BVI trust tax rules and U.S. reporting

Income tax treatment in the British Virgin Islands

The Trustee Act states that trust income in a trustee's hands is exempt from income tax, subject to stated conditions and exclusions. It also addresses beneficiaries who are not resident in the Territory, with the exemption applying to money payable to them in respect of the trust.^[1]

Where the trust has no beneficiaries resident in the Territory, the Act also describes exemption from income tax for the trust's income, profits, or gains.^[1]

The statutory provision sets conditions that remove the exemptions. The exemptions do not apply where trust property includes land in the Territory or where the trust carries on a business or trade there. The Act also refers to conditions concerning beneficiaries resident in the Territory and specified activities.^[1]

Trust administration and records

The Act sets out a recordkeeping duty for trustees. A trustee is to maintain records and underlying documentation in accordance with the statutory provision, which forms part of the rules governing trust administration.^[1]

The International Tax Authority describes its role as handling cross-border tax issues and managing tax information exchange. Its stated responsibilities include practical aspects of information exchange, negotiating tax information arrangements, and maintaining the Territory's framework for exchange of information.^[2]

Information exchange rules

The BVI International Tax Authority describes the Common Reporting Standard as a legal basis for automatic exchange of financial account information for tax purposes among participating jurisdictions. Self-certification forms are also identified for individuals and entities.^[3]

This exchange framework is distinct from the Trustee Act's income tax provision, and neither replaces U.S. federal reporting: a U.S. person with a BVI trust still reports under the U.S. foreign trust rules.^[3]

U.S. reporting for foreign trusts

For a U.S. citizen, the IRS defines a U.S. person to include a citizen or resident of the United States. IRS information reporting can apply when a U.S. person creates or transfers property to a foreign trust, is treated as its owner, or receives a distribution.^[6]

The IRS says Form 3520 is generally required for certain transactions with foreign trusts, ownership under grantor trust rules, and receipt of distributions. The Form 3520 instructions describe reporting of transactions and ownership, with a separate form for transactions involving each foreign trust.^[6]

A U.S. person treated as owner under the grantor trust rules is generally taxed on trust income. The IRS says the foreign trust provides a Foreign Grantor Trust Owner Statement with income information for the owner's U.S. income tax return.^[6]

The IRS also states that a U.S. beneficiary receiving a distribution from a foreign non-grantor trust generally reports the beneficiary's share of distributable net income. A non-grantor trust gives the beneficiary a Foreign Nongrantor Trust Beneficiary Statement. A grantor trust gives the beneficiary a Foreign Grantor Trust Beneficiary Statement.^[6]

For a foreign trust with a U.S. owner, the trust generally files Form 3520-A and provides required annual statements. If it does not file, the IRS describes a substitute Form 3520-A attached to the owner's timely Form 3520, along with annual statements to the owner and beneficiaries.^[6]

The IRS lists Form 8938 and FinCEN Form 114 among other reporting requirements that may apply. It states that exceptions to Forms 3520 and 3520-A do not affect obligations for specified foreign financial assets or other reporting requirements.^[6]

Questions and answers

Related resources

Related glossary terms

• U.S. owner of a foreign trust: The Form 3520 instructions define a U.S. owner as a person treated as owning trust assets under grantor trust rules. Ownership can apply to part of a trust.
• Uncompensated use of trust property: Uncompensated use of foreign trust property by a U.S. person or a related U.S. person is treated as a distribution at fair market value and is reportable.
• Income for the benefit of the grantor: Section 677 treats a grantor as owner of a trust portion when income can benefit the grantor or spouse, including through certain life insurance premiums.

Related articles and guides

• Bahamas Trust Tax and Reporting Rules: Bahamas trust rules on trustee duties, accounting records and certain tax matters, with the IRS reporting that applies to U.S. citizens with a foreign trust.
• Cayman Islands trust tax and reporting rules: Cayman Islands rules on exempted trusts and administrative duties, with the IRS reporting rules that apply to U.S. citizens who own or benefit from one.

Tools and official documents

• FinCEN Report 114 (FBAR): foreign account reporting: FinCEN Report 114 (FBAR) for U.S. citizens: account definitions, financial interests, signature authority, trust provisions and the filing requirements it sets.

Related pages

• British Virgin Islands: overview: Start page for this jurisdiction.
• Types of trusts
• Trustee regulation and licensing
• Reporting and information exchange