Isle of Man: Tax Efficient E-Commerce

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On this Page:

- Isle of Man Planning the Tax Structure
- What to Locate in the Isle of Man
- Isle of Man Offshore Options for E-Business People

Isle of Man Planning the Tax Structure

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).

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.

In February, 2005, Treasury Minister Allan Bell delivered his 2005 Budget, announcing a zero rate of income tax for six sectors of the Island's economy - manufacturing, film, e-gaming, tourist accommodation, agriculture and fishing. At that time trading profits were subject to 10% on the first GBP100m and 15% thereafter (non-trading income was taxed at 18%)

Mr Bell confirmed that the Island - which already had the zero rate for insurance, fund management, space and satellite technology and shipping - would introduce it as a standard for business in April 2006, with a 10% rate of tax for 'financial institutions'.

The Isle of Man's 2006 budget in February, 2006, included a package of measures to further stimulate the inflow of investment and business to the Island, including the introduction of zero corporate tax as of April 5, 2006.

The 0% tax regime was intended to stimulate inward investment by businesses establishing on the Island, and was also intended to provide a consistent treatment across all sectors of the economy as part of the Isle of Man’s commitment to a diversified economy.

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.

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. But in February 2011, treasury minister Anne Craine announced in the 2011 budget that the 0/10% regime would remain in place; instead the special anti-avoidance rules would be dropped from 2012.

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, eg 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.

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What to Locate in the Isle of Man

To date, e-commerce companies have tended to focus on marketing and selling as the most likely business functions to locate offshore, but there is no reason why procurement, administration, payroll and other corporate functions should not be based offshore.

Since physical distribution can be outsourced, and in some countries doesn't even amount to a taxable presence, the use of offshore is by no means limited to digitally-downloadable products. Still, there is no doubt that the greatest cost and tax savings are available to those companies whose products can be delivered electronically, as in the following list:

Retail businesses dealing in intangibles or intellectual property, such as software or music
Electronic publishing enterprises
Online reservations
Telecommunications services
Language translation services
Education and Internet-based training
Online gift certificates

Online brokerages and other financial services, including insurance
Legal services
Software and other technical support
Research and online information services
Internet Service Providers (ISPs)
Metamediaries and access portals
Corporate services

Data warehouse centres for processing and storing data
Database management services
Certification and verification services for business and consumer documents
Hubs for secure transactions and communications
Supply chain management centres
Communications and billing hubs for fibre optic and satellite systems
Network monitoring facilities and services

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 (quite expensive) 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 2003 it appeared that the sector would become established on a long-term basis. Indeed, in January, 2004, Irish bookmaker Paddy Power announced that it intended to relocate its London-based telephone betting service to the Isle of Man, in order to take advantage of the more attractive tax regime.

The Isle of Man has been named on the UK government's e-gaming 'white list,' which allows e-gaming companies based in the Isle of Man to market their services in the UK under the UK's Gambling Act 2005 regime, which came into force in September, 2007.

In the case of the Isle of Man, its physical proximity to EU markets, its application of EU Value Added Tax, and its Ronaldsway freeport facilities mean that it can also be used as a trans-shipment or physical distribution centre for many types of product.

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Isle of Man Offshore Options for E-Businesspeople

The object of setting up an e-commerce business, or part of one, in an offshore jurisdiction, is evidently to make money, and if the tax structure is correct, profits will accumulate in a local bank from which they can be freely invested according to an individual's preferences, either by being ploughed back into expansion of the business, or into income- or capital-generating investments.

There are as many different offshore investment situations as there are offshore investors, and anyone considering making offshore investments must absolutely take appropriate professional advice. But it can be useful to have a first idea of what kind of investment, and which offshore jurisdictions, might be suitable before approaching professionals.

For this reason, lowtax.net has opened a companion web-site called www.investorsoffshore.com, which explores the world of offshore investment from the perspective of an individual with say more than USD100,000 to invest. The site has sections on the history of alternative investment and descriptions of the main types of investment, along with hints on how and where to invest.

Recognising that investment strategies are heavily dependent on a person's country of residence, life-style and future plans, InvestorsOffshore DIY Guide allows an individual to specify the broad outlines of his or her offshore investment profile, and receive in return some suggestions as to the most suitable investment route to be further explored with professional guidance.

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