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   Compensation for services performed in the USVI..............    $50,000Compensation for services performed in the United States.....     40,000Compensation for services performed in Mexico................     30,000Income from inventory sales in Latin America attributable to      20,000 USVI Office.................................................Interest on a U.S. bank account..............................      6,000Interest on a V.I. bank account..............................      5,000Dividends from a U.S. corporation............................      4,000 
  (ii) Accordingly, S has total gross income of $155,000, comprising income from sources within the USVI or effectively connected to the conduct of a trade or business in the USVI (USVI ECI) of $75,000, income from sources within the United States of $50,000, and income from other sources (not USVI ECI) of $30,000. After taking into account allowable deductions, S's total taxable income is $120,000, of which $45,000 is taxable income from sources within the USVI, $15,000 is taxable income from other sources that is USVI ECI under the rules of section 937(b) and §§1.937–2T and 1.937–3T, and $22,500 is taxable income from sources outside the USVI (and outside the United States) that is not USVI ECI. S's tax liability incurred to the USVI pursuant to the Internal Revenue Code as applicable in the USVI (mirror code) is $30,000. S is entitled to claim a credit under section 901 of the mirror code in the amount of $10,000 for income tax paid to Mexico and other Latin American countries, for a net income tax liability of $20,000.

(iii) Pursuant to a USVI law that was duly enacted within the limits of its authority under section 934, S may claim a special deduction relating to his business activities in the USVI. However, under section 934(b), S's ability to claim this special deduction is limited. Specifically, the maximum amount of the reduction in S's mirror code tax liability that may result from claiming this deduction, computed in accordance with paragraph (b)(3) of this section, is as follows:

(20,000 + 10,000) × ((45,000 + 15,000) / (120,000)) − 10,000 × ((15,000) / (15,000 + 22,500)) = 30,000 × (.5) − 10,000 × (.4) = 15,000 minus; 4,000 = $11,000

  (iv) Accordingly, S's net tax liability incurred to the USVI must be at least $19,000 (30,000 − 11,000), prior to taking into account any foreign tax credit.

Example 2.  The facts are the same as Example 1, except that S is a U.S. citizen who resides in the United States. As required by section 932(a) and (b), S files with the U.S. Virgin Islands (USVI) a copy of his Federal income tax return and pays to the USVI the portion of his Federal income tax liability that his Virgin Islands adjusted gross income bears to his adjusted gross income. Under section 934(b)(2), S may not claim the special deduction offered under USVI law relating to business activities like his in the USVI to reduce any of his tax liability payable to the USVI under section 932(b).

Example 3.  (i) Z is a nonresident alien who resides in Country FC. In 2005, Z receives dividends from a corporation organized under the law of the U.S. Virgin Islands (USVI) in the amount of $90x. Z's tax liability incurred to the USVI pursuant to section 871(a) of the Internal Revenue Code as applicable in the USVI (mirror code) is $27x.

(ii) Pursuant to a USVI law that was duly enacted within the limits of its authority under section 934, Z may claim a special exemption for income relating to his investment in the USVI. The maximum amount of the reduction in Z's mirror code tax liability that may result from claiming this exemption, computed in accordance with paragraph (b)(3) of this section, is as follows:

27x (90x/90x) = $27x

  (iii) Accordingly, depending on the terms of the exemption as provided under USVI law, Z's net tax liability incurred to the USVI may be reduced or eliminated entirely.

Example 4.  (i) A Corp is organized under the laws of the U.S. Virgin Islands (USVI) and is engaged in a trade or business in the United States through an office in State N. All of A Corp's outstanding stock is owned by U.S. citizens who are bona fide residents of the USVI. During 2005, A Corp had $50x in gross income from sources within the USVI (as determined under section 937(b) and §1.937–2T) that is not effectively connected with the conduct of a trade or business in the United States; $20x in gross income from sources in Country H that is effectively connected with the conduct of A Corp's trade or business in the United States; and $10x in gross income from sources in Country R that is not effectively connected with the conduct of A Corp's trade or business in the United States.

(ii) Section 934(b)(3) permits the USVI to reduce or remit the income tax liability of a qualified foreign corporation arising under the Internal Revenue Code as applicable in the USVI (mirror code) with respect to income that is derived from sources outside the United States and that is not effectively connected with the conduct of a trade or business in the United States. A foreign corporation constitutes a “qualified foreign corporation” under section 934(b)(3)(B) if less than 10 percent of the total voting power and value of the stock of the corporation is owned or treated as owned (within the meaning of section 958) by one or more United States persons. A U.S. citizen is a United States person as defined in section 7701(a)(30)(A). Given that 10 percent or more of the voting power and value of its stock is owned by U.S. citizens, A Corp does not constitute a “qualified foreign corporation” under section 934(b)(3)(B). Accordingly, the USVI may only reduce or remit A Corp's mirror code income tax liability with respect to its $50x in gross income from sources within the USVI.

Example 5.  (i) The facts are the same as in Example 4, except that the outstanding stock of A Corp is owned by the following individuals:

   U.S. citizens who are bona fide residents of the USVI..........       5%U.S. citizens who are not bona fide residents of the USVI......       3%Nonresident aliens who are bona fide residents of the USVI.....      42%Nonresident aliens who are not bona fide residents of the USVI.      50% 
  (ii) Given that less than 10 percent of the voting power and value of its stock is owned by United States persons, A Corp constitutes a qualified foreign corporation under section 934(b)(3)(B). Accordingly, the USVI may reduce or remit A Corp's mirror code income tax liability with respect to its $50x in gross income from sources within the USVI and its $10x in gross income from sources in Country R that is not effectively connected with the conduct of A Corp's trade or business in the United States. In no event, however, may the USVI reduce or remit A Corp's mirror code income tax liability with respect to its $20x in gross income from sources in Country H that is effectively connected with the conduct of A Corp's trade or business in the United States.

(e) Effective date. Except as otherwise provided in this paragraph (e), this section applies for taxable years ending after October 22, 2004. Paragraph (c)(4)(ii) of this section applies to amounts paid or accrued after April 11, 2005.

[T.D. 9194, 70 FR 18935, Apr. 11, 2005; 70 FR 32490, June 3, 2005]

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