Isle of Man: E-Commerce
Planning the Tax Structure
In the Isle of Man there is no general capital gains tax, turnover tax or capital transfer tax, and there are no stamp duties. Apart from VAT, the only significant tax is income tax which is levied on 'persons', ie individuals or corporations (companies).
Various incentives are available to attract e-commerce entrepreneurs to set up their business in the Isle of Man:
- a phased approach to taxation on the whole or part of the profits for qualifying businesses for up to five years;
- financial grants of up to 40% of capital spend on equipment, marketing and professional fees are available.
In February, 2005, Treasury Minister Allan Bell delivered his 2005 Budget, announcing a zero rate of income tax for six sectors of the Island's economy - manufacturing, film, e-gaming, tourist accommodation, agriculture and fishing. At that time trading profits were subject to 10% on the first GBP100m and 15% thereafter (non-trading income was taxed at 18%)
Mr Bell confirmed that the Island - which already had the zero rate for insurance, fund management, space and satellite technology and shipping - would introduce it as a standard for business in April 2006, with a 10% rate of tax for 'financial institutions'.
The Isle of Man's 2006 budget in February, 2006, included a package of measures to further stimulate the inflow of investment and business to the Island, including the introduction of zero corporate tax as of April 5, 2006.
The 0% tax regime was intended to stimulate inward investment by businesses establishing on the Island, and was also intended to provide a consistent treatment across all sectors of the economy as part of the Isle of Man's commitment to a diversified economy.
In February 2010, the Isle of Man Income Tax Department launched a consultation on the future of business taxation on the island following scrutiny of its 0/10% regime from the European Union (EU) Code of Conduct For Business Taxation Group.
The Isle of Man’s decision to amend its business tax regime was first announced on October 20, 2009, by the Isle of Man Chief Minister, Tony Brown, in a statement to the island's parliament, the Tynwald, in response to changes to the Customs & Excise Agreement revenue sharing arrangements between the Isle of Man and the United Kingdom (UK) and other international developments.
In December 2010, the Manx government's review of the 0/10% regime was effectively put on ice until a High Level Working Party established by the European Union to review the Code of Conduct for Business Taxation had reported back to the European Council of Finance Ministers (Ecofin). The Working Party was not expected to report its findings to Ecofin until June 2011. But in February 2011, treasury minister Anne Craine announced in the 2011 budget that the 0/10% regime would remain in place; instead the special anti-avoidance rules would be dropped from 2012.
The Isle of Man has double taxation treaties with other countries, including a limited treaty with the UK which, however, did not apply to exempt or international companies. This means that dividends or other types of income paid from the Isle of Man to high-tax countries are going to be taxed in the hands of the recipient, depending on the local regime, even though they may have suffered tax in the Isle of Man, under 'Controlled Foreign Corporation' legislation, meaning that undistributed profits in a Manx (low-tax) subsidiary will be deemed to be taxable income in the high-tax residence country of a controlling owner (individual or company). The exact arrangements vary widely.
It follows that the owner of a business in a high-tax country who wants to transfer part or all of the business to a low-tax area such as the Isle of Man must follow one of the following routes or some more-or-less complicated variation or combination of them (it must be understood that the right solution will depend completely on the circumstances of age, residence, country etc - these are just illustrative possibilities):
- Set up a new business in the Isle of Man with ownership which falls outside the CFC rules, eg don't hold more than 40% from a high-tax country, and put remainder of shares in trust for children or in the hands of an offshore relative;
- Create a joint venture with other onshore companies or owners whereby ownership is sufficiently distributed to escape CFC rules.
- Owner (individual or company) move offshore (not necessarily the Isle of Man), move business to the Isle of Man and outsource high-tax area distribution (if physical);
- Transfer existing business into trust or other offshore ownership for inheritance tax purposes; set up new offshore business to handle expanded range of products or markets.
NB: Any transfer of all or part of a business away from a high-tax area is likely to trigger a disposal for capital gains, gift or transfer tax purposes - great care is needed to avoid this happening. Companies may be in a better situation than individuals to mitigate the effects of tax on a transfer; equally, companies with international subsidiaries may be able to make use of 'mixer' holding companies, and thus may not be so much affected by the CFC rules.
In fact there are numerous possibilities for arriving at an effective structure; it is normally possible to improve the tax performance of a business substantially by moving part or all of it offshore - but expert professional guidance is essential, and the suggestions above are no more than indications of the sort of thing that may be effective in some circumstances.