The Isle of Man

Background: history and government

The Isle of Man, 32 miles long and 12 miles wide and located in the centre of the British Isles between Ireland and England, is one of the three Crown dependencies, the others being the Channel Islands of Jersey and Guernsey.

Although the Isle of Man has come to share with the Channel Islands this constitutional status and indeed its position in the early 21st century as an offshore financial centre, its history is quite different. The island was settled by the Vikings during the ninth century and in view of its strategic position in the centre of the Irish Sea, it was a natural place for the administration of the Norse kingdom which originally comprised the Isle of Man and the western Isles of Scotland. The Norse parliament, the Tynwald, was established in the second half of the ninth century as the assembly for this kingdom, but after the Norse lost control over the western isles of Scotland the Tynwald continued as the parliament of the Isle of Man.

In 1266 sovereignty over the Isle of Man passed from Norway to Scotland and ultimately the island became subject to the English Crown in 1765. It did not, however, become part of the United Kingdom and throughout this history the island continued to be subject to laws made locally by Tynwald and subject to the jurisdiction of its two Deemsters (the island’s equivalent of two high court judges). At the same time, however, its legal system developed under English common law principles to have an independent judiciary and democratically elected government. Tynwald is considered to be the oldest continuously operating parliament in the world.

The head of state of the Isle of Man is Her Majesty the Queen, not, however, in her capacity as the Queen of England but as the Lord of Man, the title inherited from the Norwegian kings to whom Tynwald originally owed its allegiance. The Lieutenant Governor is Her Majesty’s personal representative on the island. Other Crown offices include those of First and Second Deemster, and Attorney General, who is the legal adviser both to the Crown and the island’s government.

The Isle of Man has a cabinet form of government with a Chief Minister elected by Tynwald and nine ministers chosen by the Chief Minister from Members of Tynwald. Tynwald comprises two chambers. The House of Keys (the lower House) has 24 members elected every five years in a general election. There are no party politics, as most candidates for the House of Keys stand as independents. The Legislative Council is the upper House, with eight members elected by the House of Keys. The Legislative Council also includes the Attorney General and the Lord Bishop of Sodor and Man, as ex-officio members. The name of the diocese “Sodor and Man” derives from the name of the ancient Norse diocese, being the Sudreys (or the Southern Isles and Man).

Tynwald is a sovereign parliament; however since coming under English influence the British parliament in London commonly legislated for the Isle of Man. The 20th century saw the gradual but steady reversal of the practice, so that today almost all statute law applying on the island is passed by Tynwald.

The island (in common with the other Crown dependencies) is fiscally independent, responsible for its own revenue and expenditure. However, the United Kingdom Government is responsible for the defence and international relations of the Isle of Man, and is ultimately responsible for its good government. The people of the Isle of Man are British citizens and carry British passports issued locally.

The Customs and Excise Agreement 1979 between the Isle of Man and the UK reflects a historical arrangement between the two countries known as the Common Purse agreement, which provides that the Isle of Man remains in a customs union with the UK and does not charge any import duties on goods from the UK, or that have been imported through the UK, in return for a share in the United Kingdom's Customs and Excise revenues.  This means that VAT is be charged on the Isle of Man at the same rate as in the UK, as are duties on goods such as liquor and fuel. Effectively this means that the Isle of Man is in a customs union with the UK and the rest of the European Union and places the island within the European VAT area.

When the United Kingdom negotiated its entry into the European Union, or rather the Common Market as it was then known, the Crown dependencies negotiated the special relationship as set out in Protocol 3 to the United Kingdom's Treaty of Accession. Under this special relationship the island is neither a member state nor an associate member of the European Union, but there is free movement of goods and trade between the island and the EU. The Isle of Man neither contributes to, nor receives from, the funds of the European Union. Of course because of the customs agreement between the UK and the Isle of Man, as described above, the Isle of Man is unique among the Crown dependencies in that it has VAT and is part of the EU for VAT purposes.

The island's economy

The island’s traditional industries of fishing, agriculture and tourism have declined in importance in the last 25 years as a result of the growth of the island’s financial services sector. However, these sectors still provide considerable employment and are socially and politically important. The Isle of Man Government offers a wide range of subsidies and other financial support to these industries.

The Isle of Man never had high income or corporate taxes, and never had inheritance or capital taxes, but key strategic policy decisions, as well as the introduction of numerous regulatory and compliance statutory regimes from the early 1980s (many of which were introduced in collaboration with similar changes introduced in the other Crown dependencies) led to a wide range of finance industries establishing and growing on the Isle of Man. Banking, life assurance, captive insurance, company and trust administration, ship management, fund administration and the accountancy and legal professions became the major employers and reversed earlier decades of net emigration, average levels of unemployment and lack of investment. Light and high tech manufacturing has also been an important employer for many years. More recently, film production, superyacht management and registration, civil aircraft registration and e-business initiatives have attracted new businesses and employment to the island.

Today unemployment levels are very low (below 1.5%, 2006), government capital investments levels in new hospitals, schools, and energy and other infrastructure projects are substantial, GDP levels exceed those of the United Kingdom and government revenues are in surplus. The Isle of Man’s government debt status has been granted AAA rating by Standard & Poors and by Moodys. New problems, such as housing costs, development and increased levels of immigration are of political concern. The new tax strategy of the island’s government, of zero corporate tax and the individual’s tax cap (see details below) is now aimed at attracting high value individuals to manage and control their business in and from the Isle of Man, rather than attracting large employers.

The local currency is the Manx pound, which is on a par with the British pound. There is no exchange control.

Taxation

Corporate tax

In 2006 the Isle of Man government implemented its much heralded zero corporate tax strategy, applicable to all Isle of Man incorporated and resident companies, taking the island out of the ever decreasing group of offshore jurisdictions still operating the old “exempt” regimes which have received so much international condemnation over recent years and ensuring that the Isle of Man is now fully compliant with its international commitments.

With effect from 6 April 2006, the general rate of corporate income tax in the Isle of Man became 0%. A higher rate of 10% applies only to income derived from land and property in the Isle of Man (such as rental income and profits derived from dealing in or developing land), and, for licensed banks, income arising from banking business. Banks’ income arising from sources which do not constitute banking business are chargeable at the general 0% rate. Government has proposals to introduce a cap on corporate tax for banks.

There are no withholding taxes payable in relation to interest or dividends paid by Isle of Man companies to companies not resident in the Isle of Man.

Personal tax

Personal income tax has also been the subject of significant change in 2006 with the introduction of a simple tax cap, whereby the maximum liability to Isle of Man income tax falling upon an Isle of Man resident individual has been capped at £100,000.

There are two bands of income tax for individuals, 10% on the first £10,500 of taxable income and thereafter the top rate is 18%. These rates are however subject to numerous allowances and reliefs, for example the single personal allowance is £8,670 (fully transferable for married couples), and mortgage and loan interest paid to an Isle of Man lender is fully deductible.

A distributable profits charge has been introduced as a measure to avoid the avoidance of income tax by Isle of Man resident individuals on income earned from Isle of Man companies which of course are now subject to the zero corporate tax rate. Essentially, to the extent that Isle of Man companies are owned by Isle of Man residents, and to the extent that they fail to distribute income to the shareholders up to certain prescribed levels of distributable profit, they will be subject to a tax charge in place of the tax charge which otherwise would have been made on the Isle of Man resident shareholder in respect of the distribution of income. This will not impact on companies not owned by Isle of Man residents, and numerous classes of companies, such as companies listed on certain prescribed exchanges such as, for example, AIM, are exempt.

This has made available an extremely simple form of tax structuring whereby if an individual becomes Isle of Man resident and moves the management and control of his company to the Isle of Man, then he should be able to receive all distributable income from a company which itself is untaxed in its jurisdiction of main residence, and the individual would be subject to an absolute cap of £100,000 on his personal income derived from the company.

The Isle of Man has no capital, wealth or inheritance taxes.

Indirect taxes

The principal source of revenue for the Isle of Man Treasury derives from indirect taxes, such as VAT and duties, which, as stated above, the Isle of Man charges in common with the UK. Another tax, which is levied on the Isle of Man at the same rates as in the UK as part of a mutually agreed arrangement, is national insurance.

International agreements

The Isle of Man only has one double taxation agreement, with the United Kingdom, dating from 1955. It is similar to the arrangements between the UK and Guernsey and Jersey. Briefly, the main provisions are that profits derived from an industrial or commercial enterprise in one country will not be taxed in the other country except to the extent that they are attributable to a permanent establishment, and an individual resident in one country is exempt from tax in the other on services performed in the other provided they are taxed in his own country. If tax is payable in both countries, tax paid in one country is allowed as a credit against tax due in the other.

The Isle of Man has also entered into a bilateral agreement in 2005 with the Netherlands whereby the Dutch government recognised the island as a legitimate state with which to do business and endorsed the Isle of Man’s new tax strategy. Under the agreement, the two governments will, inter alia, work towards a full double taxation agreement and a tax information exchange agreement.

The Isle of Man has also signed a bilateral agreement with the United States of America, which provides for the exchange of information on tax matters between the two countries.

Business entities

Company law

From 1 November 2006 the Isle of Man has introduced new companies legislation which is likely to provide the model for companies incorporated under Isle of Man law for all types of fund and other investment, trading and asset holding structures and special purpose vehicles, although the pre-existing companies legislation, the Companies Acts 1931-2004, will continue to be available for clients who wish to form companies based upon the traditional English law based legislation.

The new corporate vehicle is governed by the Isle of Man Companies Act 2006. This is a flexible and modern corporate vehicle. Some of its key features include: no requirement for authorised share capital; no capital maintenance requirements (subject to satisfaction of a solvency test); no prohibition of financial assistance; reduced compulsory registry filings; less prescriptive accountancy requirements; no distinction between public and private companies; simplified offering document requirements; ability to have single directors and (within certain limits) corporate directors; no requirement to hold an AGM and availability of transfer of domicile procedures, re-registration procedures and merger and consolidation procedures.

Companies can be formed as:

• a company limited by shares
• a company limited by guarantee;
• a company limited by shares and by guarantee;
• an unlimited company without shares; or
• an unlimited company with shares,

and as protected cell companies.

Companies will be required to appoint a registered agent in the Isle of Man who holds the appropriate licence granted by the Isle of Man Financial Supervision Commission for the purposes of provided corporate and trust services.

Further features of the legislation include lack of restrictions of the types of shares which may be issued, unlimited capacity, removal of regulation in respect of public offerings other than the imposition of statutory duties upon directors, no restrictions on distributions of income or capital subject only to solvency, and lack of prescriptive requirements in relation to the preparation and auditing of accounts.

The fundamental structure of companies established under the new Act will however be familiar to lawyers from the English and common law jurisdictions, with management being in the hands of a board of directors upon whom the traditional English law common law and fiduciary duties are imposed for the benefit of members and creditors. This is all coupled with additional and wide-ranging statutory remedies available for the protection of members’ interests and the existing regulatory regime which imposes standards upon corporate service providers and registered agents.

These companies will be taxed at the zero rate in accordance with the principles set out above, but, in common with other companies incorporated under Isle of Man law, will be subject to an annual corporate charge, set for 2007 at the rate of £250. The exempt and non-resident regimes for companies (and the associated charges) are in the process of being phased out.

Companies limited by shares and having a share capital (also known as hybrid companies) have always existed under Isle of Man company law and have been used in structures requiring discretionary distributions of income or capital with no corresponding beneficial ownership.

Other types of business entity

The Isle of Man partnership law is closely based upon English law. Limited partnerships are commonly used in offshore structuring including for collective investment structures and asset and trading structures. The limited liability company structure, or LLC, commonly used in the United States is also available under Isle of Man law. This creates a legal entity with limited liability which is owned by and may be managed by its members but which is transparent for tax purposes, the company itself being disregarded for tax purposes.

Trusts

Isle of Man trust law, in common with other areas of its common law (such as contract and tort) has developed under the influence of and in parallel to English law. A trust is a legal relationship under which one or more persons ("the trustees") receive assets from another person ("the settlor") to hold for the use or benefit of specified persons ("the beneficiaries") on defined terms. The trust imposes strict obligations on the trustees to manage and deal with the assets in accordance with those terms. The effect of the trust is to give beneficiaries equitable rights that can be enforced in a court.

As a low-tax but regulated jurisdiction which has a modern and effective judicial system, the Isle of Man continues to be popular jurisdiction for the establishment of trusts, usually discretionary or interest in possession trusts. Purpose trusts are also available. The island trust statutes mirror in most respects the English equivalents. For example the Trustee Act 2001 was enacted to widen the powers of trustees, as well as to impose safeguards for beneficiaries, and was modelled on the UK Trustee Act 2000.

As already stated, there is no capital gains tax and there are no inheritance, gift or estate taxes in the Isle of Man. Trustees may be income tax payers, however, and may be obliged to file tax returns when they are resident in the Isle of Man. Isle of Man trusts with Isle of Man resident beneficiaries are subject to income tax at 18% on undistributed income. However, where the beneficiaries are resident outside the Isle of Man and the income arises outside the Isle of Man (or is bank interest) there will be no Isle of man taxation in respect of trust income.

Summary of attractions

In many ways, the Isle of Man is a benign, stable jurisdiction. Geographically it is close to Europe and the UK, an hour’s flight from London and within the same time zone, and only half an hour from Manchester or Dublin. Both internally, and in terms of its relationship with the United Kingdom and Europe, it is politically stable. Financially it is in good shape notwithstanding huge capital investments recently made in its education, health, energy and other services over recent years. It is an island of low crime and high employment and quality of life, with lots of open space. Its legal system is based on the common law principles of English law, one of standards for international trade and finance. Its very low rates of direct taxes make it an attractive place for businesses to be based, particularly in view of its excellent transport and telecoms infrastructures. The new zero rate of corporate tax and the new individual tax cap have already attracted substantial interest.

The professional services available also make it an attractive jurisdiction for, for example, banking, insurance and fund administration. As an example, it has in the last two years become a most popular jurisdiction for the establishment of closed-ended listed funds because of its professional standards and competitive costs in the banking, administrative, accounting and legal sectors as well as the transparent and simple zero tax rate, and this before the benefits of a simplified company law regime were introduced, as they were being in November 2006. Similar successes have been seen in many other sectors, such as ship management, company management and the insurance and investment industries. At the same time the Isle of Man’s government continues to support all variety of private sector industries from agriculture, manufacturing, film and e-business to banking and insurance, aviation and shipping.