸ and the exception for income kept before a beneficiary was born or turned 21 does not apply to it.¹⁰⁹

If you are a bona fide resident who files your income tax return in the Virgin Islands, not with the IRS,¹¹⁰ how the gain and accumulation distribution rules above apply is a question for that return, which this guide does not cover; the reporting above does not change. Reporting the trust's income on a Virgin Islands return does not file anything with the IRS. A bona fide resident of the Virgin Islands who relies on the proposed regulations files none of these for a trust located there, to the extent of their own part as transferor, owner, or recipient, and an executor reports a death unless the executor is a bona fide resident too; a U.S. person living elsewhere still reports.^17,20 FBAR (FinCEN Form 114) and Form 8938 are separate and may also apply.¹¹¹