Isle of Man Focus
15 September, 2015
Recently endorsed by international ratings agency Moody's, the Isle of Man remains one of the strongest, most resilient and advanced economies in the world of offshore, and is the subject of this feature.
Situated in the Irish Sea, the Isle of Man's diminutive geographical stature – the island is 50km long and 22km wide at its broadest – belies its position as one of the world's largest and most reputable international offshore financial centers, which is of particular importance to the economy of the United Kingdom.
The Isle of Man and its Economy
The Isle of Man is a Crown dependency of the UK, but is self-governing in all areas except defense and foreign policy. The Island's ancient parliament, Tynwald, is the oldest legislature in the world in continuous existence, dating back to Viking origins over one thousand years ago. Its Parliament has two branches: the House of Keys and the Legislative Council. The majority of Members sit as independents, and the virtual absence of party politics encourages a high degree of consensus. This has contributed to the remarkable stability of the Manx system and has allowed the government to put in place a legislative framework upon which a thriving financial services industry has been built, underpinned by benign taxation. Key sectors of the Manx economy are described in more detail below.
The island has its own courts, but the main body of the law is based on English common and civil law, and English precedents are often followed. Some UK legislation is adopted as such by the Isle of Man by agreement with the British Government. The ultimate court of appeal is the English Privy Council.
The Manx economy is stable and has enjoyed growth every year for the last 31 years. In the 2013/14 tax year, the Manx economy grew by 6.1 percent, according to the Government, and in September 2015, credit rating agency Moody's confirmed the Isle of Man's Aa1 rating, noting the territory is seeing "stronger and less volatile growth than that of other offshore centers," with its diverse economy and high growth sectors, such as ICT.
The financial and economic crisis has, however, had an undeniable effect on international offshore financial centers like the Isle of Man, with bank deposits and assets under management in Manx investment funds having declined since 2008.
The Isle of Man's fortunes are to a large extent tied to those of the City of London. While this leaves the island's financial services sector somewhat vulnerable, it has also been a source of strength for the Manx economy.
According to a government-commissioned report written by Ernst and Young, the City benefited from USD38.9bn in net financing from Isle of Man sources during the second quarter of 2011. The report also found evidence of the strong contribution the island makes to the UK's regional development, in particular in the North West where the Isle of Man Aerospace Cluster plays an important role in the growth of the UK's aerospace industry.
The report found that the Isle of Man and the United Kingdom should maintain a symbiotic relationship in recognition of the Isle of Man economy's supportive role in balanced growth in the United Kingdom. "International Business Centers (IBCs) play a key role in contributing to investment, employment and growth in neighboring countries in particular, and the global economy in general", it says, adding that the Isle of Man has "led the way amongst IBCs in establishing a modern regulatory system aligned to world best practice", with a conducive environment for strong economic productivity, through the island's internationally-recognized low-tax and robustly-regulated regime.
The Isle of Man also plays an important role in the raising of capital in the UK, and has carved out a niche for itself as a favored jurisdiction for companies floating on London's Alternative Investment Market (AIM). In 2012, the Isle of Man was home to 40 AIM-listed entities, ahead of the Cayman Islands (38), the British Virgin Islands (33) and Ireland (26), but behind Guernsey (67) and Jersey (35).
The Isle of Man's Relationship with the EU
The Isle of Man is not a member of the EU, and Protocol No 3 of the UK's Treaty of Accession to the EU excludes the island from most of the effects of the Treaty. There is, however, free movement of industrial and agricultural goods between the island and the UK; and between the island and EU and EEA countries, and the island applies the external common customs tariff of the EU.
The Isle of Man chose to become part of the EU's VAT regime, but is not part of the EU fiscal area in any other respects. The island's VAT scheme is largely similar to that of the UK; and for some types of business activity inside the EU it is an advantage to be within the scope of VAT.
The Isle of Man's constitutional position in relation to the EU cannot be changed without unanimous agreement of the member states, including of course the UK. The island sees its current relationship with the EU as beneficial, and does not seek to change it. However, the possibility of a "Brexit" casts some doubt on the jurisdiction's future position within the EU, and in May 2015 representatives from the Isle of Man met with officials and policy makers from the EU and the UK, and subsequently with representatives from Scotland, Northern Ireland, Wales, and Gibraltar to discuss the impact of a UK exit from the EU.
Thanks largely to its close constitutional relationship with the UK, the Isle of Man has fallen foul of the EU's drive to stamp out "harmful" taxes in the area of corporate taxation (see below).
The Financial Services Commission
The Financial Supervision Commission was established in 1983 as an independent statutory body in the Isle of Man. The Commission's functions are described in the Financial Services Act 2008 and include:
- the regulation and supervision of persons undertaking regulated activities (i.e. deposit-taking, investment business, services to collective investment schemes, fiduciary services, money transmission services) in or from the Isle of Man;
- the maintenance and development of the regulatory regime for regulated activities; and
- the oversight of directors and persons responsible for the management, administration or affairs of commercial entities.
The Commission's regulatory objectives are:
- securing an appropriate degree of protection for the customers of persons carrying on a regulated activity;
- the reduction of financial crime; and
- supporting the Island's economy and its development as an international financial center.
At the time of writing, the Commission's responsibilities do not extend to the insurance and pensions industries, which are supervised by the Insurance and Pensions Authority. However, on November 1, 2015, the island's newly unified financial services regulator, the Isle of Man Financial Services Authority, will come into being. The FSC and the Insurance and Pensions Authority will as a result of this reorganization be combined into a single regulatory unit.
The majority of banks in the Isle of Man are engaged in providing private banking services to UK expatriates and to foreign nationals. The services offered often extend beyond deposit taking to establishing and administering trusts and managing the underlying companies and assets held by those trusts, including investment management. The growth in other areas of the Island's finance sector, including captive insurance, life assurance, collective investment schemes, investment management and ship management, means that these organizations have sums of money to invest and therefore require investment management services. Some banks also act as trustees to collective investment schemes.
The Isle of Man is recognized as being one of the leading centers for captive insurance and has attracted high quality captive business from all over the world.
A broad range of captive management services are available, ranging from small local operations to representatives of the world's leading captive management groups.
Isle of Man legislation offers a wide range of captive structures, including single-parent captives, association captives, rent-a-captives, Protected Cell Company (PCC) captives, limited liability partnership captives and captives writing third party business under limited third party authorization.
Fund management activities are currently included in the Isle of Man's zero percent corporation tax regime (see below). Mutual funds can take the form of companies (open or close-ended), trusts, limited partnerships or pure contractual arrangements.
As in other offshore jurisdictions, managers in the Isle of Man are more focused on administration than asset allocation. Where a manager chooses not to establish a real presence in the Island, it is a requirement that its business must be administered by a licensed third party fund administrator.
Isle of Man legislation provides for a number of different types of funds, as follows:
- Authorised Schemes: These are the most highly regulated funds which can be sold directly to the public in the Isle of Man and, subject to recognition, in the following jurisdictions: the UK, Hong Kong, Australia, Jersey and Guernsey. Investors in an Authorised Scheme benefit from an investor compensation scheme.
- Regulated Funds: These funds are aimed at retail investors or markets requiring a fiduciary depositary. There are no restrictions on the type on investor that these funds can be marketed to, and they are usually sold through independent financial advisors. Regulated Funds are subject to FSC pre-approval.
- Qualifying Funds: These are non-retail funds aimed at qualifying investors investing less than USD100,000. A Qualifying Fund is not subject to approval in the Isle of Man and investors in such funds are not protected by any statutory compensation arrangements in the event of the fund's failure.
- Specialist Funds: The Specialist Fund is a sub-category of the International scheme which is available only to specialist investors who are generally institutional investors and high net worth individuals. The minimum investment in a Specialist Fund is USD100,000. A Specialist Fund is not subject to approval in the Isle of Man and investors in such funds are not protected by any statutory compensation arrangements in the event of the fund's failure.
- Exempt Schemes: These are Isle of Man schemes that must have less than 50 investors and their relevant constitutional documents must expressly prohibit the making of an invitation to the public to subscribe in any part of the world. Exempt International Schemes are regarded as private arrangements and are not subject to regulation.
- Recognized Schemes: These schemes are managed in or authorised under the law of another country or territory outside the Island but may not be promoted to the general public in the Island unless they have been granted recognition by the Financial Supervision Commission. Once granted recognition, a Recognized Scheme may be promoted to the general public in the Island.
- Overseas Schemes: These are schemes established outside the Isle of Man that are not Recognized Schemes or Exempt-type Schemes.
The net asset value of funds under management or administration in Isle of Man funds totaled USD21.84bn at the end of March 2014.
Life and Pensions
The Life Assurance industry has enjoyed strong growth in terms of premium income and in overseas market penetration for many years, and the Isle of Man is the considered the number one choice for offshore life insurance.
Funds under management reached in excess of GBP50bn in 2011 with premium income over GBP7bn, and the island is the center of operations for many leading life and pension companies.
Almost uniquely amongst its competitors, the Isle of Man has specific and separate pension legislation for added clarity and security. On the back of this innovation, the Isle of Man has a large number of International Pension Schemes which has grown strongly and now includes many large multinational names.
E-Commerce and E-Gaming
There is something of a competition between a number of offshore jurisdictions to offer the most advanced e-commerce environment to businesses seeking an offshore base for part or all of their operations. The Isle of Man is clearly one of the leading jurisdictions, being one of the few which have enacted e-commerce legislation and is already host to an active e-commerce community of providers and users. The island has world-class and highly resilient telecoms and electricity infrastructure and a network of new data hosting centers which incorporate disaster recovery facilities. The Isle of Man e-Business sector now accounts for around 23 percent of the economy, of which 15 percent is e-Gaming.
Figures for 2014 show that e-Business is the island's fastest-growing sector, with over 100 additional jobs created in 2014 and further growth expected in 2015. The island's Minister for Economic Development, Laurence Skelly, said: "We have had further good news in this sector recently with Microgaming receiving planning approval for expanding its headquarters in Douglas [the Manx capital], which will see it create many further jobs and also provide a well over GBP10m boost for the local construction sector."
The Isle of Man is fast becoming a popular center for digital currency businesses, a sector that the Government is keen to encourage. The Crypto Currency community on the Island currently comprises approximately 20 firms in the exchange, mining, compliance and hardware/software spaces.
In 2014, the Isle of Man enabled the formation of the first company with Bitcoin capital, Garigus Limited, as part of the territory's efforts to foster the creation of a niche market centred on digital currencies. The Department Of Economic Development's Director of E-Business, Peter Greenhill, said: "The Isle of Man recognizes both the risks and opportunities presented by digital and virtual currencies. We are conscious of issues that have surrounded these activities, but also can identify serious and credible entrants to the market wishing to explore this innovative technology."
Trusts and Fiduciary Services
Trust management, particularly for wealthy UK individuals, has been a traditional business for the Isle of Man. Successive tightenings of UK anti-avoidance legislation have reduced the possibilities for UK citizens, but trust work continues to be significant. As a result, the Isle of Man has a well-developed legal and financial infrastructure for trust management.
The law of trusts is based on the English law and documents are in English, and there are no requirements for registration; there is no stamp duty. The normal perpetuity period of a Manx trust created prior to 2001 is 80 years. Trusts created after 2000 have a statutory perpetuity period of 150 years. There are no restrictions on the accumulation of income during the perpetuity period.
There are over 200 licensed Corporate and Trust Service Providers who provide a full range of company and trust services to entities incorporated in the Isle of Man plus other offshore jurisdictions. The incorporation of companies and the provision of services to companies and trusts in the Isle of Man generally is regulated by the FSC.
Company Law And Taxation
Recent company law reforms have responded to international pressure by effectively removing the distinction between 'offshore' and 'onshore' company vehicles. However, most companies still benefit from 0 percent income tax under the '0/10' tax legislation, which went into effect in 2006.
The Isle of Man's Companies Act 2006 came into force on November 1 that year, and the first New Manx Vehicles, or '2006 Act companies' as they are known, were incorporated on the same day. Each 2006 Act company is allocated a number followed by the suffix 'V' to distinguish the new-style companies from the more traditional companies which may still be incorporated under the Companies Acts 1931-2004.
The Companies Law 2006 provides for five types of company as follows:
- Limited by Shares. The nominal capital of the company is not required to be stated for incorporation purposes, only that listed within section 5 of the Act is required.
- Limited by Guarantee. Members' liability is limited to the amount they have agreed to contribute to the company's assets if it is wound up. Essentially used as a mutual company for charitable, quasi-charitable, non-profit or social purposes, this form of company can be utilised to great effect for tax planning purposes by means of pledged payment to the collateral of the company.
- Limited by Shares and by Guarantee. This type of company is commonly known as a "Hybrid company", combining the features of both companies limited by shares and companies limited by guarantee. Members consist of those whose liability is limited to the amount unpaid on shares which they hold, and those whose liability is limited to the amount they have agreed to contribute to the company's assets if it is wound up. The flexibility provided by this form of company structure has led to its increasing use as a 'Foundation', a popular alternative to the discretionary trust and for proprietary purposes.
- Unlimited with or without Shares. Such companies are not dissimilar to civil law partnerships and their use is now usually limited to complex situations where extreme flexibility of capital structuring is required or where corporate personality only is needed.
In 2006, the jurisdiction moved towards a zero tax rate for all businesses, except 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), which pay income tax at 10 percent. Prior to this change, companies in the insurance, fund management, space and satellite technology and shipping sectors enjoyed a zero rate of corporate tax (extended in 2005 to companies in the manufacturing, film, e-gaming, tourist accommodation, agriculture and fishing sectors).
The 0 percent tax regime, introduced on April 6, 2006, 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.
However, in 2013, the 10 percent rate was extended to retailers operating in the Isle of Man and who have an annual profit of over GBP500,000 as part of the Government's plans to consolidate the territory's finances.
In January 2013, Manx lawmakers backed proposals for a comprehensive review of the island's tax regime. To be undertaken over the period 2013-2016, the plans envisage a review of all aspects of the Manx tax regime, from the taxation of individuals, national insurance, the taxation of business, and international tax. The government has underscored however, that the review will not lead to the introduction of capital gains tax or an inheritance or death tax, and the island's zero-ten corporate tax regime will remain.
The Isle of Man is viewed as one of the most reputable IOFCs, and was the first to substantially implement the internationally-agreed standard on tax transparency. The jurisdiction was white-listed by the OECD in 2009, and now has a large and growing network of tax information exchange agreements.
The Isle of Man's tax transparency standards were endorsed in a report by the OECD in June 2012, which noted that the jurisdiction was one of only 12 reviewed countries to have all elements of effective tax information exchange in place. This placed the Isle of Man alongside Australia, China, France, India, Ireland, Italy, Japan, Malta, Norway, Qatar and the Seychelles.
The Isle of Man already shares information automatically on personal savings income with the UK and other European Union countries, having been the first non-EU jurisdiction to make a public commitment to this under the EU Savings Directive in June 2009.
The Isle of Man signed an intergovernmental agreement with the United States on the implementation of the Foreign Account Tax Compliance Act (FATCA) on December 13, 2013, and in October 2013 was the first British dependent territory to sign an agreement with the UK extending the automatic disclosure of tax information, which is based on FATCA.
The Isle of Man also became the first Crown Dependency to join the Convention on Mutual Administrative Assistance in Tax Matters, a multilateral agreement initiated by the OECD and Council of Europe to tackle tax evasion and avoidance.
In addition, the Isle of Man was one of the countries that committed to being an "early adopter" of the new global standard for tax information exchange, which is also based on FATCA, at the seventh meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes in Berlin in October 2014. 51 signatories, including the Isle of Man, committed to share information automatically in accordance with the Common Reporting Standard developed by the OECD from September 2017.
Anti-Money Laundering/Counter Terrorist Financing Legislation
The Island introduced its first anti-money laundering legislation in 1987, the Drug Trafficking Offences Act. In the meantime, the AML/CFT legislative framework has been improved on a regular basis, culminating in the latest piece of the legislation, the new Money Laundering and Terrorist Financing Code 2015 which came into effect on April 1, 2015. The revision to the legislation included:
- changes made to take into account the revised FATF Recommendations adopted in 2012;
- changes in relation to simplified CDD concessions; and;
- general amendments to improve the layout, flow and language of the Code.
In addition Schedule 4 to the Proceeds of Crime Act 2008 was extended to cover:
- tax advisors;
- payroll service providers;
- controlled machines;
- Specified non-profit organizations; and
- virtual currency businesses.
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