Isle of Man: An International Finance Centre of Excellence

Last Updated: 5 July 1999

For the past fifteen years the Isle of Man has enjoyed steady growth and continues to cement its position as a leading international finance centre. Its image as the jurisdiction for professionals has been enhanced by sophisticated international business attracted by the versatility and effectiveness of vehicles like Professional Investor Funds (PIFs), Limited Liability Companies (LLCs) and Purpose Trusts.

INTRODUCTION

Geographically the Isle of Man is part of the British Isles. The Isle of Man is a Crown Dependency and does not form part of the United Kingdom. The UK Government is responsible only for the Island's foreign representation and defence which are services paid for by the Isle of Man. Dating back to Viking origins over one thousand years ago, the Island's parliament (Tynwald) is the oldest legislature in the world in continuous existence. Tynwald legislates on all internal matters, including fiscal affairs. The majority of members are independents, and the virtual absence of party politics encourages a high degree of consensus. This has contributed to the remarkable stability of the Isle of Man's political system.

The Isle of Man is not a member of he EU, but enjoys a special relationship with the EU as set out in Protocol 3 of the UK's Treaty of Accession, which allows free trade in industrial and agricultural products with the Single Market. The Island is not a participant in the European Single Market programme, and, as a fiscally independent country, is not subject to any harmonisation of direct taxation within the EU. However, by virtue of Protocol 3 and the Common Purse Agreement with the UK, the Island effectively enjoys customs union with the EU. As well as streamlining regular business trading, the combination of low taxation and ability to participate in the European VAT system, facilitates the conduct of EU wide triangular transactions using an Isle of Man company as intermediary.

REGULATION

Established in 1983, the Isle of Man Financial Supervision Commission was set up to develop and operate systems for the protection of, the interests of depositors and investors, and the good name of the Isle of Man. It licences and supervises all banks, investment businesses, collective investment schemes and building societies carrying on business in the Island.

The Island's Financial Supervision Commission continues to strive to further protect and enhance the Island's reputation as a well regulated finance centre. They have recently issued proposals to license corporate service providers, regulating and supervising those who form and administer companies in the Isle of Man. The aim of the legislation is to increase and develop the level of confidence which those in the international finance community have in relation to such providers. The legislation will probably come into effect from the year 2000 and licence holders will be required to comply with a code of conduct. The key responsibilities would include "Know your Customer" and, where directors are provided, the taking of reasonable steps to ensure that those directors are suitable for their role and that they understand their duties, responsibilities and liabilities as directors.

Regulation of the Island’s insurance and pensions sector is undertaken by the Isle of Man Insurance and Pensions Authority .

TAXATION

The cornerstone of the Isle of Man’s economic success has undoubtedly been a system of low taxation to which the Government is firmly committed. The Isle of Man offers attractive rates of taxation with personal tax at a standard rate of 15% with a higher rate of 20%, and generous allowances for individuals.

Local companies and trusts generally are assessable to tax at a flat rate of 20% on their taxable income which in the case of companies is charged on their profits after distribution of dividends. However there is an extensive system of exemptions and reliefs.

Non residents receiving interest and certain other forms of income paid by banks, and from other approved institutions in the Island receive payment gross without deduction of withholding tax.

However, of significance to offshore businesses is the availability of two forms of corporate entity which do not pay local tax (the "Exempt Company" and "Non Resident Company" ) while a third form, the "International Company" introduced in 1994 may elect whether or not to pay a minimum level of tax (1%) or agree a higher rate (up to 35%) to suit its international circumstances.

ISLE OF MAN COMPANIES & PARTNERSHIPS

To maintain its position as a leading and reputable quality business base the Island is proactive in introducing new innovative legislation. The Isle of Man's International Business Act 1994 introduced both the concept of the International Company and the International Limited Partnership (ILP). The ILP is a tax-favoured structure for the international ownership of vessels, collective investment schemes and other joint ventures where the limited partners have no liability to Manx income tax. The status of the ILP is that of a non-resident for tax purposes, but which has a place of business within the Isle of Man and is subject to an annual fee of £400. ILPs can be formed by limited partners who are non resident individuals or companies, or a combination.

The Isle of Man further enhanced its capacity to provide effective solutions, in particular to its American client base, by introducing the Limited Liability Companies Act 1996. Based on the Wyoming model the LLC extends the limited liability concept further by creating an incorporated entity with separate legal identity. But, in other respects, it operates as a limited partnership and, if US international revenue service policy is followed, an LLC will be treated accordingly by other jurisdictions. The LLC is flexible and easy to operate and has proved both useful and popular in areas ranging from US tax planning to transatlantic mergers.

Another recent addition to the Island's corporate legislation is the Companies (Transfer of Domicile) Act 1998 which provides for the migration of certain qualifying companies between the Isle of Man and other jurisdictions without the need for dissolution and winding up. The legislation facilitates the ease of migration and reduces the costs of moving domicile where this is commercially desirable.

BANKING AND DEPOSIT TAKING

Although the Island’s banking industry has been dominated primarily by subsidiaries and branches of the main UK clearing banks, there are a growing number of top foreign banks.

Whilst the Island's currency is sterling, deposits are accepted in all major currencies of the world. Operating within a statutory framework laid down under the Banking Acts, most banks offer a full range of services, including private and retail banking, treasury, investment management and trust administration.

TRUSTS

The Island is able to offer a full range of trust and trustee services under its long established common law based system of trust law. Key features are security, confidentiality and continuity and an absence of restriction on the accumulation of income throughout the perpetuity period.

The Trusts Act 1995 provides for certainty in trusts formed for forced heirship planning purposes and under the Purpose Trust Act 1996, trusts can now be created to fulfil a specified commercial purpose. This has contributed to the Isle of Man becoming a significant centre for aircraft leasing and financing arrangements with many high value international finance transactions taking place

INVESTMENT BUSINESS AND FUND MANAGEMENT

The Island has a thriving fund management industry which was further boosted by the reduction of taxation on fund manager profits to 5%. In addition there is no VAT on professional fees for handling Isle of Man domiciled funds. Mutual funds on the Isle of Man can take the form of companies (open or closed-ended), trusts, limited partnerships (more than 20 limited partners are allowed) or pure contractual arrangements, whilst investors can participate through the holding of shares, debt securities, units or basic contractual rights.

Most of the funds run from the Isle of Man are also "SIB-recognised" which means that they meet the strict supervision criteria for sale in the UK as well as internationally. The UK Government has recognised that Isle of Man-authorised funds are protected to standards at least as good as those in the UK. Indeed, the Island was the first offshore centre to achieve recognition as a designated territory under the terms of the UK Financial Services Act.

The Island's authorities have also responded to the international demand for fast-track collective investments with the Professional Investor Fund (PIF). PIFs allow like-minded sophisticated investors to be grouped together and offered the equivalent of custom-made vehicles with individually-tailored investment risk profiles. PIFs are subject to minimal regulation and are both quick and inexpensive to establish. PIF managers have the freedom and flexibility to invest as they like within any self-imposed constraints.

LIFE ASSURANCE AND CAPTIVE INSURANCE

The Isle of Man's financial services sector is probably best known for its international life companies. The services on offer from these insurance companies comprise insurance protection, regular savings, capital investment, pensions and some standalone collective investment funds, asset management and trust facilities. The Isle of Man was chosen as a location for these companies for a variety of reasons, principally the beneficial tax environment, but also because the Island has designated territory status under the UK's Financial Services Act. The Island also has a well-qualified labour force which is experienced in the insurance industry.

In addition, captive insurance whereby major corporations form their own subsidiaries to insure and manage their own risks are also an important form of business for the Island which now has in excess of 159 captives.

The Isle of Man insurance regulator has been comprehensively restructured to encompass pensions business as well as life and captive insurance. The Insurance and Pensions Authority will oversee the new major developments which are being planned for the sector. This includes proposals to implement primary and secondary legislation for the regulation of pension schemes. The new pensions legislation will develop a model for international arrangements which can be adapted to conform with host country regulations. Under the new regime all pension schemes set up in the Isle of Man will be authorised by the Insurance and Pensions Authority. The major targets are the world's large multinationals who will be able to take advantage of tax breaks if they base their occupational pension plans on the Island.

SHIP MANAGEMENT AND REGISTRATION

The Isle of Man has a traditional Manx Shipping Register which although over 200 years old, has only been actively promoted to ship owners and their managers since 1984. A notable feature of the Isle of Man Register is that there is no registration or tonnage tax, the only fees chargeable being those connected with the administration costs of registration, survey and certification. It should be stressed that the Isle of Man is not a flag of convenience and that Manx ships fly the British Red Ensign.

CONCLUSION

As demonstrated above, the Isle of Man has made great progress in recent years in gaining international recognition as a centre of excellence and maturity in financial services and is servicing the top end of the international financial market. Together with the space and tightly regulated but flexible systems, the overriding attractions of the Isle of Man are sound legal and regulatory systems, wide professional and commercial expertise and political stability.

Two main benefits afforded by the Isle of Man for businesses requiring a real presence offshore are the Island's relatively low operating costs and abundant room for expansion. Factors such as availability of low cost office accommodation and a well educated pool of labour, which can also be drawn from outside the Island if necessary, are of increasing importance to major corporations seeking an offshore base. Probably the most understated attraction of the Isle of Man is the quality of life, which extends from the excellence of its scenic environment to its low crime rate, and is highly valued by the local population as well as incoming residents.

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.

This article also appears in the 'International Offshore and Financial Centres Handbook 1999/2000'. For further information about this highly informative guide to offshore centres, or to order your copy, please phone +44 (0) 207 820 7733 or send an email to iofch@mondaq.com

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