Isle of Man: Isle Of Man Tax Planning Structures

Pauline Doyle, Partner Ernst & Young Isle of Man

Currently, there are twelve basic entities which are capable of use in a tax planning structure involving the Isle of Man, namely:-

1. Isle of Man Tax Exempt Company
2. Isle of Man International Company
3. Isle of Man International Limited Partnership
4. Isle of Man Resident Company
5. Isle of Man Special Deduction Company
6. Isle of Man Limited Liability Company
7. Isle of Man Guarantee Company
8. Manx Family Foundation
9. Isle of Man Tax Exempt Trust
10. Isle of Man Special Purpose Trust
11. Foreign Company administered in the Isle of Man
12. Transfer of Domicile

The key features of each entity are outlined below:

• Income must originate from outside the Isle of Man, except bank interest
• Company must be beneficially owned by a non-Isle of Man resident
• Management and control within the Isle of Man
• At least one director and company secretary must be resident in Isle of Man
• The company secretary must have certain professional qualifications
• Exemption fee of £400 per annum is payable

The concept of the exempt company is retained within an international company (See IoM International Company) but the latter is to offer greater flexibility amongst other advantages. For any tax year, eligible companies may apply to be classed as either an exempt company or an international company.

• The key features of the International Company (IC) introduced in 1994 are as follows:-
• An IC will not be permitted to carry on business or have a source of income on the Island except deposit interest
• The company must be beneficially owned by non-resident(s) in the Isle of Man
• At least one director and the secretary must be resident in the Isle of Man
• The status is available to Isle of Man and foreign registered companies, as well as to Isle of Man branches of foreign companies
• There are two methods of assessing tax on the income of the IC:

1. On application, a minimum tax charge of £1,200 (insurance companies, a minimum tax charge of £2,000)
2. If not, an IC will be subject to a tax charge between the minimum tax charge and a maximum rate of tax of 35%, on the taxable income of the company

The International Business Act 1994 also dealt with the taxation of certain limited partnerships, international limited partnership (ILP). The requirements are very similar to those applicable to an IC. Key features are:-

• A limited partner in an ILP is exempt from liability to Isle of Man Income Tax
• Such a partner must be resident out of the Isle of Man
• A fee of £400 per annum is payable by a qualifying ILP
• No limitation of 20 members for partnerships involved in the management, ownership or charter of ships and aircraft.

• Income arising usually in isle of man
• Usually beneficial ownership by Isle of Man resident
• Residence, management and control within Isle of Man
• At least one director resident in Isle of Man
• Income Tax of 20% is payable on taxable profits (with a provision that the first £100,000 of taxable profits can be taxed at 15%)
• Generous capital allowances and government grants available for approved manufacturing companies.

In certain tax arrangements, for example, for an Isle of Man subsidiary or branch to avail of a participation exemption (either Dutch or Swedish), it is advisable (i) to use a "regular tax" and resident Isle of Man company and (ii) it is desirable to have the lowest actual "reasonable" tax rate applied to taxable profits, usually 2%. For this purpose, an Isle of Man resident company, officially taxed at 15% or 20%, is used. However, in order to achieve an effective low tax rate, it is possible to agree, with the Isle of Man Assessor of Taxes, a tax deductible charge, for example 90% of profits, to be described as, for example, management fee, amortisation or, in insurance companies, special reserve. This will, therefore, reduce the taxable profit base, to which the regular corporate rate of 15% or 20% is applied. Summary key features are as follows:

• Company must be beneficially owned by a non-Isle of Man resident
• Income must originate from outside the Isle of Man
• "Special" agreed high tax deductible charge
• Income Tax at 15% or 20%, effective tax rate much lower

• The Limited Liability Companies Act 1996 permitted the incorporation of an "offshore" LLC in the Isle of Man. Key features are as follows:-
• The company has legal personality and capacity for the exercise of its purposes and powers
• The company can choose to be "open-ended" or to be dissolved within a fixed period
• The liability of its members is limited to the extent of their contribution to its capital
• Restrictions are imposed on the transfer of members interests in the company
• The management of the company is vested in the members in proportion to their contribution to the capital of the company or as otherwise permitted by this Act
• The company must be wound up and dissolved on the happening of certain events such as the death or resignation of a member
• The profits of the company will be treated as the income of the members for the purposes of Income Tax
• If no members resident in the Isle of Man, as an international LLC, profits are exempt from Isle of Man taxation - exemption fee of £400 is payable

• Pure guarantee company - all the members are guarantee members with no shareholder
• Hybrid guarantee company - class of shareholder entitled to capital and at the same time, guarantee members entitled to dividend
• Management and control must be exercised within the Isle of Man
• If beneficial ownership outside Isle of Man, no Isle of Man taxation
• Guarantee membership ceases upon death or resignation
• Can have a protector (as often found in trusts)
• Can have many of the characteristics of a trust

• A variant of the Isle of Man company limited by guarantee
• Members are elected and can resign - they guarantee debts of the company to a nominal extent
• The founder is elected, and a board of directors is appointed
• Assets transferred into the foundation as a subscription, beneficial ownership of assets is vested in the foundation
• Not subject to rules against perpetuities and accumulations
• Very important - the Manx family foundation can trade
• Recognised in civil law countries
• If no Manx beneficiaries, there is no Isle of Man taxation

• All beneficiaries are non-Isle of Man residents
• All trust income originates from outside Isle of Man except bank interest
• No exemption fee is payable.

• The purpose trust allows a company's assets to be held by an independent offshore entity which carries out its duties in accordance with special purpose trust deed
• Purpose trusts are used for international treasury or finance operations, to place assets "off balance sheet" for confidentiality, or other reasons, as part charitable trusts and often for simple commercial reasons
• No tax due if all beneficiaries are non-Isle of Man residents and all trust income arises outside Isle of Man except for bank interest

• The Isle of Man may conveniently be used as a place for the administration of companies incorporated in other jurisdictions without the necessity for any permission from or disclosure to any authorities
• No local tax payable except flat rate fee of £400 (as Isle of Man exempt company) by such companies provided that they are resident outside the Island. Where it is desirable to have a place of business in the Island a foreign company may register there
• Requirement to file on the public record details of its directors and shareholders (who may be nominees) and to file a copy of its statutory documents (or a certified translation if they are not in English)

• Under the Companies (Transfer of Domicile) Act 1998, which entered into force on 1 June 1998, a company that is incorporated outside the Isle of Man and does not carry on any banking, insurance and investment business or other specified activity may apply to the Isle of Man Treasury for consent to be continued in the Isle of Man.
• An Isle of Man public company that has its shares listed on a prescribed exchange may apply to the Treasury for consent to be continued in a country or territory outside the Isle of Man, as if it had been incorporated under the laws of that country and to be discontinued under the Isle of Man Companies Act.