Isle of Man International Focus
By Lowtax Editorial
14 June, 2012
Situated in the Irish Sea, the Isle of Mans diminutive geographical stature the island is 50km long and 22km wide at its broadest belies its position as one of the worlds largest and most reputable international offshore financial centres, 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 defence 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 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 the economy has enjoyed an average of over 6% annual growth in real terms over the past 27 years. The financial and economic crisis has, however, had an undeniable effect on international offshore financial centres like the Isle of Man with bank deposits and assets under management in Manx investment funds having declined since 2008. Also in November 2011, international ratings agency Standard & Poor's reduced its 'AAA' international credit rating on the Isle of Man to AA , citing external vulnerabilities and lack of monetary flexibility as credit weaknesses.
The Isle of Mans fortunes are to a large extent tied to those of the City of London. While this leaves the islands 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 Centres (IBCs) play a key role in contributing to investment, employment and growth in neighbouring 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 City, and has carved out a niche for itself as a favoured jurisdiction for companies floating on Londons Alternative Investment Market (AIM). The Isle of Man is home to the highest number of AIM-listed entities (41), with Guernsey (38) taking second place, then the Cayman Islands (37) and the BVI and Jersey (both 34).
The Isle of Mans 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.
Thanks largely to its close constitutional relationship with the UK, the Isle of Man has, however, fallen foul of the EUs drive to stamp out harmful taxes in the area of corporate taxation (see below).
Although the number of banks established in the Isle of Man has fallen slightly over recent years, the calibre of banking operations has been showing marked improvement.
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 organisations have sums of money to invest and therefore require investment management services. Some banks also act as trustees to collective investment schemes.
Banking deposits did, however, fall in 2011, by 6.4% to GBP47bn by the end of the year, and the value of deposits has declined steadily from a peak of GBP57.29bn recorded on December 31, 2008. The value of corporate/trust/fiduciary deposits fell by GBP1bn to GBP19bn in 2011 while retail deposits fell from GBP19.85bn to GBP18.1bn. Moderate declines were witnessed in group deposits.
Of a total of 33 banks present on the island at the end of last year, nearly half (16) were UK-based banks. There are a total of four Irish banking institutions, two Spanish, two South African, two Swiss, and one bank each from France, Belgium, the Cayman Islands and the US operating in the Isle of Man. Two banks present on the Isle of Man are domestic banks.
In 2011, over one third (37%) of funds held by island banks were from Isle of Man-resident individuals and companies (9% and 28%, respectively). One quarter of deposits were from entities based in the United Kingdom; 3% from the Republic of Ireland; 5% from other EU countries; 9% from EEA countries; 2% from the Middle East; 3% from the Far East; and 4% from North America.
The banking sector is well capitalised, with all banks meeting or surpassing Minimum Risk Asset Ratios set by the regulator.
Banks are regulated by the Financial Services Commission under the Financial Services Act 2008. This new legislation, which came into force on August 1, 2008, consolidated several pieces of financial services legislation, including the Financial Supervision Act 1988 and the Banking Act 1998, into one Act and simplified the licensing regime. The underlying regulations remain largely unchanged however, although the term 'banking' has been reclassified as 'deposit taking.'
The first mutual funds were established in the Island in the mid-1960s and were mainly used by British expatriates. New legislative initiatives in the early 1980s created opportunities for growth and gave rise to a rapid expansion of the Island's fund management industry.
The Isle of Man became the first offshore jurisdiction to be granted 'designated territory status' by the UK in 1986, thus enabling Isle of Man funds to apply for recognition in the UK. Fund management activities are currently included in the Isle of Man's 0% 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 funds 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 funds 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.
· Recognised 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 Recognised 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 Recognised Schemes or Exempt-type Schemes.
Licensing of investment management, including that of collective investment funds, was introduced by the Investment Business Acts 1991 to 1993, with a definition of activities to be licensed contained in the Investment Business Order 1991. The regulatory regime for collective investment funds is now governed by the Collective Investment Schemes Act 2008 (CIS Act) which came into force on August 1, 2008, having been previously established by the Financial Supervision Act 1988. Subordinate legislation made under the Financial Supervision Act 1988 continues to have effect as if it was made under the relevant provisions of the CIS Act.
Total funds under management or administration in Isle of Man funds totalled GBP25.1bn at the end of March 2012. This was slightly higher than at the end of 2011, but substantially lower than the figure recorded at the end of June 2008, when total assets under management or administration peaked at GBP57.7bn.
The difficult trading environment since the fall of Lehman Brothers, which is widely credited with precipitating the financial crisis, was recognised by the FSC in its 2010/11 Annual Report. The FSC observed that certain alternative investment fund performances had been stymied by the credit squeeze and liquidity issues, leading to a reduction in assets under management and administration from the Isle of Man. The report went on to note however, that asset classes in more traditional assets, for example equities, have generally seen positive performance and net inflows. The asset value of Qualifying Funds and Legacy EIFs increased during the year and the number of Isle of Man Funds also increased.
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 is governed by the following acts: the Trustee Act 1961 as amended; the Variation of Trusts Act 1961; the Perpetuities and Accumulations Act 1961; the Trusts Act 1995; and the Purpose Trusts Act 1996. The Trusts Act 1995 establishes that both for Manx trusts and for foreign trusts migrating to the island, Manx law is conclusive and will overcome any forced heirship provisions emanating from civil law jurisdictions. The Isle of Man adopted the Hague Convention in the Recognition of Trusts Act 1988, albeit with some modifications.
Trust 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.
Trusts used for Investment Funds (Unit Trusts) are governed by the Prevention of Fraud (Investments) Act 1968, which contains prudential rules among others.
Until 2004, trustees were not licensed or supervised by the Financial Supervision Commission, unless the fiduciary carried on business in investment, banking or insurance, in which case licences are required under those headings. However, this changed with the introduction of new Fiduciary Services legislation.
The licensing of fiduciaries brought the Isle of Man into line with similar arrangements already established in other offshore jurisdictions such as Bermuda, Guernsey and Jersey and an external review of the proposals by London law firm Stikeman Elliot found the bill compares favourably with legislation in these places.
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 which is already host to an active e-commerce community of providers and users.
In June 2001, the government's e-commerce division published a report which set out in detail the Island's approach to becoming one of the world's leading e-commerce centres and most advanced 'e-societies'. Entitled 'The E-Commerce and E-Society Strategy Report,' it obtained the approval of Tynwald and was actively promoted by the government.
The islands e-commerce strategy is supported by first class telecommunications infrastructure, with all telephone exchanges having been upgraded with ADSL-enabling equipment, making the island potentially one of the most attractive high speed internet locations in Europe.
The Isle of Man has also been used in recent years as a test-bed for new technologies and was at the forefront of the launch of both 3G and 3.5G services. Manx Telecom was the first European operator to launch a 3G mobile service and the first in the world to launch a 3.5G mobile service.
The Isle of Man has targeted betting and gaming among other offshore e-commerce sectors, with some success. Purpose-built legislation was introduced in 2001 and a number of licenses were issued to international gaming consortia. Problems with payment mechanisms in the light of US antipathy towards on-line gaming led to some closures in 2002, but by 2005 it appeared that the sector had become established on a long-term basis.
Following the announcement in August, 2005, of the granting of a gambling licence to Poker Stars, the second largest operator of its type in the world, the resulting publicity both in the business and trade media helped to raise considerably the Isle of Man's profile in the international e-gaming industry.
In July 2011, the Isle of Man launched a new Network Services Licence for business-to-business e-Gaming operators. The Network Services Licence is a new level of licence available under the existing Online Gambling Regulation Act 2001 (OGRA) and is designed to recognize the business-to-business relationships that many gaming operators now have. The licence aims to provide Isle of Man-based gaming operations the opportunity to make their platform available to business customers around the world. It is anticipated that this new business model will not only attract new and larger businesses into the Isle of Man but it will also increase opportunities for those businesses already based on the island to develop relationships with companies across the globe.
In February 2012, the government welcomed the successful application of TWLV for a license to operate a new online bingo site from the island. The company said its decision to select the Isle of Man was because the island offers large telecoms capacity, first-class data centres, skilled professionals, world-class regulation and a business friendly and supportive government.
Alex Downie, the Department of Economic Developments Political Member with responsibility for e-Gaming, added: "I am pleased that TWLV Gaming has announced the launch of their novel new website. In addition this showcases the islands success as a leading jurisdiction for gaming companies due to its excellent reputation in regulation and support. The Isle of Man offers an ideal environment for TWLV to develop its business."
As of mid-2012, there were 45 online gambling licence-holders on the Isle of Man, and the e-business sector now accounts for around 12% of the Manx economy.
The Isle of Man passed the Merchant Shipping (Registration) Act 1984 in order to encourage registration of ships on the island. There is a zero-tax regime for ship management companies based on the Isle of Man.
In 2006, the Manx government announced a change of the name of the Marine Administration to the 'Isle of Man Ship Registry', a change designed to communicate greater "clarity of message" by describing exactly what the organisation does: the registration of ships and yachts and the technical regulation of, and jurisdiction over, those vessels on the register. The revamp came into effect February 1, 2007.
Enhancements were made to the registration process in August 2009 which made it simpler and more cost effective to register a vessel in the Isle of Man. These changes included: the dropping of the pre-registry survey requirement; the welcoming of previously excluded ship types, such as passenger vessels; and an increase in the maximum age of ships on the Manx registry from 15 years to 20 years. In addition, the Registry extended the number of Accepted Countries, allowing ownership structures of vessels using companies registered in the following countries to remain unchanged when vessels transfer registration to the Isle of Man: Australia, the Bahamas, Canada, China, Hong Kong, India, Japan, Liberia, the Marshall Islands, New Zealand, Pakistan, Panama, Russia, Singapore, South Africa, United Arab Emirates, and the United States.
However, in March 2009, the Isle of Man Ship Registry announced its intention to introduce an annual registration fee for the first time in its 25-year history. The fee has been set at GBP730 per merchant vessel (at the time about USD1,000) which compares favourably with the cost of registration with competitor flags. Unlike other registries, the fee will not be dependent upon ship size or type. In addition the IoM Registry will grant "substantial discounts" for multi-vessel owners registering with the flag. The Registry has also announced that it is cutting the costs of other fees for services and certification as a result of the introduction of the annual fee.
In January 2012, the Isle of Man Ship Registry reported that Gross Registered Tonnage increased by 12% during 2011, from 12.36m GRT at the start of the year to 13.84m GRT, evidence that vessel registration in the Isle of Man continues to be in high demand. With registered tonnage at record levels, the Isle of Man is now among the top fifteen ship registries in the world in terms of registered tonnage. This demonstrates significant growth in terms of the registration of larger vessel types, given that the register topped 10m GRT for the first time in its history in April 2009. The Ship Registry reported that the Isle of Man has seen increased demand from companies in the Asia Pacific region, notably Japanese and Singapore-based corporations.
Alex Downie, the Department of Economic Development political member with responsibility for shipping, said: 2011 was another very successful year for the Ship Registry, despite continuing global economic pressures. The ship registrys high quality and service levels combined with a low cost fee structure are continuing to attract larger corporations involved in wet cargo (oil and gas) as well as dry bulk trades. The cost savings offered by the Isle of Man Ship Registry are significant, especially for their larger vessels.
Film Production and Financing
The Isle of Man has a thriving film industry, which is subsidised by the government. The Isle of Man Film Commission (now called Isle of Man Film) was established in 1995 and has co-produced and co-financed nearly 100 feature films and televisions dramas, with these investment worth about GBP170m to date.
Attractive tax incentives are available for both companies and film-makers wishing to use the island as a location and production base and for film management companies or co-ordinating producers of offshore productions.
Since 2007, the Isle of Mans investment in film and television has been managed by CinemaNX, and in June 2012, the government announced that it was seeking to negotiate a binding agreement with UK-based Pinewood Shepperton plc to source and advise on film investment opportunities for its GBP25m (USD39m) Media Development Fund for an initial term of five years.
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% 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, and the first New Manx Vehicles, or '2006 Act companies' as they are known, were incorporated on the same day. Each 2006 Act company will be 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.
Income tax is levied under the Income Tax Acts 1970 to 2008. 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.
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%. 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% 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 Mans commitment to a diversified economy.
In February 2010, the Isle of Man Income Tax Department launched a consultation on the future of business taxation following scrutiny of its 0/10% regime from the European Union Code of Conduct For Business Taxation Group. This review was effectively put on ice, however, until a High Level Working Party established by the European Union to review had reported back to the European Council of Finance Ministers. It was then announced in the February 2011 budget speech that the 0/10% regime would remain in place and the attribution regime for individuals (ARI) be removed from April 2012. Following this change, it is now considered that the Isle of Mans business tax regime is in compliance with the Code, but further changes cannot be ruled out in the future.
The Isle of Man is, however, 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 it has a large and growing network of tax information exchange agreements in place.
There is no general definition of 'residence' or 'ordinary residence' in Manx tax law; they are often interpreted as in English law. The concept of 'domicile' is not much used.
A person will qualify as a resident if they spend a total of six months on the island in any income tax year (April 6th to April 5th). An individual who visits for more than an average of three months each year for four or more consecutive years will also be deemed resident. There is an important short term residence concession which allows a person who owns a property on the Island to spend not more than four months in any two consecutive years in the Island and not be liable to Manx income tax.
Persons ordinarily resident on the island remain resident for tax purposes during temporary absences.
In practice, a new resident is taxed from the date of his arrival, while a person who leaves is non-resident from the date of departure.
Resident individuals are liable to tax on their worldwide income; non-residents only on income arising in the island.
In the 2012/2013 tax year the standard rate of Manx income tax for individuals is 10% on the first GBP10,500 of taxable income, rising to 20% on the balance (up from 18% in 2009/10).
Income is comprehensively defined and includes employment income and benefits (defined more or less as in the UK), income from property (less expenses and capital allowances) pensions, income from a trade or profession, and investment income. Pension contributions are mostly not taxed. Most types of interest, dividend and royalty payment originating on the island and paid to non-residents are exempt from tax.
The Isle of Man operates a deduction scheme for employment income under the Income Tax (Instalment Payments) Act 1974 as amended; this is quite similar to the UK PAYE system.
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