Isle of Man: E-Commerce
Planning the Tax Structure
This page was last updated on 24 February 2020.
The Isle of Man has no general capital gains tax, turnover tax, capital transfer tax or stamp duty. Apart from VAT, the only significant tax is income tax which is levied on 'persons', i.e. 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.
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, e.g. 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.