12.01 TAX TREATMENT OF LOSSES
Regulations have been introduced to bring provisions for the relief of losses into line with those that operate in the UK. These enable losses incurred in carrying on a trade to be set off against other sources of income for the same or previous year, or carried forward and set off against profits from the same trade in subsequent years.
A trading loss for this purpose will include deductions for capital allowances and dividends paid.
12.02 TRANSACTIONS WITH RELATED PARTIES
There are no specific regulations in the Isle of Man tax code regarding related party transactions. The Assessor has the power to make assessments to counteract the avoidance or reduction of a liability providing only if the main purpose or one of the main purposes of the transaction was the avoidance of income tax.
12.03 TAXATION OF BRANCHES OF FOREIGN COMPANIES
The trading profits of an Isle of Man branch of a non-resident company are generally taxed in the same manner as those of a resident company. Normally, the taxable profits of the branch are determined on the basis of branch financial statements. However, if the Assessor believes that the true profits of the branch cannot be readily ascertained from those financial statements, he may charge tax on a fair and reasonable percentage of the turnover of the branch.
12.04 GROUPS OF COMPANIES
There are no special rules on the taxation of inter-company dividends. A dividend is subject to income tax in the hands of the receiving company, but is deductible from the taxable income of the paying company.
Any member of a 75% group may transfer current trading losses to a profit-making member of the same group. This is called group relief. The amount of the transfer is limited to the smaller of the transferor's loss or the transferee's profit, but there is no necessity to transfer the whole of the loss up to this limit. A 75% group exists where one company owns, directly or indirectly, 75% or more of the ordinary share capital of the other, or 75% or more of the ordinary share capital of both companies is owned by a third company. However, only Manx resident companies may form part of a group for group relief purposes.
Frequently, the transferee company will pay the transferor company for the group relief received, especially if minority shareholders' interests are affected by the transfer. These payments are not deductible by the transferee or taxable in the hands of the transferor.
Losses of a company owned by a consortium of other companies, or of a 90% subsidiary of a company owned by such a consortium, may be transferred to the owning companies in proportion to their respective shareholdings, limited to the amount of their respective profits. For this purpose, a company is owned by a consortium if all its share capital is directly and beneficially owned by five or fewer companies. A consortium company must not be a 75% subsidiary of any other company.
When a company joins or leaves a group of companies or a consortium, the normal group loss relief provision has to be modified. Losses of earlier accounting periods cannot be transferred to other groups or consortium companies in a current accounting period.
12.05 CLOSELY HELD COMPANIES AND CONTROLLED FOREIGN COMPANIES
There is no specific legislation which relates directly to either of these situations. As the Isle of Man is a low tax jurisdiction, specific legislation is not felt necessary.
12.06 TAX ASPECTS OF CORPORATE REORGANISATIONS
On the liquidation of a company, its trading inventories must be valued in the company liquidated at their market value unless they are transferred to a person who carries on or intends to carry on a trade in the Isle of Man, in which case the value is the transfer price in the sale contract.
In the tax year in which the business of the company ceases, tax is assessed on the actual profits arising from the beginning of the tax year (that is, 6 April) to the date of cessation. If the actual profits arising during the preceding tax year exceed the amount that will be assessed on the normal basis of assessment, as described under "Accounting Periods and Tax Years" below, the assessment for that year will be increased to tax the actual profits.
The transfer of capital assets on a liquidation does not give rise to taxable gains, as capital gains are not taxed in the Isle of Man.
Neither the company nor the shareholders are liable for Manx tax on any liquidation distributions.
A company transferring its business to another company is subject to provisions similar to those relating to both the transfer of trading inventories and the cessation rules as applied on the liquidation of a company described in the previous section. However, if a business is transferred between two companies one of which beneficially owns the other, by concession both companies may continue to be assessed on the normal preceding-year basis of assessment described below. This concession does not allow tax losses to be transferred between the two companies.
12.07 TAX TREATMENT OF SPECIFIC INDUSTRIES
Unless a company is established as exempt, an exempt insurance company, a tax exempt bank or a non-resident duty company (see relevant sections) there is no special taxation treatment for any specific industry with one exception.
75% of the fees received by a resident company as a manager of a collective investment scheme, which is authorised under the Financial Supervision Act 1988 or is a restricted scheme within sub-section 5 of this Act, are deductible for tax purposes from total income. Their effective rate of tax therefore is 5%. Fund Managers have also been exempted from charging VAT on professional fees for managing restricted funds.
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.