Isle of Man Domestic Corporate Taxation

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 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). 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 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, the future of the '0/10' system was subject to some uncertainty, having attracted the attentions of the European Union's Code of Conduct on Business Taxation (see below).

The VAT rate cut from 17.5% to 15% entered into force on December 1, 2008, was considered as a temporary measure to buoy consumer consumption during the recession and the increased rate of 17.5% became effective again after midnight of December 31, 2009.

The standard value-added tax (VAT) rate in the Isle of Man increased to 20% with effect from January 4, 2011, in line with the UK.

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.”

In December 2010, the Manx government's review of the 0/10% regime was effectively put on ice until a High Level Working Party established by the European Union to review the Code of Conduct for Business Taxation had reported back to the European Council of Finance Ministers (Ecofin). The Working Party was not expected to report its findings to Ecofin until June 2011.

However, it was 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.

Treasury Minister, Anne Craine MHK, said in her speech: "the Isle of Man Government considers that with the removal of the ARI, our business taxation system does not have features which can be considered to be harmful under the provisions of the Code of Conduct, and we have today communicated that view to the Chair of the Code Group." She added: "We remain committed to our policy of being a good neighbour, which encompasses being responsive to the views of the European Union. At the same time, the Isle of Man is fiscally independent, and participates in the Code of Conduct process on a voluntary basis."

Isle of Man Scope of Corporation Tax

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.

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.

Isle of Man Corporation Tax Rates

The standard rate of corporate income tax in the Isle of Man is 0%. The 0% rate was introduced on April 6, 2006 and applies to the profits of accounts that form the basis of a company’s 2006/07 income tax assessments and any subsequent accounting periods. For rates prior to 2006/07, see below.

Also with effect from April 6, 2006, a 10% rate of tax applies to income received by a company from any of the following sources:

Resident companies pay an annual charge from April 6 2006, which was 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 (GBP360 at the time of writing), 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.

Companies qualifying for the 0% corporate tax may elect to pay tax at 10% in order to avoid the Distributable Profits Charge (DPC, since replaced, see below), which 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 did not distribute their profits were required to pay the Distributable Profits Charge on behalf of their Manx-resident shareholders. The DPC 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.

In expectation of ARI being declared harmful under the European Code of Conduct for Business Taxation, it was announced in the 2011 budget that ARI would be abolished from April 2012. This move will enable the 0/10% tax regime to remain intact.

Corporate Tax Cap

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 Situation Prior To 0/10

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 GBP500,000 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 GBP500,000 to GBP100,000,000 (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.

Isle of Man Calculation of Taxable Base

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.

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.

Foreign investment income is normally treated as 'franked'; but the rules are complex, particularly for the UK (and see the Double Taxation section).

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, 2009.

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, is no longer available for any company.

The option to treat the part of a distribution exceeding 55% of trading distributable profit as a distribution from reserves is also no longer be available; and the whole of a distribution of up to 100% of the trading distributable profit of an accounting period is included for averaging purposes.

Only that part of a distribution which exceeds 100% of the distributable profit of an accounting period is 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 applies to all accounting periods ending after April 5, 2009 until April 5, 2012 (see above). 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.

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 stipulated that the tax rate on trusts for the fiscal year 2009/10 was 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.

Isle of Man Filing Requirements and Payment of Tax

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 (including the Distributable Profits Charge and Loans to Participators); from a year of assessment basis to an accounting period basis “pay and file” system.

As companies will be assessed on an accounting period basis, returns will be issued at the end of a company’s accounting period. The due date for the filing of company tax returns is 12 months and one day after the end of the accounting period. This is also the date by which payment of any income tax liability or charge must be made. Returns can be filed and payments can be made before the due date.

If the return is not filed by the due date, a late return penalty will be charged. A second penalty will be charged if the return is still outstanding six months after the due date. Interest may be charged on any income tax liability or charge that is not paid by the due date, and will be calculated from the due date; no matter when any form of payment notice was issued.

Returns for accounting periods can now be completed and submitted online, together with payment of any liability due, using Online Tax Services.

Isle of Man Withholding Tax

There are generally no withholding taxes on interest, dividend and royalty payments. Exceptions include interest payments made by financial institutions in the Isle of Man to residents of EU member states under the savings Tax Directive, where a 20% withholding tax applies (although the Isle of Man intends to switch to automatic exchange of information from July 1, 2011 when the rate increases to 35%), and a 20% withholding tax on royalties paid to individuals in jurisdictions which do not have a tax treaty with the Isle of Man.

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.

Lowtax Jurisdictions

Isle of Man: Domestic Corporate Taxation

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