Isle of Man
The Isle of Man is an established international business and finance centre, with a secure base built on a reputation for political stability, low taxation and a firmly established fiscal and regulatory environment.
The Isle of Man is an internally self-governing dependent territory of the British Crown and whilst it is situated within the British Isles, it is independent of the UK. The Isle of Man is technically a Crown Dependency of the UK but is independent in all matters except in relation to foreign affairs and defense, both of which are the responsibility of the United Kingdom Government.
Why Isle of Man companies have been so popular as listing vehicles?
One of the main advantages of an Isle of Man company is paying zero tax on trading and investment income in the Isle of Man. The Isle of Man has a customs and excise agreement with the UK. This means that for Value Added Tax, customs, and most excise duties, the two territories are treated as one. So it may be advisable to register an Isle of Man offshore company for VAT if it plans trading with the UK or EU. The Isle of Man is therefore a very good jurisdiction to incorporate a trading company if you wish to import and export goods into and out of the EU.
Some of the other common uses of the Isle of Man offshore company formation are:
- holding investment, e.g. portfolios, UK commercial property and other company shares – these activities are not taxed;
- simplified trading within the EU due to the zero rate of tax on trading income and the ability to quote an EU accepted VAT number;
- holding intellectual property since the Isle of Man is a signatory to the Paris Convention on Patents and Trademarks.
The formation of an Isle of Man company can be as quick as one hour (additional charge) once the company name approval has been applied for and received from the Companies Registry.
An Isle of Man Companies Act 2006 offshore company may be incorporated with a single shareholder, which can have a single share with zero par value. A single director is allowed and he/she may be non – Isle of Man resident.
Key advantages of an Isle oef Man holding company
Advantages to setting up your holding company in the Isle of Man:
- The Isle of Man has an excellent reputation and business infrastructure
- Political and economic stability
- Long established legal system
- Sophisticated and extensive banking system
- 0% corporate income tax (depending on certain circumstances for example companies engaged in banking or Isle of Man property transactions may be subject to a 10% tax rate)
- Dividends made to non-residents are taxed at 0%
- No withholding tax
- No capital gains tax
- No stamp duty
- No thin capitalization rules
- Losses can be carried forward indefinitely provided a continuity of business test is satisfied. There are also provisions for loss relief within groups of companies
- Double tax relief is available for foreign tax paid
Tax neutrality at the holding company level
An Isle of Man company is not subject in the Isle of Man to any income or capital taxes, there are no withholdings on account of Isle of Man tax on the payment of dividends or interest on loans, and no stamp duty or other similar taxes are levied in the Isle of Man on the issue or transfer of shares in an Isle of Man company.
The Isle of Man Companies Act 2006 provides a robust legal framework for a flexible and cost-effective corporate vehicle that is very attractive for both international businesses and investors. Key benefits include:
- a company’s articles of association can be structured in such a way as to meet the expectations of investors and accommodate the requirements of any relevant listing rules;
- there are no prescriptive content requirements for offering documents; such documents must simply contain all material information required to enable informed investment decisions to be made by recipients;
- shares can be traded through CREST (or certain other electronic trading platforms) without the need for depositary receipts and can be denominated in any currency;
- distributions (including dividends), shares buy-backs and capital returns may be made subject solely to a resolution of the directors and satisfaction of a statutory solvency test (unless provided otherwise in the company’s articles of association);
- financial assistance may be given without any statutory prohibition or restriction; and
- the UK Takeover Code applies to Isle of Man companies.
In addition, a closed-ended company is not subject to financial services regulation in the Isle of Man and there is no requirement to obtain pre-incorporation or pre-listing approval from any Isle of Man government agency (unlike in some other offshore jurisdictions).
Access to global capital markets
Isle of Man corporate vehicles have direct access to global capital markets and have established a successful track record of listing on recognized stock exchanges in London, New York, Singapore, Frankfurt and Toronto.
In relation to LSE Main Market listings, Isle of Man companies are potentially eligible for inclusion in the FTSE Indices, giving access to a larger range of institutional investors.
Isle of Man companies have also been formally included on the Hong Kong Stock Exchange’s approved list of companies and are able to list on its exchanges.
The Isle of Man, which was immediately “whitelisted” by the OECD in 2009, is a leading international finance centre that is well regarded by international governments and regulators as a jurisdiction which has co-operated fully with international initiatives (such as those against money laundering, terrorist financing and tax evasion).
In the words of the Minister of the UK Ministry of Justice, the Isle of Man “leads the way in terms of how small jurisdictions with financial services should operate”.
Other key benefits of the Isle of Man include:
- a stable and sophisticated finance industry with highly qualified and motivated professionals in law, accountancy, banking and fiduciary services (the fees for such services typically being very competitive when compared to the cost of similar service offerings in certain other offshore jurisdictions);
- a legal system that is based on the principles of English common law;
- the Isle of Man is bound by the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards;
- an established and well regarded track record of Isle of Man company listings;
- quick and simple company incorporation process: incorporation within 2 hours (for expedited service) or 48 hours (for normal service) of documents being lodged with the Companies Registry;
- economically and politically stable with substantial financial reserves; and
- in the same time zone as London.
Methods of establishing an Isle of Man holding company
There are a number of ways of establishing an Isle of Man holding company.
In relation to a new business, if the founders of a new business anticipate a listing at some point in the future, an Isle of Man holding company could be established and used from the outset.
In relation to an existing business, a new Isle of Man holding company of the existing group could be established by way of a group re-organisation (usually effected by way of a scheme of arrangement or a share for share exchange) or the existing foreign holding company could be re-domiciled to the Isle of Man (subject to satisfaction of certain conditions).
Tax issues for Isle of Man Companies
Corporate income tax
The corporate tax rate in the Isle of Man (IoM) is zero for all companies except in the case of income from banking, Manx land and property and retail businesses with substantial profits on which tax is payable at a rate of 10%. This means that a company resident in the island will generally not need to pay any corporate income tax on profits earned in the island. Profits earned in other countries will not be subject to Isle of Man tax but they may be subject to tax in those other jurisdictions if the IoM Company is deemed to have a taxable presence there.
In many countries any income earned in the territory of that jurisdiction will be subject to tax there. So although the Isle of Man Company will not be subject to tax in its home jurisdiction it will be taxed on its profits earned elsewhere under the tax system of the other country.
Some countries only tax profits under their domestic law if the company earning the income has a permanent establishment in that jurisdiction. A permanent establishment would be a fixed base such as an office or factory, or could be a construction site that continues for a particular period of time. In this case a company from outside that jurisdiction that does not have a fixed base there may not be subject to tax on some income that it earns, however the definition of a permanent establishment in the relevant tax law would need to be studied carefully to make sure of this.
The concept of permanent establishment can also be introduced into double taxation agreements, which allocate taxable income between the two contracting states where a resident of one state earns income in the other state. However the Isle of Man has only entered into comprehensive double taxation agreements with a few countries, including the UK.
Currently there is a move to tighten up permanent establishment rules and the UK for example has already introduced a diverted profits tax to ensure that companies cannot artificially avoid become liable to tax by circumventing the definition of a permanent establishment in the UK. This means that it will in future be even more difficult for an Isle of Man company to perform any business in the UK and not pay tax there on its income.
The Isle of Man does not charge any taxation on capital gains. This can be useful both for trading companies and for individuals forming Isle of Man companies to hold investments, but care must be taken not to fall within anti-avoidance legislation of other countries such as the UK. The use of artificial schemes to use an Isle of Man company to avoid UK capital gains tax by UK individuals has been combated by the UK government which has powerful anti-avoidance legislation in place.
Nevertheless in the context of ordinary business activities the absence of tax on capital gains is a useful feature of the Isle of Man tax system and increases the attractiveness of the Isle of Man as a place for investment and doing business.
Exchange of tax information
In line with the international standard on transparency in tax matters the Isle of Man has in recent years signed a number of agreements with other countries providing for the exchange of tax information. This means that the Isle of Man can exchange information with many other jurisdictions about the tax affairs of individuals or companies in either jurisdiction.
Generally the provisions for exchange of tax information worldwide are being strengthened and it is becoming increasingly easy for tax administrations to gain information about the worldwide tax affairs of individuals or companies resident or holding funds in their jurisdiction. The arrangements for the exchange of tax information are contained in double tax treaties or in agreements for the exchange of tax information.
Some international agreements for the exchange of information also exist and the Organization for Economic Cooperation and Development (OECD) is currently encouraging more countries to sign up to international agreements and international standards on transparency and exchange of information. The Isle of Man has committed itself to reaching the international standard on automatic exchange of information by 2016.
Anyone looking at possibilities for using a company based in a jurisdiction that charges zero corporation tax on that company must be aware of the possibility that various kinds of anti-avoidance legislation may be used by jurisdictions in which the company earns income. Some countries for example may charge higher rates of withholding tax on payments to companies in the Isle of Man while other countries will include payments to companies in low tax jurisdictions in their transfer pricing rules and apply rules to ensure that all payments to an Isle of Man company are at arm’s length.
General anti avoidance rules
It is also worth noting that many jurisdictions are introducing general anti avoidance rules (GAAR) under which transactions considered to be artificial in nature can be disregarded for tax purposes. This means that where purely artificial transactions are set up with the main purposes of securing tax advantage taxation could be imposed on the real transaction or any tax advantage could be disregarded. The UK for example has passed a general anti abuse rule targeting transactions considered to be abusive.
Controlled Foreign Companies rules
Controlled foreign companies (CFC) legislation has been introduced by most major economies such as the UK to prevent profits being accumulated in a non-resident company that is controlled by persons who are resident in that state. Under the CFC rules certain income arising in the controlled foreign company is apportioned among the non-resident shareholders and is deemed to be part of their taxable income.
CFC rules in the UK and other jurisdictions would operate to prevent persons resident in the UK or similar jurisdictions from setting up companies in the Isle of Man to accumulate income without this income being subject to tax. Under the general tax rules of the UK the income of an Isle of Man company owned by UK resident shareholders would not be taxable until paid back to the UK as dividend income, but under the CFC legislation the income would be apportioned and taxed on the UK shareholders in the period when it arises.
Another point to consider is that the whole subject of CFC rules is currently being considered by the OECD as part of its action plan on base erosion and profit shifting (BEPS). Recommendations are to be made to governments with a view to strengthening these rules to combat tax base erosion. These rules are therefore likely to be strengthened further by all major economies in the future.
The Isle of Man government strives to maintain its reputation and seek to ensure that the Isle of Man continues to be a popular destination for company incorporation.
We have 2 decades of experience in the incorporation and management of asset holding companies, whether it be for owning property, or for other reasons such as holding an investment portfolio.
We do not simply incorporate Isle of Man companies; we always take a client’s needs and personal circumstances into consideration before deciding upon which jurisdiction of incorporation will be best and most suitable.
Owning your assets through a company can reduce or eliminate inheritance tax, capital gains tax and income tax, and afford confidentiality (seen as a major benefit for those clients residing in high risk countries).
Asset holding companies can also circumvent the need for the granting of probate, an often time consuming and expensive process, and play a vital role for long term family financial planning.
We are happy to examine possibilities with you for as long as it takes, in order to find the best solution for you and your family.
Please do not hesitate to contact us for more information on how we might be able to benefit you in the ownership of your assets.