Isle of Man's offshore tax and legal regimes

The term 'offshore' is not used in Isle of Man legislation or in describing company forms. Prior to 2006, non-residence was the key criterion for obtaining offshore tax treatment other than for the International Company and Exempt Company, which were regarded as being resident. Until 2006, the main forms useful for offshore operations in the Isle of Man were the Exempt Company, the International Company, the International Limited Partnership, the Limited Liability Company (LLC) and the Trust. Normally, non-resident tax treatment is given to foreign income, while income arising in the Isle of Man is taxed more highly.

In December 2000 the OECD announced the Isle of Man's commitment to eliminate harmful tax practices by 31 December 2005 which secured the jurisdiction's deletion from the OECD list of countries deemed to possess "harmful" tax practices.

The OECD said it welcomed the commitment, which includes undertakings in favour of transparency, non-discrimination and effective co-operation. No timetable has been established for these moves, and the announcement was made before US resistance to the OECD forced the organisation to back off some of its proposals including those for 'non-discrimination' and upwards harmonisation of tax rates. Later, the Isle of Man made clear that changes would only take place if they were mirrored in other, comparable jurisdictions - the famous 'level playing field'.

With the introduction of its '0/10' taxation regime in 2006, under which corporation tax is abolished except for a 10% levy on financial institutions, the Non-Resident Company, the Exempt Company and the International Company forms were abolished.

Tax Treatment of Offshore Operations

See Domestic Corporate Taxes for the general principles of Isle of Man corporate taxation, which also apply to offshore entities except as indicated below.

As from 2006, taxation (at 10%) applies only to 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 following text applies to the situation prior to 2006, although existing non-resident, exempt and international companies were permitted to retain their existing status until the end of 2006.

Offshore Manx companies were taxed as follows:

Non-resident limited liability companies (and foreign branches with non-resident status) were liable to an annual duty of GBP830, payable to the Registrar of Companies along with the annual return. They were exempt from income tax on foreign-derived income, but paid Isle of Man higher-rate income tax (18%) on any local income.
Exempt Companies paid a fee of GBP475 along with their annual application for exemption (more if it is late). They were not permitted local income, except (untaxed) bank interest (by concession).
International Companies (which, like Exempt Companies, were not permitted local trading income) negotiated a rate of tax up to 35% on their foreign income (minimum tax to be paid = GBP1,260). The intention was to help companies, particularly investment companies, conform to minimum tax requirements imposed by other jurisdictions.

Non-resident partners in a Manx partnership, limited partnership or Limited Liability Company are liable for tax only on Manx-derived income (with the usual concessions regarding bank interest), and then as individuals (see Personal Taxes).

Effective 1st April 2006, all IOM captive insurance companies became liable for tax; however the tax rate is zero per cent.

Previously, (captive) insurance companies could apply to be exempt from IOM income tax under the Income Tax (Exempt Insurance Companies) Act 1981. As with exempt companies in general, application for exempt status had to be made annually, with a total fee for insurance companies of GBP2,500. Normally exemption only applied to underwriting of risk arising outside the island. Applications were made to the Chief Financial Officer.

Trusts with non-resident beneficiaries are exempt from Isle of Man income tax on income arising outside the island and (by concession) on IOM bank interest.

There are no special rules applying to the foreign or Manx employees of offshore operations. The various exemptions from income tax described above do not apply to employees: any business employing and paying people on the Isle of Man will have to operate the ITIP system of deductions from pay (based on and similar to the UK PAYE system). It is not legal to employ non-Manx people on the island without a work permit. See Domestic Personal Taxes for the general principles of individual taxation on the island, which also apply to the resident employees of non-resident entities. Most types of compensation and benefit paid to employees are taxable; there are no special privileges or exemptions for expatriate workers.

There is no statutory definition of residence. The Isle of Man often follows the UK in this respect. Normally, an individual is resident if he spends more than six months on the Island in any one year, or more than 3 months on average in each of 4 consecutive years.

Non-residents are liable to pay Manx income tax only in respect of income arising on the island or from Manx sources. By concession, Isle of Man bank interest is not taxed in the hands of non-residents.

For exempt companies, International Companies and International Limited Partnerships, activities on the island were limited to administration of external business, or dealing with other exempt organisations. Non-resident companies could have activity on the island, but not such as to constitute management and control; in their case, and in most other cases, there could be trading activity on the island, but it was taxed. As long as the operation was not judged to be resident (when all income was taxed) income was simply split according to its source and taxed or not accordingly.