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.

The new 0% tax regime is intended to stimulate inward investment by businesses establishing on the Island, and will also 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 current 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 Treasury’s stated intention to move to an overall zero rate of corporate income tax when revenues permit.

The Treasury says it will now give further consideration to the timing and level of a cap based on the consultation results.

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

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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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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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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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.

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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.

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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