Isle of Man: Zero Rate of Corporate Income Tax in the Isle of Man

Last Updated: 31 July 2006
Article by Nick Verardi

The Isle of Man is now in its 21st year of unbroken economic growth and has been able to maintain its coveted AAA credit rating from both Standard and Poor’s and Moody’s credit rating agencies since the year 2000 which strengthens the Isle of Man’s reputation as a well regulated jurisdiction for international business.

In response to recent OECD and EU initiatives, the 2006 Isle of Man budget saw the implementation of the Isle of Man tax strategy which has been the subject of much planning, fine tuning and consultation over the past 5 years. The result is an innovative and proactive corporate income tax strategy which will strengthen the Island’s competitive position internationally.

With effect from 6th April 2006, the general rate of corporate income tax in the Isle of Man is 0%.

A higher 10% rate of corporate income tax will apply to the following sources of income only:

  • income arising from banking business carried on by banks licensed under the Isle of Man Banking Act 1998. Income arising from sources which do not constitute banking business will be chargeable at the general 0% rate; and
  • income derived from land and property in the Isle of Man. This will include both rental income and profits derived from dealing in or developing land in the Isle of Man.

The result of taxing these income sources at a rate of 10% means that some companies may have profits split between the two rates of tax.

The Isle of Man Treasury Minister has also confirmed that the Isle of Man Government has no intention of introducing capital gains tax in the Isle of Man and there will continue to be no stamp duty or taxes on wealth.

Repeal of Income Tax Exempt Company Status and Other "Exempt" Regimes

Up until now it has been possible for Isle of Man companies to apply to the Isle of Man Assessor of Income Tax for income tax exempt status if certain criteria are satisfied, for example, if the company does not derive income receipts from persons in the Isle of Man, no person in the Isle of Man has an interest in the ownership of the company and the company does not engage in any one or more prescribed trades or businesses. Upon payment of an annual fee such companies are exempt from Isle of Man income tax. In addition, any dividends, interest, shares of profits or directors remuneration paid by such companies to persons not resident in the Isle of Man are not subject to Isle of Man withholding tax.

To address the international concerns regarding all offshore "exempt" regimes, Isle of Man income tax exempt companies and companies with non-resident tax status will now be migrated into the new domestic tax system. This migration will be effected over a transitional period as follows:

  • Companies which held Isle of Man income tax exempt status or non-resident tax status prior to 6th April 2006 can retain their income tax exempt status or non-resident tax status until 5th April 2007;
  • No new companies with income tax exempt status can be formed on or after 6th April 2006;
  • Income tax exempt status and non-resident tax status will not be available for any companies after 5th April 2007;
  • From 6th April 2007 all Isle of Man incorporated companies will be treated as Isle of Man resident for tax purposes and subject to the zero rate regime described above.

Audit Exempt Status

Regulations made pursuant to the Isle of Man Companies Acts 1931-2004 enable private companies which satisfy certain criteria to elect to be exempt from the requirements set out in the Companies Acts 1931-2004 which relate to the audit of accounts.

In order to qualify for election for audit exemption, a company must be a private company and must satisfy one of the following criteria:

  • it is a company which has income tax exempt status or non-resident tax status; or

it is an "audit exempt company".

Until recently, a company qualified as an "audit exempt company" in any financial year if:

  • its turnover in that year did not exceed £1,000,000; or
  • throughout that year all its members were directors and it existed wholly for the purpose of holding shares, securities, other investments or land;

and it was not regulated.

In light of the implementation of the new Isle of Man tax strategy, the introduction of the zero rate of corporate income tax and the forthcoming repeal of special income tax exempt regimes, the Isle of Man has amended and widened the audit exemption thresholds. As a result a company will now fall within the definition of an "audit exempt company" in any financial year if at least two of the following three conditions are met:

  • its turnover in that year does not exceed £5.6 million;
  • its balance sheet total does not exceed £2.8 million at any time during that year; or
  • it employs no more than 50 persons at any time during that year; and it is not regulated.

A private company will also continue to fall within the definition of an "audit exempt company" in any financial year if all its members are directors and it exists wholly for the purpose of holding shares, securities, other investments or land and is not regulated.

Isle of Man Withholding Tax

As mentioned above, any interest paid by Isle of Man income tax exempt companies to persons not resident in the Isle of Man is not subject to Isle of Man withholding tax.

Notwithstanding the removal of the income tax exempt status regime, the position will remain unchanged in respect of interest paid by Isle of Man companies to companies not resident in the Isle of Man. The Isle of Man Income Tax Division has announced that with effect from 6th April 2006 the Isle of Man will not charge withholding taxes on interest payments made by Isle of Man companies to non-resident companies and it is proposed that with effect from 6th April 2007 the Isle of Man will not charge withholding taxes on dividend payments made by Isle of Man companies to non-resident companies or individuals.

The Distributable Profits Charge—Relevant to Companies with Isle of Man Resident Owners

The new Distributable Profits Charge (the DPC) will be introduced with effect from 6th April 2006 for all companies for the year of assessment 2006/2007 onwards to coincide with the introduction of the new zero rate of corporate tax. The rationale behind the DPC is to discourage companies from rolling up profits in the 0% tax regime. The DPC is payable by the company only in respect of profits that are attributable (but not distributed) to owners of the company resident in the Isle of Man. Accordingly, the DPC will not be payable where all owners of the company are resident outside the Isle of Man or in respect of the proportion of any distributable profit that is attributed to nonresident owners. The DPC will also not apply to certain listed companies.

The Corporate Charge

The 2006 Budget has also introduced the ‘corporate charge’. This is a new concept and has been set at £250 and will be payable annually by each corporate taxpayer (except those that have been specifically exempted and those that currently pay a fee e.g. if a company decides to apply for income tax exempt status for the 2006/2007 tax year it will not be required to pay the corporate charge). It is envisaged that the corporate charge will be creditable against any liability to income tax that a company may have if, for example, it derives any income from banking business or from land and property in the Isle of Man. The rationale behind the corporate charge is to offset the loss of fee revenue to the Isle of Man Government from the elimination of the income tax exempt status regime and other exempt regimes whereby exempt companies paid £475 each year, and companies with non-resident tax status paid £1,000 each year, to the Isle of Man Government.

Tax Cap for Individuals

Another new concept introduced by the 2006 Budget is the cap of £100,000 on an individual’s income tax liability, commencing on 6th April 2006. This cap will be available, on application to the Assessor, for all individual taxpayers, both current residents and new residents.

A consultation exercise has now been commenced by the Isle of Man Income Tax Division with a view to introducing a cap on corporate tax liabilities—primarily aimed at banks— which could form part of the Island’s future taxation strategy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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