Isle of Man: International Tax and Business Guide 1999 - Business Entities - 8.Other Forms

Any company that is incorporated outside the Isle of Man and which has either an established place of business or holds land in the Island must file with the Registrar of Companies:

• A certified copy of its memorandum and articles of association.
• A list and particulars of its directors and secretary.
• A list of names and addresses of one or more persons resident in the Isle of Man authorised to accept communications and notices.

Both general and limited partnerships can be established in the Isle of Man. Partnerships in the Island are governed by the Partnership Act 1909, which is based on the UK's Partnership Act 1890 and Limited Partnership Act 1907.

Foreigners or foreign corporations may become partners in an Isle of Man partnership, although individuals may require work permits.

A partnership business name must be registered at the General Registry in Douglas if that name does not consist of the names of all the partners. There is no requirement for other information, such as the partnership agreement or financial statements, to be filed at the General Registry.

Partnerships should normally be constituted by a written agreement, although this is not legally essential.

If a partner dies or wishes to leave the partnership, or a new partner is admitted, this can necessitate its dissolution, although a successor partnership can be quickly restructured.

A trust is formed by a person, the settlor, who transfers the ownership of property to others, the trustees, for the benefit of third parties, the beneficiaries. The essential fact is that the settlor is no longer the legal owner of the property held in trust, although he may still influence those who may make use of the assets to some degree. It is possible to form a trust where the settlor may also be a beneficiary, through his enjoyment of the right to some or all of the income of the trust, or his entitlement to some or all the assets of the trust, or both.

Manx trust law is set out in the Trustee Act of 1961 and is based very closely on UK trust law. This may have advantages in determining legal issues relating to trusts. The trust law covers areas such as the creation and duration of a trust, the appointment and duty of trustees, liability for breach of trust, and the termination of a trust.

On the successful application of an interested party, the courts in the Isle of Man will enforce a trust and control the exercise of the trustees' fiduciary powers. No public register of trusts exists, and there is no requirement to file accounts or other information. Consequently, Manx trusts may maintain confidentiality.

The Isle of Man imposes a 20% income tax on companies (15% on first £100,000 of profits of a trading company) and other entities resident in or deriving income from sources within the Island. However, international business activities may be conducted by a number of entities free of the Island's income tax, provided certain conditions are satisfied. The most important of these entities are as follows.

The exempt company form enables a company to be established on the Isle of Man entirely free of Manx income tax. The particular advantage of an exempt company is that it may be managed, controlled, and operated from the Island provided all its receipts and income arise outside the Island, from dealings with other exempt companies, or from investment in approved Manx financial institutions, and its activities are not specifically excluded from the benefit of the exempt company provisions as described below. The Treasury can by regulation protect the Island's domestic tax base or provide new opportunities for the use of exempt companies. Exempt companies must not have any Manx resident shareholders, but at least one director and the company secretary must be resident on the Island. A similar tax-exempt status may be enjoyed by the branch of a non-Manx company registered on the Island and satisfying the exempt company conditions. The annual audit requirement can, on agreement of all the shareholders, be dispensed with.

An exempt company may undertake any type of business except those specifically excluded by an order of the Manx Treasury. The activities currently excluded from taking place in the Island are manufacturing, retailing, wholesaling, distribution, fishing, agriculture, horticulture, building, land development, land speculation, and exploration for or extraction of minerals or petroleum at or from any location within the Island or its territorial waters. These activities are permitted elsewhere in the world for an exempt company. In addition, the provision of trustee services, corporate, accounting and legal services provided to the general public cannot be undertaken by an exempt company.

Exempt companies may receive interest from Isle of Man banks and other approved financial institutions tax-free.

An exempt company must pay a fee of £400. This, together with the application for exemption, must be submitted to the Income Tax Division of the Treasury annually.

Exempt companies are required to file their annual returns with the Registrar of Companies. However, annual financial statements are not required to be filed.

The Isle of Man exempt company legislation has been extended to incorporate several changes and additional legislation known as the International Business Act 1994 has been enacted. The main features of this legislation are as follows:

a) Investors may register their company as either an exempt company or as an international company.

b) An International company may pay income tax at any rate from 1% to 35% of its profits. The exact rate of tax can be agreed with the Assessor of Income Tax at the time of filing its annual return.

c) A public company may apply to become an international company.

d) An international company paying tax at 15% or more will be within the Isle of Man/United Kingdom double tax arrangement.

e) A company, currently restricted from registering as an exempt company, will in certain circumstances be able to register as an international company. This enables an exempt insurance company to pay Manx tax at an agreed rate should it wish to do so.

The most significant change perhaps is b) above. If a company based in the Isle of Man is required by its parent to be tax paying in the Isle of Man for controlled foreign company legislation purposes this may be achieved. The exempt company legislation will run in parallel with the new Act, thereby permitting the continued activity of those companies from the Isle of Man, without suffering local taxation. It is considered that companies will continue to register under the 1984 Exempt Companies Act unless it particularly requires to pay Manx income tax.

The legislation also provides for international business to be carried on from the Island in the form of a limited partnership.

Providing the limited partnership is registered and;

• has all its limited partners, other than partners which are international companies, resident outside of the Island; and
• does not carry on a restricted trade; and
• has a general partner which is a company registered on the Island and qualified to be an international company;

then all the profits of that partnership will be exempt from Manx income tax.

The advantage of using a partnership as a business entity rather than a limited company is because its residence position is not determined by the central management and control test. In addition, for tax purposes it is transparent. A partnership is therefore often more flexible in international tax planning than a limited company.

Special provisions enable insurance companies to operate from the Island free of Manx income tax. Insurance companies qualify for exempt status if they are incorporated in the Island, or incorporated outside the Island and registered under the appropriate section of the

Manx Companies Act. Their underwriting profits and losses must arise solely from risks undertaken outside the Island, or with other exempt insurance companies.

An exempt insurance company must be licensed to carry on an insurance business in the Island by the Insurance Authority. It must satisfy additional conditions to those applying to normal companies in order to ensure proper supervision of insurance business on the Island. These additional conditions include:

• Minimum share capital must be £50,000 for a captive insurance company, £100,000 for a company undertaking general insurance business, and
• £500,000 for a company undertaking life insurance business.
• A solvency margin, which varies with the type of business being undertaken, must be maintained.
• Annual financial statements and quarterly returns must be filed with the government's Insurance Authority.
• At least half the directors must be resident in the Isle of Man.
• The directors, secretary, and managers of the company must have appropriate experience in the insurance business.
• The auditors of an insurance company must have professional indemnity coverage of at least £10 million.

An exempt insurance company must pay an annual fee of £2,500.

A company incorporated in, but managed and controlled outside, the Isle of Man that carries on its trade or other business outside the Island and that has filed a non-resident declaration at the General Registry is treated, for Manx tax purposes, as non-resident and as deriving its income from sources outside the Island. Consequently, it will not be liable to Manx income tax. Such companies do, however, pay an annual non-resident duty of £775 per year.

By concession, non-resident duty companies are permitted to receive interest from Manx-approved financial institutions and distributions of income from Manx-approved investment companies without losing their tax-free status.

A company's liability to any income tax on income from any kind of property within the Isle of Man is reduced by its non-resident duty.

A non-resident duty company must submit an annual return to the Registrar of Companies but need not file audited financial statements. However, in exceptional circumstances the Income Tax Division of the Treasury may request the audited financial statements.

A company can become non-resident or cease to be non-resident during a year of assessment. Such a company will not be assessed to income tax in respect of income for the part of the year in which it is non-resident.

Following the Edwards Report the Isle of Man Government have put a moritorium on the formation of new non-resident companies with effect from 6 April 1999. It is likely that this moritorium will become permanent.

Limited Liability Companies ("LLC’S")

The Limited Liability Companies Act 1996 has now received royal assent.

The principal factors of the Act in the context of LLC’s are:

• it will be a body corporate which is a legal entity separate from its members;
• the members of the company will have their liability limited to the extent of the capital which they introduce;
• management rests with the members although a manager can be appointed;
• taxation of the company will be similar to that of a partnership, the profits of the company will be divided amongst the members and will be taxed in their hands;
• it will have a life which is limited to a period not exceeding 30 years.

The laws of many states in the United States of America permit the incorporation of such companies and the Act follows closely the concepts contained in the Wyoming Limited Liability Company Act.

For Manx tax purposes a member of an international LLC will not be liable to pay Manx income tax on income received from that company. The company, on payment of a fee, will apply to the Assessor for a certificate of International LLC status. The conditions surrounding excluded activities and the manner and timing of the payment of the fee are similar to those contained in the International Business Act.

A hybrid company (a company limited by guarantee which also has a share capital) is being increasingly promoted around the Isle of Man as an alternative offshore structure to a trust.

The tax planning advantages of this entity are limited, particularly for the United Kingdom domiciled beneficial owners. The attraction lies more in the greater flexibility offered by a hybrid than a trust.

A hybrid company is a company formed as a company limited by guarantee but which also has a share capital. There are two forms as follows:-

• a company whose members contribute to the capital of the company and acquire rights, pro rata to their contribution to the capital and are issued with the shares, but who are additionally required to contribute to capital should the company subsequently go into liquidation;
• a company where some of the members contribute to the capital of the company and acquire rights, pro rata to the contribution to their capital, and are issued with shares but who are additionally required to contribute to capital should the company go into liquidation, and the rest of its members are elected into membership without being required to contribute to capital on election but who can be required to contribute to capital should the company subsequently go into liquidation.

Members can therefore be, either, both shareholders and required to contribute to capital upon liquidation; or in only one of these two categories.

Where a company is formed such that the shareholders are in a different category to the non-shareholder members it is possible to separate, completely, control of the company from the beneficial interest. A hybrid can be formed such that professional administrators hold all the issued shares of the company and in whom the voting and administrative powers of running the company are vested whilst the beneficial owners can be the non-shareholder members in whom would be vested all the rights to income and the capital. In this way only the non-shareholding members can actually benefit from the company.

The Purpose Trusts Act 1996 has recently been enacted onto the Statute Book in the Isle of Man.

The Act enables a person to form a trust in the Isle of Man for a period not exceeding 80 years, providing the purpose of the trust:

• is certain, reasonable and possible, and;
• is not unlawful, contrary to public policy, or immoral.

The trust must be created by deed or will; have at least two trustees and must provide for the appointment of a person, independent of the trustees, to enforce the trust.

The "enforcer" will have an absolute right to access any information or document which relates to the trust, its assets, or administration.

A purpose trust is designed for more general use than a usual trust, i.e. it will not be for the benefit of particular identified persons or for charitable purposes.

Open-ended Investment Companies

An open-ended investment company is similar to a unit trust or mutual fund. Normally, an investor in such a company will acquire redeemable preference shares in the company and may subsequently realise his investment by selling or redeeming those shares. The capital of the company therefore varies with the number of acquisitions and redemptions, and the value of the redeemable preference shares reflects the value of the underlying investments of the company. Often a separate management company is established to manage the investments.

The shares of an open-ended investment company may be offered for sale to the public in the UK or in other countries, provided an appropriate prospectus is issued and filed in the country in question. In order to increase flexibility for investors, the investments of an open-ended investment company may be divided between a number of separate funds; for example, into different types of investment or different currencies. Investors may often be able to switch from one fund to another.

Open-ended investment companies will usually be formed either as exempt companies or as approved investment companies.

The 1989 Income Tax Act introduced provisions whereby the whole or part of the profits or income of a managed bank may be exempted from liability to income tax.

The following conditions must exist:

a) the bank must not transact any business with any person except another bank, resident in the Island;

b) the bank must be granted a licence by the Financial Supervision Commission;

c) he bank must be managed by the holder of such a licence.

The Assessor will not pursue the liability to income tax of non-resident persons in receipt of dividends, interest, share of profits or remuneration from a tax exempt managed bank.

A managed bank will have to submit accounts to the Assessor only when requested to by the Assessor. This is unlikely to be on an annual basis.

There is an annual fee of £25,000 which obviously restricts the use of such entities to large concerns.

Where all the beneficiaries of a Manx trust are resident outside the Isle of Man and all the income of the trust arises from sources outside the Island, the trust will not be liable to Manx income tax. By concession, such trusts are also permitted to receive interest from banks and other approved financial institutions in the Isle of Man free of income tax. Normally, no other taxes in the Island apply to trusts.

The exempt company is a favourable vehicle in which to own and charter shipping and aeroplanes. Not only can accumulated profits be retained in the Island tax free until repatriated but also the ownership of a ship in an Isle of Man company affords the ship all the privileges of being on the UK shipping register.

The information given is not exhaustive and is based on conditions existing at 5 May 1999. Readers are advised to consult with professionals, such as independent accountants, legal counsel, and investment bankers, before taking any formal action. Deloitte & Touche would be pleased to discuss specific problems.