Senate Bill Would Increase Floor on Franchise Taxes

Franchise taxes for corporations, a small tax on each licensed corporation doing business in the territory, will increase slightly, if legislation approved Tuesday by the Senate Finance Committee becomes law.

Under the proposal, the franchise tax for V.I. corporations would increase from a minimum of $150 to a minimum of $300 and for outside companies doing business in the territory from $300 to $500. The bill also defines “paid in capital” for the purpose of computing this tax. The tax is the greater of either the minimum tax, or $1.50 for each $1,000 in “capital stock” used by the company.

The change in the law is needed because the definition of “capital stock” is undefined. A 2001 court case applied a definition that reduced its meaning to a nearly insignificant proportion of actual stock in a company, Denise Johannes, Director of the Division of Corporation and Trademarks in the Office of the Lieutenant Governor testified.

The case; Miller Properties versus the Government of the Virgin Islands in 2001, upheld on appeal in 2003, reduced franchise tax payments.

“Miller Properties sued the Virgin Islands government to clarify that the words ‘capital stock’ was equivalent to “capital,” which limited the calculation of franchise tax to the value of issued and outstanding shares as set forth in the articles of incorporation. Any surplus payments to a corporation in excess of the par value of stock, which is generally referred to as paid-in capital, was not taxable as capital or capital stock. Furthermore, although the price paid for later issued stock generally exceeds the par value set forth in the articles of incorporation, under the current version of the statute this additional amount is not taxable as ‘capital stock,'” Johannes said.

“Given that the standard issuance at the time of formation is often only nominally stated as 1,000 shares at $1 each, what this means is that oftentimes large, well-capitalized Virgin Islands corporations only pay $150 in franchise taxes annually,” she said.

The new definition of “paid-in capital” would include the cash and other consideration received, minus expenses, plus any cash and other consideration contributed to the corporation by or on behalf of its shareholders, plus amounts transferred to paid-in capital by action of the board of directors or shareholders pursuant to a share dividend, share split, or otherwise, and the amount of capital paid in that is in excess of the stated par value of any class of stock.

The more expansive definition will mean larger companies with more resources will pay a higher tax than before.

Voting to send the measure on to the Rules and Judiciary Committee were: Vialet, Sens. Marvin Blyden (D-STT), Dwayne DeGraff,(D-STT) Neville James (D-STX), Nereida “Nellie” Rivera-O’Reilly(D-STX) , Tregenza Roach (D-STT) and Brian Smith (D-At-Large). All members were present.

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