company formation isle of man

Introduction/summary: The Isle of Man has a double taxation agreement only with England, and therefore only from an English point of view it is no offshore company. Therefore, the Isle of Man is only suitable as shareholder of the English Limited company. Any profits of the English Limited company flow into the Isle of Man and are taxed with only approx. £ 450 per year. In addition, the Isle of Man Limited company may send invoices to the English Limited company, which means capital outflow from the English Limited company before withholding tax.

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 at a maximum rate of 18% on 'persons', ie individuals or corporations (companies). In its budget for 2002/03 the government reduced lower rates of income tax to 10%. 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). The island forms part of the EU VAT area, and applies the same rate as the UK.

According to plans announced in mid-2002, the rate of corporation tax will be reduced to zero for all companies other than banks and some other financial services companies, in stages over a 4-year period.

Meanwhile, companies can take advantage of a number of offshore regimes in order to reduce taxation. The term 'offshore' is not used in Isle of Man legislation or in describing company forms. Non-residence is the key criterion for obtaining offshore tax treatment other than for the International Company and Exempt Company, which are regarded as being resident. The main forms useful for offshore operations in the Isle of Man are the Exempt Company, the International Business, 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 July, 2004, the Income Tax (Amendment) Bill 2004 was signed, marking an important step towards the programme of changes under the island’s Taxation Strategy, whilst also helping the jurisdiction to meet its international commitments, said Treasury Minister Alan Bell.

“One of the most significant changes that will impact on individuals on the Island is the move to a current year basis of assessment including the introduction of a payment on account,” Mr Bell explained.

He added: “The change to current year basis of assessment and the introduction of the new payment on account system will be achieved this year. When the next income tax return form is issued in April 2005, people will have a longer period to complete it - there will, however, be a new late filing penalty system.”

The Act includes measures to:

Extend the current year basis of assessment to all income received by individuals and other non-corporate taxpayers, including income from investments, self-employment and other sources. (Income from employment is already on a current year basis).
Introduce a payment on account system for those people who do not pay their annual income tax liability through the Income Tax Instalment Payment or Sub Contractor’s Deduction Schemes.
Allow more time to make a tax return and, after a period of education, introduce a late filing penalty system.
Provide the Assessor with additional powers to obtain information, including documents and information required to enable the Island to comply with its international commitments.
Prevent the avoidance of Manx tax through the use of company loans to take advantage of the differential between corporate and personal income tax rates.

"As I said when I introduced this Bill last year, the people of the Isle of Man are entitled to an income tax system that works as efficiently as possible and collects all the money that is owed to public funds,” Mr Bell continued, noting:

“Manx income tax rates are low compared with other countries and it is not unreasonable to expect payment of what is due. It is also important for the reputation and stability of the Island that we have the ability to honour our international commitments.”

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.

Offshore Manx companies are taxed as follows:

Non-resident limited liability companies (and foreign branches with non-resident status) are liable to an annual duty of £830, payable to the Registrar of Companies along with the annual return. They are exempt from income tax on foreign-derived income, but pay Isle of Man higher-rate income tax (18%) on any local income.
Exempt Companies pay a fee of £475 along with their annual application for exemption (more if it is late). They are not permitted local income, except (untaxed) bank interest (by concession).
International Companies (which, like Exempt Companies, are not permitted local trading income) negotiate a rate of tax up to 35% on their foreign income (minimum tax to be paid = £1,260). The intention is 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). The International Limited Partnership, which is analogous to the International Company, pays £475 annually with its application for such status; it may not have local income other than bank interest.

(Captive) insurance companies can 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 must be made annually, with a total fee for insurance companies of £2,500. Normally exemption will only apply to underwriting of risk arising outside the island. Applications are made to the Chief Financial Officer.

As a consequence of its commitment to the OECD, the Isle of Man announced in its 2002 budget that shipping and insurance companies would be brought within the regular income tax system, but at a zero rate.

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.

Taxation of Foreign Employees of Offshore Operations

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.

Exchange Control

The Isle of Man has no exchange controls.

Offshore Activities

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

Employment and Residence

There are no special privileges for the employees of non-resident or offshore entities on the Isle of Man. See Personal Taxation - Residence and Liability for Taxation and Labour Regulation - Work Permits for further information.