Isle of Man: Offshore Business Sectors
Investment and Fund Management
This page was last updated on 24 February 2020.
The first Manx investment (mutual) funds were established in the mid-1960s and were mainly used by British expatriates. The island's fund management industry expanded rapidly after legislative changes were introduced in the early 1980s. The Isle of Man became the first offshore jurisdiction to be granted 'designated territory status' by the UK in 1986, enabling Manx funds to apply for social investment business recognition in the UK. The 1991 introduction of a 5% tax on fund managers' profits provided a further incentive to look towards the island.
The Financial Supervision Act 1988. established the Isle of Man Financial Services Commission (IOMFSC), which exercises regulatory powers. The Financial Services Act 2008 and the Collective Investment Schemes Act 2008 (‘CIS Act’) consolidated the main pieces of legislation which had hitherto regulated the Isle of Man's financial services industry.
Fund management activities are currently included in the Isle of Man's 0% corporation tax regime. Investment funds can take the form of companies (open or closed-ended), trusts, limited partnerships or pure contractual arrangements.
As in other offshore jurisdictions, managers on 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. The leading association in the island is the fund management association.
In July 2005, the IOMFSC revised its policy dictating who may locally act as a custodian to an experienced investor fund (EIF) or professional investor fund (PIF). In addition to licensed banking institutions in the Isle of Man, the IOMFSC considers licensed investment businesses with a category 4 or 5 licence.
Such licence holders wishing to act as custodians are assessed individually, taking into account the type or nature of the underlying scheme assets. A licence holder must also demonstrate that it is an entity with adequate financial resources and sufficient track record, competence, experience and systems to do so.
The IOMFSC's previous policy, under which only a licensed banking institution can act as a custodian in the Isle of Man, was retained for persons wishing to act as trustee/custodian of an authorised or 'pure' international scheme.
Experienced Investor Fund
The experienced investor fund has now been superseded by the qualifying and specialist funds, so no new experienced investor funds can be established.
In 2013, the Alternative Investment Fund Manager Directive (AIFM Directive) was implemented. Its aim was to put hedge funds, private equity and other alternative investment firms under a regulated framework. Following up from this, implementation of a second directive, AIFM II, began on 2 August 2019. The main change of AIFM II is that it redefines what constitutes pre-marketing.
Regulatory Framework Reviewed
The Collective Investment Schemes (Legacy) Regulations 2010 abolished international schemes. No new schemes were permitted, though existing funds were allowed to continue. International schemes were superseded by the regulated fund, of which the following types exist:
Authorised Collective Investment Scheme
Any scheme established in the island which is promoted to the general public in the island (or the UK by virtue of the island's designated territory status) must be authorised by the IOMFSC under Schedule 1 to the CIS Act. Authorised schemes are subject to detailed regulation concerning their structure and operation. Note that the Authorised Collective Investment Schemes (Compensation) Regulations 2008 only applies to investors in authorised schemes.
Other Fund Types
All these funds are 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.
- The specialist fund (SF) is only available to specialist investors –generally institutional investors and high net worth individuals. The minimum investment in a SF is US$100,000.
- The qualifying fund (QF) is only available to qualifying non-retail investors.
- The professional investor fund (PIF) is only available to professional investors who are generally market professionals and who have net assets in excess of $1m. The minimum investment in a PIF is $100,000.
Exempt schemes (as defined in Schedule 3 to the CIS Act) must have less than 50 investors. Their relevant constitutional documents must expressly prohibit inviting the public to subscribe in any part of the world. Exempt international schemes are regarded as private arrangements and are not subject to regulation.
Collective investment schemes which are managed in or authorised under the law of another country or territory outside the Isle of Man may not be promoted to the general public in the island unless they have been granted recognition by the IOMFSC under Schedule 4 to the CIS Act. Once granted recognition, a recognised scheme may be promoted to the general public in the island.
Under the Collective Investment Scheme (Fees) Order 2019, annual fees are as follows:
- Authorised scheme funds:
- single-tier funds pay GB£1,573 per fund
- umbrella funds pay £867 per sub-fund;
- Recognised scheme funds:
- CIS Order 2019 Schedule 4 paragraph 1 funds pay £1,894 per fund
- Single-tier funds under Schedule 4 paragraph 2 pay £2,108 per fund
- Umbrella funds under Schedule 4 paragraph 2 pay £706 for each of the first 10 sub-funds, then £493 per sub-fund
- International scheme funds
- Full international schemes pay £1,733 per fund
- Other international schemes pay £814 per fund.
Fund managers require a business licence: the annual fee costs £12,318 for managers of authorised funds, and £8,052 for managers of international collective schemes (including professional and experienced investor & overseas funds). See Law of Offshore for further details of the regulatory structure of investment funds.