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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."
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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.
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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.
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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.
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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 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.
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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.
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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.
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