An extract from The Private Wealth & Private Client Review, 9th Edition
This section is not intended to provide a comprehensive overview of the Isle of Man’s tax rates and practices, but instead to provide a high-level summary as context for the wealth structuring and succession planning considerations being discussed.
i Personal taxation for individuals
Manx-resident individuals are subject to taxation on their worldwide income at rates of up to a maximum of 20 per cent, with generous personal allowances on which no tax is paid. Couples may elect for joint taxation, which results in a doubling of tax allowances and income bands above which the 20 per cent rate of taxation applies.
Non-residents with income from a Manx source are liable to tax at 20 per cent on the income, with no personal allowance.
It is possible for a Manx resident to elect to cap their total income tax liability at £200,000 per annum for a five-year period. This figure is doubled for couples who have elected for the joint basis of taxation.
ii Other taxes
Most companies in the Isle of Man are subject to corporation tax at the rate of zero per cent. There are exceptions for licensed banks and local retail businesses with a taxable profit above £500,000, both of which are taxed at a rate of 10 per cent, and for income derived from Isle of Man land and property, which is taxed at 20 per cent.
Value added tax (VAT), currently at the rate of 20 per cent, applies to the supply of most goods and services in the Isle of Man through a system that is substantially the same as that in the United Kingdom, albeit that it is administered separately by the Isle of Man’s Customs and Excise Division. The island is treated as part of the United Kingdom for customs, excise and VAT purposes under its Customs and Excise Agreement.
The Isle of Man does not impose taxation on capital gains, nor is there any inheritance tax, wealth tax or stamp duty.
iii Cross-border structuring
The Isle of Man has an extensive network of double taxation agreements and, as a responsible and forward-thinking international financial centre, it is also party to many tax information exchange agreements. There is no withholding tax on payments of interest or dividends from the Isle of Man, and no transfer pricing legislation.
In response to challenges by the EU Code of Conduct Group on Business Taxation, the Isle of Man, together with the Channel Islands, introduced economic substance requirements legislation with effect from 1 January 2019. This legislation codified what was already seen as best practice, imposing core substance requirements on companies operating in sectors that could be classified as ‘geographically mobile’. These sectors are: banking; insurance; shipping; fund management (excluding collective investment vehicles); financing and leasing; headquartering; distribution and service centres; holding companies; and intellectual property.
In very simple terms, the central requirements are that the companies are directed and managed in the Isle of Man, conduct core income generating activities in the Isle of Man and that they meet the physical substance requirements.
Failure to comply with the substance requirements may result in disclosure to foreign tax authorities, imposition of civil penalties of up to £100,000 or issuing strike-off notices.
iv Taxation matters for entrepreneurs
The island’s tax system is highly conducive to entrepreneurs, with the absence of taxes such as corporation tax, capital gains tax and stamp duty, which can be a drain on working capital. The favourable regime for entrepreneurs is further aided by the individual tax cap, which means that shareholders may extract profits from their business by means of dividends while still limiting their overall tax liability to just £200,000. For new arrivals to the island, a Key Employee Concession has been introduced, which limits the individual’s income tax liability to Manx source income only for a maximum period of three years. This could be especially beneficial to entrepreneurs with substantial streams of income from outside the Isle of Man, but who wish to relocate to the island to establish or support the growth of a business that is in the interests of the island’s economy.
The favourable corporation tax regime makes the Isle of Man a location of choice for international holding structures because it offers tax neutrality without the need for reliance on specific relieving provisions, such as the substantial shareholding exemptions on the receipt of dividends. This tax neutrality, combined with the stability of both corporate and tax legislation, is a significant factor in the use of Isle of Man companies for holdings on the UK’s alternative investment market (AIM), with the Isle of Man being a jurisdiction of choice for incorporation outside the United Kingdom for AIM-listed companies. This is of significant value to entrepreneurs because it provides a ready-made route to market in the event that there is a need for raising capital, or indeed for the ultimate exit from a business through a public offering.
A further benefit to international business operations is the flexibility permitted in cross-border transactions. The absence of transfer pricing legislation and controlled foreign company rules means that, while business structures and interactions must reflect the true economic structure and commercial reality (as is required, for example, under the Organisation for Economic Co-operation and Development (OECD)’s Base Erosion and Profit Shifting framework), it is possible for international businesses to arrange their internal affairs with relative freedom without the need to consider artificial tax constraints, which can be the unintended consequence of such legislation.