ISLE OF MAN
1.
Introduction
The Isle of Man is a dependency of the British Crown located in the northern part of the Irish Sea,
approximately equidistant from England, Ireland and Scotland. The Island is self-governing
through its parliament, Tynwald, which includes the directly elected House of Keys and the
indirectly elected Legislative Council.
The Isle of Man holds neither membership nor associate membership of the European Union, but
has a limited relationship with it concerning the free movement of goods under the Treaty of
Accession of the United Kingdom to the EU. The Isle of Man is part of the customs territory of
the EU and so its goods can be freely moved within the EU, but capital and services can not.
Common customs tariffs, levies and import measures apply to trade between the Isle of Man and
non-EU countries.
A system exists by which persons who are not qualified as Isle of Man Workers may obtain
permits to work in the Isle of Man. The Isle of Man is part of a common travel area with the UK,
Ireland and the Channel Islands, and Isle of Man immigration law generally mirrors UK
immigration law. There are no property holding or quota restrictions to prevent individuals from
taking up residence in the Island.
Company law in the Isle of Man has historically been based broadly on English company law but
has in recent years seen changes to increase the types of company structure available. There
are no minimum capitalisation requirements or debt/equity ratios; depending on the type of
company, shares may be issued with or without a par value, fully or partly paid and subscription
may be in cash or other assets. Companies incorporated by guarantee, hybrid share/guarantee
companies and unlimited companies are also available. Single member companies are
permitted.
The Companies Act 2006 introduced a new type of company alongside the traditional company,
which provides a simpler regime for corporate administration, with reduced requirements for the
production and audit of accounts, for the holding of annual general meetings and for public
record filings. Traditional companies may be converted to Companies Act 2006 companies by a
straightforward administrative process.
The Isle of Man also offers a US-style Limited Liability Company (LLC), a flexible type of
business organisation which provides limited liability while at the same time being transparent for
tax purposes in many jurisdictions, and so potentially taxed as a partnership or trust rather than
as a company.
Protected Cell Companies are available, and a Companies Act 2006 PCC may be used for any
purpose, including insurance, investment funds and property holding. Legislation has been
introduced in Tynwald which would see Incorporated Cell Companies joining the Isle of Man’s
structuring offering for the insurance sector.
Isle of Man law requires that the business name of a general partnership must be registered
where its name does not consist of the names of all of its partners. A registration system exists
for limited partnerships.
Isle of Man taxation summary for IAG
Isle of Man taxation summary for IAG
2.
Taxation of Income – Individuals
2.1
Status of Taxpayers
2.1.1
Residence
The Isle of Man tax system for individuals when determining how income should be
taxed is concerned with whether an individual is resident or non-resident. There is no
general definition of residence for tax purposes in the Isle of Man. An Isle of Man
resident is taxed on worldwide income, whereas a non-resident is generally taxed on Isle
of Man-source income only.
In determining residence, the Assessor of Income Tax will look at evidence of a ‘view or
intent of establishing residence’ as opposed to presence on the Island for a temporary
purpose. New residents complete a “Registration for Isle of Man Income Tax Form R25
(New)” in order to establish their residence status. In most circumstances, this will result
in that person being accepted as resident.
When individuals claim not to be resident for tax purposes, despite regularly visiting the
Isle of Man, specific rules apply to determine tax residence based on physical presence.
Individuals residing in the Isle of Man for a period in the whole equal to more than six
months in any tax year (i.e. the year commencing 6 April) are tax resident and liable to
Isle of Man income tax1. The Assessor does not count days of arrival and departure
when determining the number of days that a person has spent in the Isle of Man.
Based on decided cases, individuals whose visits to the Island over a period of four or
more consecutive years exceed an average of three months (90 days) in each tax year
are also treated as resident. In cases where the average exceeds 90 days per year, the
Assessor will regard the individual as resident from the fifth year: however, where it is
clear when an individual first visits the Isle of Man that he intends to make visits
exceeding an average of 90 days in each tax year over a period of four or more years,
he will be treated as resident from the beginning of the first year.
2.1.2
Domicile
The concept of individual domicile (which is distinct from residence) is not relevant to Isle
of Man domestic tax. However, if an individual is able to establish an Isle of Man
domicile to the satisfaction of foreign tax authorities, the tax neutrality of an Isle of Man
domicile may be to his advantage in terms of his liability for that foreign tax.
2.1.3
Joint Taxation of Married Couples
Married couples may elect to be taxed jointly, in which case they may pool their untaxed
personal allowances and standard rate bands. This can result in a significant reduction
in the amount of tax payable in cases where one spouse works but the other does not.
The spouses are jointly and severally responsible for their tax affairs.
Where no such election is made, spouses are taxed independently, in which case each
spouse would have responsibility only for his or her own tax affairs, but the couple would
not be able to take advantage of the pooling of personal allowances and standard rate
bands.
This regime currently applies only to married couples and no equivalent provision is
currently made for unmarried couples or civil partners.
1
by virtue of Section 10, Income Tax Act 1970
Isle of Man taxation summary for IAG
2.2
Personal Tax Rates and Allowances 2010/2011
2.2.1
There is a resident personal allowance of untaxed worldwide income of GBP9,300
(GBP18,600 in the case of a jointly assessed married couple). The standard rate of
income tax, which applies thereafter to the first GBP10,500 of a resident’s taxable
income (GBP21,000 in the case of a jointly assessed married couple), is 10%, with
income above that level being taxed at the higher rate of 20%.
2.2.2
No personal allowance is available for non-resident individuals. Non-resident married
couples may not apply to be assessed jointly. The non-resident rate of income tax,
which applies to all Isle of Man-source income, is 20%.
2.2.3
In an effort to encourage the residence of high net worth individuals in the Isle of Man,
an individual’s personal income tax liability is capped at GBP115,000, regardless of the
amount of that person’s earnings. The liability of jointly assessed married couples is
capped at GBP230,000.
3.
Taxation of Income – Trusts
3.1
Introduction
Trusts, settlements, trustees and beneficiaries are not referred to in Isle of Man income tax law.
However, trustees and beneficiaries are ‘persons’ for the purposes of Isle of Man income tax and
therefore the taxation position of trustees and beneficiaries is determined on the basis of their
residence and the source of income. Trusts having at least one trustee resident in the Isle of
Man, or where the administration of the trust is conducted in the Isle of Man, fall within the scope
of Isle of Man income tax.
As a general rule, as trust property is held for the use and benefit of the beneficiaries, the
taxation of trusts reflects the tax position of the beneficiaries: the burden of tax imposed on the
income of a trust should be the same as would have been levied on the beneficiaries had they
received the income directly, with the result that trustees will not be taxed on the income of an
Isle of Man resident trust if there are no Isle of Man resident beneficiaries. Where income is
derived from property held by a trustee for another person who is absolutely entitled to that
property as against the trustee, then the trustee is not within the scope of Isle of Man income tax
in respect of that income.
This position is similar to that in many countries that have brought in trust legislation where the
beneficiaries are the taxable persons, and can be compared to the position in the UK where the
trustees are taxable in their own right in respect of the income and gains of the trust.
3.2
Interest in possession trusts
When a beneficiary has an absolute right to the income of a trust, that beneficiary will be taxable
in respect of the trust income as and when it arises. The Assessor of Income Tax will apply this
principle to treat an Isle of Man resident beneficiary of an interest in possession trust as if the
trust income accrued directly to the beneficiary. The trustee is not liable to tax in this scenario.
3.3
Discretionary trusts
If trust income is distributed, the beneficiaries will be taxed according to their residence status as
follows:
Isle of Man taxation summary for IAG
3.3.1
beneficiaries who are not resident in the Isle of Man are taxed on the income distributed
to them as if the income accrued to them directly (ie. provided the trust has no Isle of
Man source income, no Isle of Man tax is payable because they are non-resident); and
3.3.2
beneficiaries who are resident in the Isle of Man are subject to Isle of Man tax in respect
of any income distributed to them (to the extent that it has not already been taxed in the
hands of the trustees as previously undistributed income).
Trustees will be taxed on income not distributed as follows:
3.3.3
if all of the beneficiaries are not resident in the Isle of Man, undistributed income will be
subject to the same amount of tax as would be charged where the same type and
amount of income had been received by a non-resident individual (ie. If there is no Isle
of Man source income, the trustees are not taxed);
3.3.4
if any of the beneficiaries is resident in the Isle of Man, undistributed income will be
subject to Isle of Man tax.
4.
Taxation of Income – Partnerships and LLCs
4.1
Introduction
Under Isle of Man law, both general and limited partnerships are available; foreign partnerships
may operate in the Isle of Man, subject to a practical requirement for trading partnerships to
register their business name. While English-style Limited Liability Partnerships (LLPs) are not
available, the Isle of Man Limited Liability Company (LLC) is available, and is also taxed for Isle
of Man purposes as a partnership (although it may be taxed differently for foreign tax purposes).
For income tax purposes, general and limited partnerships (whether formed under Isle of Man
law or otherwise) and LLCs are treated in the same manner.
There is, however, a requirement for a partnership or LLC to file a tax return. Where none of the
partners is resident in the Isle of Man, then an attorney or agent may be required to pay any Isle
of Man income tax on behalf of non-resident partners or members.
4.2
Status of partners and members
A partnership or LLC is not liable to pay income tax on its profits, but each partner or member is
liable to pay income tax at the appropriate rate in respect of that person’s whole income,
including his share of profits, under the rules applicable to individuals and companies.
Consequently, in practice:
4.2.1
a partner of a partnership governed by Isle of Man law, or a member of an Isle of Man
LLC, who resides in the Isle of Man is liable to Isle of Man income tax in respect of his
share of profits derived in the Isle of Man or elsewhere;
4.2.2
a partner of a partnership governed by foreign law who resides in the Isle of Man is liable
to Isle of Man income tax in respect of his share of profits derived in the Isle of Man or
elsewhere;
4.2.3
a partner of a partnership governed by Isle of Man law, or a member of an Isle of Man
LLC, who does not reside in the Isle of Man is liable to Isle of Man non-resident income
tax in respect of his share of profits derived from business carried on in the Isle of Man
or from Isle of Man-source income;
Isle of Man taxation summary for IAG
4.2.4
a partner of a partnership governed by foreign law who does not reside in the Isle of Man
is liable to Isle of Man non-resident income tax in respect of his share of the partnership
profits derived from business carried on in the Isle of Man or from Isle of Man-source
income; and
4.2.5
a partner who does not reside in the Isle of Man and whose partnership does not carry
on business in the Isle of Man or derive any Isle of Man-source income will have no
liability to Isle of Man non-resident income tax, regardless of where the partnership is
established.
5.
Taxation of Income – Companies
5.1
Introduction
With effect from 6 April 2006, the Isle of Man moved to a “zero-ten” basis of corporate taxation,
applicable to companies other than LLCs. The standard rate of corporate income taxation is 0%,
with income from banking business and from land and property in the Isle of Man (including
property development, rental or property letting and extractive industries) liable to a 10% rate of
tax. Certain trading companies may in addition elect to pay tax at 10%. All income is taxed at
these flat rates: there are no minimum or maximum income thresholds or tiered rates of
corporate taxation.
Despite the fact that most Isle of Man companies, registered foreign companies with a place of
business in the Isle of Man and other companies managed and controlled from the Isle of Man
will not be liable to any taxation other than at 0%, all such companies still have a responsibility to
file an annual tax return. The form is generally not onerous to complete, with income broken
down by trade classification, but penalties are payable in the event of late submission.
5.2
Changes to corporate taxation
While the Isle of Man’s “zero-ten” corporate tax regime was found to be compliant with
international standards and the EU Code of Conduct on Business Taxation, concerns have been
raised in late 2009 in relation to the compliance of similar regimes subsequently introduced in the
Channel Islands. There are no plans at the time of writing for the Isle of Man to abandon the
“zero-ten” regime.
5.3
Applicability of “zero-ten” regime to the Isle of Man’s double tax treaties
The effect of the “zero-ten” regime on the Isle of Man’s treaties is that some countries may refuse
the application of a treaty on the basis that the purpose of a double tax treaty is, amongst other
things, to relieve double taxation, and if there would be no corporation tax in the Isle of Man to
pay in respect of a particular transaction then the corresponding country may argue that the
treaty should not apply to reduce taxes in that country.
6.
Anti-avoidance measures
6.1
The Attribution Regime for Individuals
While no distinction in terms of corporate tax liability is made between resident and non-resident
companies, anti-avoidance provisions exist to prevent Isle of Man residents from using
companies to avoid or defer income tax. These take the form of the Attribution Regime for
Individuals (ARI), which attributes the income of relevant companies to their members and
introduces a charge to income tax for Isle of Man resident members on their share of the
attributed profits of that company.
Isle of Man taxation summary for IAG
A company is excluded for the purposes of ARI if, for instance, it is a trading company which has
distributed 55% of its profits to members within a set period, a trading company electing to pay
tax at 10%, a company listed on a recognised stock exchange, or a company limited by
guarantee. All non-trading companies, such as investment holding companies, are subject to
ARI. However, if a company has no Isle of Man resident members, there are no persons who
would be liable under ARI.
6.2
General anti-avoidance powers
Where the Assessor is of the opinion that the purpose or one of the main purposes of any
transaction is the avoidance or reduction of the liability of any person to Isle of Man income tax,
he may make an assessment to counteract the avoidance or reduction of liability. An appeal may
be made on the basis that the purpose of the transaction was not the avoidance or reduction of
an Isle of Man income tax liability.
Isle of Man residents are required to disclose whether they have the power to enjoy the income
of any non-resident person and may be assessed for tax in respect of any such income.
7.
Other taxes
7.1
Value Added Tax (VAT) and customs revenue
The Isle of Man has a revenue sharing agreement with the UK which covers VAT, customs duties
and many other (but not all) indirect taxes. The agreement means that for VAT, customs and
most (but not all) excise duty purposes the Isle of Man and UK are treated as if they were one
state. Under the terms of the agreement, most of these indirect taxes and duties are pooled and
shared between the two territories in accordance with an agreed formula. This negates the need
for customs barriers between the Isle of Man and UK.
The standard rate of VAT is kept in line with the UK standard rate, and with effect from 4 January
2011 is 20%. However, lower rates apply only in the Isle of Man in respect of certain domestic
supplies, such as hotel accommodation and domestic property repairs.
There is no insurance premium tax in the Isle of Man or in respect of Isle of Man based risks.
7.2
Capital taxes
The Isle of Man has no capital gains tax, estate or inheritance tax, wealth tax or gift tax, whether
for individuals or companies.
7.3
Withholding taxes and the EUSD
Payments of dividends and loan interest may be made by resident companies to non-resident
companies and individuals without deduction of withholding tax. There is no withholding on bank
deposit interest, save as discussed below. Income arising from land in the Isle of Man is subject
to a 10% rate of withholding tax for corporate payees and 20% for individuals. Other Isle of Man
source income paid to a non-resident company will not be subject to any withholding, but other
payments to non-resident individuals will be subject to 20% withholding tax. Relief from
individual withholding tax is available in respect of certain directors’ and consulting fees.
Although the Isle of Man is not part of the European Union, it agreed to introduce measures
equivalent to the European Union Savings Directive with effect from 1 July 2005. The aim of the
EUSD is to provide for automatic exchange of information between EU member states on
savings income earned by EU resident account holders; however for a transitional period it
allows either exchange of information or for tax to be deducted from interest payments due to EC
resident individuals. Accordingly, the Isle of Man introduced a withholding tax regime for savings
Isle of Man taxation summary for IAG
interest payable to EC resident individuals at rates of 15% for the first three years and 20% for
the subsequent three years. From 1 July 2011, the withholding tax option will be withdrawn in
the Isle of Man and information will be exchanged automatically.
Colin Bird and Christopher Kinley
Maitland
18 October 2010