Isle of Man: Domestic Corporate Taxion
Calculation of Taxable Base
With effect from April 6, 2007, the Income Tax (Corporate Taxpayers) Act 2006 changed the way in which companies in the Isle of Man are taxed; from a year of assessment basis to an accounting period basis “pay and file” system.
For companies, income tax is normally assessed for income arising in the previous fiscal year.
Allowable expenditure needs to be incurred 'wholly and exclusively' for the business; however, mixed private/company expenses can often be apportioned.
The system of capital allowances follows that of the UK. However there are 100% first year allowances for industrial buildings and structures, and for agricultural land and buildings. There are special rules for tourist development, leasing companies and shipping.
Loss relief, group relief and consortium relief are available, and broadly speaking follow the UK rules. The companies involved all need to be resident on the Isle of Man.
Foreign investment income is normally treated as 'franked'; but the rules are complex, particularly for the UK (and see the Double Taxation section).
In April 2009, the Income Tax Division of the Treasury issued Practice Note PN 156/09 which affected Manx resident companies, their shareholders and agents. It explains a significant revision to the assessor's practice in respect of the tax treatment of company distributions, which entered into effect on April 6, 2009.
According to Isle of Man law, distributions made by a company to its shareholders from its profits constitute income in the hands of those shareholders. The assessor has for a number of years, however, been prepared to relax the strict application of the law in certain circumstances and treat distributions as if they were capital in the hands of the company’s shareholders. This practice was generous, but took account of issues which arose during the period when individual and, in particular, corporate income tax rates were reduced rapidly.
The assessor has therefore reviewed this practice and considers that it is giving rise to an unintended level of deferral or loss of revenue. The revisions to the assessor’s approach were intended to introduce a system more appropriate to the prevailing circumstances at the time
It was announced in Guidance Note 41 ‘Attribution Regime for Individuals’ (ARI) that, from April 6, 2008 a distribution of trading profits in respect of a company’s accounting period which formed the basis of its income tax assessment for 2005/06 or earlier would be treated as if it were a distribution of capital. This extended significantly the Assessor’s existing practice, which was to treat a distribution from trading profits assessed for 2000/01 or earlier as if it were a distribution of capital. Such distributions became commonly known as “distributions from reserves”. Non-refundable tax credits of 12% and 10% became obsolete with this more beneficial treatment for shareholders.
The earlier Guidance Note 36 ‘Distributable Profits Charge’ (DPC) stated that where a distribution exceeded 55% of a company’s trading distributable profit, the excess could be treated as if it were a distribution of capital. This was an alternative to that excess distribution increasing the company’s averaged profits.
The revision to the assessor’s practice in respect of the tax treatment of company distributions was amended as follows, with immediate effect:
For accounting periods ending after April 5, 2009, the option to treat the whole of a distribution as a distribution from reserves, with no part of it meeting the ARI/DPC distribution requirement, is no longer available for any company.
The option to treat the part of a distribution exceeding 55% of trading distributable profit as a distribution from reserves is also no longer be available; and the whole of a distribution of up to 100% of the trading distributable profit of an accounting period is included for averaging purposes.
Only that part of a distribution which exceeds 100% of the distributable profit of an accounting period is treated as a distribution from reserves.
This revised practice also applies to corporate income taxable at 10% (including cases where an election to be taxed at 10% has been made). In this case, the whole of the taxable profit must be distributed with tax credit vouchers before any distribution from reserves can be claimed.
The ARI applies to all accounting periods ending after April 5, 2009 until April 5, 2012 (see above). A distribution which is paid within 12 months of the end of an accounting period can be ‘referred back’ to that accounting period to meet the ARI/DPC distribution requirement.
For these accounting periods, the date on which a distribution is made will determine whether it can be claimed as a distribution from reserves.
In respect of accounting periods ending between April 6, 2008 and April 5, 2009 only, where a company can demonstrate that it has declared and paid more than 55% of its trading distributable profit before April 6, 2009 the amount exceeding 55% can be claimed as a distribution from reserves under the previous practice.