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). The Assessor of Income Tax is
the head of the Income Tax Division of the
Manx Treasury and carries out the functions
of tax assessment and collection. The Manx
tax year runs from April 6th to April 5th
(as in the UK).
In
February, 2004, Treasury Minister, Allan Bell
revealed that the government intended to extend
a zero rate of corporate tax to businesses
involved in the space and satellite industries.
The jurisdiction planned to move towards a
zero tax rate for all businesses by 2006.
In
February, 2005, Treasury Minister Allan Bell
delivered his 2005 Budget, announcing a zero
rate of income tax for six more sectors of
the Island's economy - manufacturing, film,
e-gaming, tourist accommodation, agriculture
and fishing.
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'. This includes companies
holding banking licences and those receiving
income from land and property in the Isle
of Man (which includes rental income, extraction
of minerals and property development).
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 5th April 2006.
Resident
companies pay an annual charge from April
6th 2006, which is set at GBP250. For 2007/08
the Corporate charge was set at GBP250 per
company but is now collected as part of an
increased Company Annual Return fee, set by
the Financial Supervision Commission, reducing
bureaucracy for companies. In the 2009 budget,
the Treasury revoked the Corporate Charge
Deduction for corporate tax payers who pay
tax at rate of 10%. The Order applies from
April 6, 2009 for all accounting periods ending
on or after April 6, 2009.
The
new 0% tax regime is intended to stimulate
inward investment by businesses establishing
on the Island, and provide a consistent treatment
across all sectors of the economy as part
of the Isle of Man’s commitment to a diversified
economy.
In
August, 2006, the Treasury released the results
of a consultation on capping the new 10% corporate
tax liabilities for financial institutions;
the response, not surprisingly, was favourable.
The
aim of the consultation was to seek views
about the proposal to cap corporate tax liabilities
at a level above the current highest payer,
therefore ensuring that current revenue receipts
are not reduced. Seven responses were received:
two from individuals, two from professional
firms and three from professional bodies.
No one was opposed to the idea; some responses
were cautiously supportive and several were
very enthusiastic.
- “This
is a fantastic idea – it will be incredibly
beneficial for the Isle of Man.”
- “..this
could be a good thing for the IOM...”
- “..an
interesting idea and worthy of further consideration.”
One response did suggest that this should
only be an interim measure which should not
detract from the aspiration to make all of
industry subject to a zero rate of tax. They
also suggested that a ‘floor’ as well as a
‘ceiling’ would be appropriate and would attract
smaller start ups, which would in turn bring
more highly qualified staff with them.
A cap of at least GBP6 million, just above
the then highest tax paid by a company, had
been suggested in the consultation document.
Two responses requested that a cap should
be revenue neutral and recognised that this
would not affect established Island companies;
however, it may attract new banking business.
Two responses mentioned the possibility of
allowing subsidiaries or associated companies
to pool their tax liabilities for the purposes
of the cap. One suggested that such an approach
should not use the existing group relief provisions
within the income tax legislation.
The IOM's current definition of a group is
found in Schedule 2 of the Income Tax Act
1980, and its key principle is that: “two
companies shall be deemed to be members of
a group of companies if one is the 75% subsidiary
of the other or both are 75% subsidiaries
of a third company”.
As the Isle of Man now has a standard 0% rate
of corporate income tax, the corporate tax
cap concept would be a further move towards
applying the standard rate to all companies.
A cap, being based on a level of income which,
once exceeded, will then see the remaining
income charged at the 0% rate, would further
demonstrate the Treasury’s stated intention
to move to an overall zero rate of corporate
income tax when revenues permit.
The Treasury said it would give further consideration
to the timing and level of a cap based on
the consultation results.
The
Distributable Profits Charge was introduced
at the same time as the 0% rate of corporate
income tax to ensure Treasury revenue cash
flow and as an anti-avoidance measure. Some
companies that do not distribute their profits
may be required to pay the Distributable Profits
Charge on behalf of their Manx-resident shareholders.
The
Distributable Profits Charge was replaced
by the Attribution Regime for Individuals
(ARI) for companies with accounting periods
commencing on or after April 6, 2008. The
ARI applies to all resident individuals with
an interest in a relevant company.
Resident
individuals with an interest in a relevant
company are charged to income tax on their
share of the attributed profits from that
company. This in essence removed the corporate
veil for income tax purposes as individuals
are taxed directly as if they had received
the income attributable to their share of
the annual profits of a relevant company.
This is known as the attributed income.
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.
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.
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, will
no longer be available for any company.
The option to treat
the part of a distribution exceeding 55% of
trading distributable profit as a distribution
from reserves will also no longer be available;
and the whole of a distribution of up to 100%
of the trading distributable profit of an
accounting period will be included for averaging
purposes.
Only that part of a
distribution which exceeds 100% of the distributable
profit of an accounting period will be treated
as a distribution from reserves.
This revised practice
will also apply 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 will applies
to all accounting periods ending after April
5, 2009.
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.
The standard value-added
tax (VAT) rate in the Isle of Man increased
to 17.5% with effect from January 1, 2010,
in line with the UK.
The VAT rate cut to
15% entered into force on December 1, 2008,
but was always considered as a temporary measure
to buoy consumer consumption during the recession.
Special arrangements
were put in place to ease the administrative
burden of those who traded through New Year's
Eve into New Year's Day, such as bars and
telecoms businesses – again in line
with the UK; for these businesses, the VAT
rate reverted to 17.5% after 6:00 am on January
1. For most registered businesses, however,
the increased standard rate was effective
after midnight of December 31, 2009.
The Future
of the 0/10 Regime
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.
As part of his statement,
the Chief Minister said:
“We have been watching
the way international sentiments and standards
have been moving in response to the global
economic crisis, and especially the speed
with which such matters have been changing
and the potential effect they may have on
our economy."
“[Revisiting our business
tax regime] will allow us to develop and position
the island and its future tax regime, so the
island can continue to remain competitive
and at the same time be accepted by the international
community as responsible and co-operative.”
“The
government will also be actively looking to
identify what new opportunities can be taken
to secure further business within the Island
with a view to continuing to diversify our
economy and increasing our income.”
The
remainder of this page deals with the corporate
income tax regime as it existed until April,
2006.
Isle of Man Scope of Corporation
Tax
Income tax is levied under the Income Tax
Acts 1970 to 1995. Resident companies (referred
to as 'associations' in Manx law) pay income
tax on their worldwide income. Resident companies
are those controlled and managed in the Isle
of Man. Non-resident companies are liable
for income tax on income derived from the
Isle of Man. Branches of foreign companies
are treated for tax purposes as if they were
Manx companies, once registered, depending
on whether they are resident or non-resident.
The
Manx Government sometimes gives temporary
exemption from income tax on part or all of
their profits to industrial undertakings (up
to 5 years) and to managed banks (branches
of foreign banks managed by local banks).
See
Offshore Tax Regimes
for details of the duty and taxes payable
by non-resident and exempt companies, and
International Companies.
BACK
TO TOP
Isle of Man Corporation Tax
Rates
Until 2006, the standard rate of Manx income
tax for companies (associations) was 15% for
trading companies and 18% for non-trading
companies. For trading companies, the first
£500,000 of taxable income was taxed
at 10% from the 2002/03 tax year.
The
Isle of Man's budget for 2002/03 also included
a provision that exempt insurance companies
and ship management companies would be brought
within the domestic tax system, but at a zero
rate.
This
move formed part of a package of proposed
radical tax reforms announced in late 2000;
other elements of the proposals included:
-
A simplified approach to capital allowances
whilst retaining 100% relief when necessary;
and
-
A new tax credit system for distributions
will ensure that tax neutrality is preserved
for the investor, whether resident or non-resident.
In
the Island's 2003/2004 budget, the threshold
at which the standard rate of 15% becomes
payable was increased from £500,000
to £100,000,000 (one hundred million),
effectively resulting in all taxable trading
income being charged at the 10% rate. The
higher rate remained at 18% for all other
companies.
BACK
TO TOP
Isle of Man Calculation of
Taxable Base
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.
Payments
of dividend, bonus, interest or profit shares
to shareholders or associates are deductible
from pre-tax income (and are untaxed in the
hands of residents - but see Withholding Taxes
below concerning non-residents).
75%
of fees received in return for managing an
authorised collective investment scheme are
deductible (a public, resident investment
company can deduct all its management expenses).
Foreign
investment income is normally treated as 'franked';
but the rules are complex, particularly for
the UK (and see the Double
Taxation section).
BACK
TO TOP
Isle of Man Taxation
of Trusts
In the normal trust situation, ie with settlor,
life tenants and beneficiaries all being non-resident,
full exemption from Isle of Man taxation is
given to foreign income and local bank interest,
by concession.
A
Manx resident who receives income from a trust,
whether Manx or foreign, will be taxed on
it; however, if income is accumulated in a
Manx trust with Manx beneficiaries, the trustee(s)
will be assessed on the income.
In October 2009, the
Isle of Man Treasury released additional guidance
on the taxation of trusts in a practice note
which set out the Assessor's view of when
trustees and beneficiaries of trusts may be
subject to Isle of Man income tax.
The Practice Note provides
guidance on: filing requirements; the Resident
Exclusion Clause; changes in trustees, and
the trustees’ tax positions; trustee
management expenses; income distributions
to non-resident beneficiaries; and Purpose
Trusts. The practice note also stipulates
that the tax rate on trusts for the fiscal
year 2009/10 will be set at 18%.
The
Treasury has reminded interested parties that
the practice note, which should be read in
conjunction with PN 141/07 – The Taxation
of Trusts in the Isle of Man, is intended
only as a general guide, and reference should
also be made to the appropriate legislation.
BACK
TO TOP
Isle of Man Filing Requirements
and Payment of Tax
Companies (associations) in the Isle of Man
must make a return on Form R1(c) by 30th June,
for the preceding year's income. The Assessor
of Income Tax calls for returns, assesses
income tax, issues notices of assessment to
income tax and generally combines the functions
exercised in the UK by Inspectors and Collectors
of Taxes and the Commissioners of Inland Revenue.
The income tax year runs from April 6 to the
following April 5, as in the UK. Income tax
is payable to the Assessor on or before 1
January for the year ending on the following
5 April. Interest is chargeable on unpaid
tax from 1 January in the year to which the
assessment relates.
Isle
of Man Withholding Tax
Until 2006, companies had to deduct withholding
tax (at 18%) from payments made to non-residents
in respect of dividends, interest, profit
shares and directors' remuneration. However,
the Government offered a number of concessions
which exempted various classes of payment
from this requirement, including payments
from a number of specified financial institutions
including banks, authorised investment companies
and some insurance companies.
BACK
TO TOP
LOWTAX.NET
13/07 
