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 February, 2004, Treasury Minister, Allan Bell revealed that the government intended to extend a zero rate of corporate tax to businesses involved in the space and satellite industries. The jurisdiction planned to move towards a zero tax rate for all businesses by 2006.

In February, 2005, Treasury Minister Allan Bell delivered his 2005 Budget, announcing a zero rate of income tax for six more sectors of the Island's economy - manufacturing, film, e-gaming, tourist accommodation, agriculture and fishing.

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'. This includes 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).

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 5th April 2006.

Resident companies pay an annual charge from April 6th 2006, which is 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, 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.

The new 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.

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 Distributable Profits Charge 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 do not distribute their profits may be required to pay the Distributable Profits Charge on behalf of their Manx-resident shareholders.

The Distributable Profits Charge 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.

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.

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.

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, will no longer be available for any company.

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

Only that part of a distribution which exceeds 100% of the distributable profit of an accounting period will be 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 will applies to all accounting periods ending after April 5, 2009. 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.

The standard value-added tax (VAT) rate in the Isle of Man increased to 17.5% with effect from January 1, 2010, in line with the UK.

The VAT rate cut to 15% entered into force on December 1, 2008, but was always considered as a temporary measure to buoy consumer consumption during the recession.

Special arrangements were put in place to ease the administrative burden of those who traded through New Year's Eve into New Year's Day, such as bars and telecoms businesses – again in line with the UK; for these businesses, the VAT rate reverted to 17.5% after 6:00 am on January 1. For most registered businesses, however, the increased standard rate was effective after midnight of December 31, 2009.

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.”

The remainder of this page deals with the corporate income tax regime as it existed until April, 2006.

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Isle of Man Scope of Corporation Tax

Income tax is levied under the Income Tax Acts 1970 to 1995. 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.

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Isle of Man Corporation Tax Rates

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 £500,000 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 £500,000 to £100,000,000 (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.

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Isle of Man Calculation of Taxable Base

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.

Payments of dividend, bonus, interest or profit shares to shareholders or associates are deductible from pre-tax income (and are untaxed in the hands of residents - but see Withholding Taxes below concerning non-residents).

75% of fees received in return for managing an authorised collective investment scheme are deductible (a public, resident investment company can deduct all its management expenses).

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

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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 stipulates that the tax rate on trusts for the fiscal year 2009/10 will be set at 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.

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Isle of Man Filing Requirements and Payment of Tax

Companies (associations) in the Isle of Man must make a return on Form R1(c) by 30th June, for the preceding year's income. The Assessor of Income Tax calls for returns, assesses income tax, issues notices of assessment to income tax and generally combines the functions exercised in the UK by Inspectors and Collectors of Taxes and the Commissioners of Inland Revenue. The income tax year runs from April 6 to the following April 5, as in the UK. Income tax is payable to the Assessor on or before 1 January for the year ending on the following 5 April. Interest is chargeable on unpaid tax from 1 January in the year to which the assessment relates.

Isle of Man Withholding Tax

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.

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