Company Formation Isle of Man

Offshore Company formation – Company Formation Isle of man

• Tax planning via a network of international tax advisers and attorneys
• Why form a company in a foreign country with a tax accountant specialized in international tax law?
• Basic Considerations regarding the Formation of Companies in „Zero-Tax Havens“ i.e. in countries that have not entered into Double Taxation Agreements with other countries
• Offshore Company Formation: Tax haven rankings
• Examples for the legal reduction of corporate taxes
• DTA permanent establishment concept – Our services and fees
• Parent companies and their subsidiaries in the European Union
• Beware of cheap founders!

Company Formation Isle of Man: Isle of Man: General

• Surface area: 572 m2
• Languages: English, Manx
• Currency: Pound Sterling (own bank notes)
• Inhabitants: 76,000
• Capital city: Douglas
• Inflation: 3 percent
• Unemployment: 1.6 percent

A jewel in the Irish Sea between Ireland and Great Britain, the Isle of Man is under the patronage of the British crown. In terms of foreign policy and defence the islanders rely on the British mainland just 100 kilometres away. Up until recent times, tourism and agriculture were the main source of income for the islanders. However, today more than 45,000 British companies in particular, generate 50 percent of the gross national product through their offshore activities. The government is thus placing strong focus on transforming the island into a financial centre.

By mid 2003 approx. 70 banks and financial companies and almost 200 insurance companies were established there. Bank deposits have grown in the past ten years by more than 400 percent to approx. 40 billion Euros. But the register of shipments in Douglas is also quite impressive. Tax exemptions, low costs and a one-time registration fee have attracted foreign ship-owners. Meanwhile, more than 200 ships with a tonnage of 5.2 million tonnes fly the Manx flag.

Tax advantages, membership of the Sterling monetary area and good connections with Great Britain are the driving force behind this development. The island belongs to the EU free-trade area and with the exception of foreign policy it is exempt from all aspects of the Rome treaties; it is entitled to determine and collect its own taxes.

• Currency controls: none
• Fiscal extradition agreement: none
• Political risks: none
• Legal system: Subject to British Common Law, company and tax law are regulated by the Company Acts of 1931 and 1974.
• Patent protection: Subject to British law
• Residence: For EU citizens no problem. One must provide evidence of approx. 50,000 pound cash income. The desired tax revenue is 10,000 pounds per annum. Each foreign national that purchases property on the island, must invest an additional 50 percent of the purchase price over ten years in government bonds that are not acceptable as collateral.
• Taxes: There is no property tax, inheritance tax, gift tax or capital gains tax for residents. Should tax at source be collected on the assets of residents outside the island, these can be credited against island taxes. Income tax for resident natural and legal persons is between 15 and 20 percent of net profits. Non Resident Companies pay a flat taxation of 750 pound on their profits. Corporate tax for trading companies has been reduced from 18 to ten percent.

Losses can be presented without time restrictions or transferred within a group and depreciable mobile assets can be written off immediately. A law on exempt companies has been in place since 1984. This provides additional incentives for companies, which only conduct offshore business, to trade or invest from the island. The Isle of Man does not levy taxes on property, capital, capital gains, gifts or inheritance. Likewise, there is no such thing as stamp tax. Value added tax is at a state imposed rate of 17.5 percent.

• Double taxation agreements: only for natural persons from Great Britain
• Living costs: same as Great Britain
• Communication: good
• Travel: Car: via Liverpool. In the summer there are other connections to ports on the British Isles. Flying: via London directly to the island airport Ronaldsway
• Companies: It is advisable to establish a Non Resident Limited Company that is taxed on a lump sum basis.

In recent years the island has grown to become one of the leading captive centres in the world. Highly attractive for insurance, with well in excess of 100 companies established there – paying an annual licence fee of 2,000 pounds and fully tax-free.

With further tax advantages the government is trying to coax existing non-resident companies currently trading offshore to establish themselves on the island.

Trusts are a specific feature of the Isle of Man. These may be established by non-residents for the usufruct of non-residents. Where the income of the trust is earned outside the island, there is no taxation obligation on the Isle of Man. The Isle of Man was the first offshore centre to be afforded a special status – under the British financial services law. Thus approved investment companies and shares in mutual funds on the island can be sold in Great Britain. The annual fee income of the Trust manager is tax free.

Company Formation Isle of Man: Fees for complete packages (full service)

The following services are included in our complete packages:

Forming of the company, entry in the commercial register of the country, apostille, notarially certified translations of certificates into English, unless official language

• Nominee director: An attorney in the formation country will act as nominee director of the company (to the outside) and transfers all rights and obligations internally to the actual beneficiary (notarial deed of trust). The director does not have any account authority.
• Nominee shareholder: a tax office in the formation country will act as nominee shareholder (to the outside) of the company and transfers all rights and obligations internally to the actual beneficiary (notarial deed of trust).
• Domicile of the company in the formation country: deliverable postal address, availability by telephone, telephone and fax, mail forwarding service
• Account opening: bank account for the company at a renowned major bank in the formation country, internet banking, VisaCard and cheques. Only the founder of the company is authorized to have access to the account.
• General power of attorney to the founder: Only the founder receives a notarially certified general power of attorney for the company.
• Recommendation of a renowned tax office in the formation country, for book-keeping and accounting
• Internet-homepage of the company hosted on a server in the formation country: 5 pages for presentation of services/products, feedback form, imprint, e-mail address. May be extended at any time.

In the Isle of Man there is no general capital gains tax, turnover tax or capital transfer tax, and there are no stamp duties. Apart from VAT, the only significant tax is income tax which is levied at a maximum rate of 18% on ‘persons’, ie individuals or corporations (companies). In its budget for 2002/03 the government reduced lower rates of income tax to 10%. The Assessor of Income Tax is the head of the Income Tax Division of the Manx Treasury and carries out the functions of tax assessment and collection. The Manx tax year runs from April 6th to April 5th (as in the UK). The island forms part of the EU VAT area, and applies the same rate as the UK.

According to plans announced in mid-2002, the rate of corporation tax will be reduced to zero for all companies other than banks and some other financial services companies, in stages over a 4-year period.

Meanwhile, companies can take advantage of a number of offshore regimes in order to reduce taxation. The term ‘offshore’ is not used in Isle of Man legislation or in describing company forms. Non-residence is the key criterion for obtaining offshore tax treatment other than for the International Company and Exempt Company, which are regarded as being resident. The main forms useful for offshore operations in the Isle of Man are the Exempt Company, the International Business, the International Limited Partnership, the Limited Liability Company (LLC) and the Trust. Normally, non-resident tax treatment is given to foreign income, while income arising in the Isle of Man is taxed more highly.

In July, 2004, the Income Tax (Amendment) Bill 2004 was signed, marking an important step towards the programme of changes under the island’s Taxation Strategy, whilst also helping the jurisdiction to meet its international commitments, said Treasury Minister Alan Bell.

“One of the most significant changes that will impact on individuals on the Island is the move to a current year basis of assessment including the introduction of a payment on account,” Mr Bell explained.

He added: “The change to current year basis of assessment and the introduction of the new payment on account system will be achieved this year. When the next income tax return form is issued in April 2005, people will have a longer period to complete it – there will, however, be a new late filing penalty system.”

The Act includes measures to:

• Extend the current year basis of assessment to all income received by individuals and other non-corporate taxpayers, including income from investments, self-employment and other sources. (Income from employment is already on a current year basis).
• Introduce a payment on account system for those people who do not pay their annual income tax liability through the Income Tax Instalment Payment or Sub Contractor’s Deduction Schemes.
• Allow more time to make a tax return and, after a period of education, introduce a late filing penalty system.
• Provide the Assessor with additional powers to obtain information, including documents and information required to enable the Island to comply with its international commitments.
• Prevent the avoidance of Manx tax through the use of company loans to take advantage of the differential between corporate and personal income tax rates.

“As I said when I introduced this Bill last year, the people of the Isle of Man are entitled to an income tax system that works as efficiently as possible and collects all the money that is owed to public funds,” Mr Bell continued, noting:

“Manx income tax rates are low compared with other countries and it is not unreasonable to expect payment of what is due. It is also important for the reputation and stability of the Island that we have the ability to honour our international commitments.”

Tax Treatment of Offshore Operations

See Domestic Corporate Taxes for the general principles of Isle of Man corporate taxation, which also apply to offshore entities except as indicated below.

Offshore Manx companies are taxed as follows:

• Non-resident limited liability companies (and foreign branches with non-resident status) are liable to an annual duty of £830, payable to the Registrar of Companies along with the annual return. They are exempt from income tax on foreign-derived income, but pay Isle of Man higher-rate income tax (18%) on any local income.
• Exempt Companies pay a fee of £475 along with their annual application for exemption (more if it is late). They are not permitted local income, except (untaxed) bank interest (by concession).
• International Companies (which, like Exempt Companies, are not permitted local trading income) negotiate a rate of tax up to 35% on their foreign income (minimum tax to be paid = £1,260). The intention is to help companies, particularly investment companies, conform to minimum tax requirements imposed by other jurisdictions.

Non-resident partners in a Manx partnership, limited partnership or Limited Liability Company are liable for tax only on Manx-derived income (with the usual concessions regarding bank interest), and then as individuals (see Personal Taxes). The International Limited Partnership, which is analogous to the International Company, pays £475 annually with its application for such status; it may not have local income other than bank interest.

(Captive) insurance companies can apply to be exempt from IOM income tax under the Income Tax (Exempt Insurance Companies) Act 1981. As with exempt companies in general, application for exempt status must be made annually, with a total fee for insurance companies of £2,500. Normally exemption will only apply to underwriting of risk arising outside the island. Applications are made to the Chief Financial Officer.

As a consequence of its commitment to the OECD, the Isle of Man announced in its 2002 budget that shipping and insurance companies would be brought within the regular income tax system, but at a zero rate.

Trusts with non-resident beneficiaries are exempt from Isle of Man income tax on income arising outside the island and (by concession) on IOM bank interest.

Taxation of Foreign Employees of Offshore Operations

There are no special rules applying to the foreign or Manx employees of offshore operations. The various exemptions from income tax described above do not apply to employees: any business employing and paying people on the Isle of Man will have to operate the ITIP system of deductions from pay (based on and similar to the UK PAYE system). It is not legal to employ non-Manx people on the island without a work permit. See Domestic Personal Taxes for the general principles of individual taxation on the island, which also apply to the resident employees of non-resident entities. Most types of compensation and benefit paid to employees are taxable; there are no special privileges or exemptions for expatriate workers.

There is no statutory definition of residence. The Isle of Man often follows the UK in this respect. Normally, an individual is resident if he spends more than six months on the Island in any one year, or more than 3 months on average in each of 4 consecutive years.

Non-residents are liable to pay Manx income tax only in respect of income arising on the island or from Manx sources. By concession, Isle of Man bank interest is not taxed in the hands of non-residents.

Exchange Control

The Isle of Man has no exchange controls.

Offshore Activities

For exempt companies, International Companies and International Limited Partnerships, activities on the island are limited to administration of external business, or dealing with other exempt organisations. Non-resident companies can have activity on the island, but not such as to constitute management and control; in their case, and in most other cases, there can be trading activity on the island, but it will be taxed. As long as the operation is not judged to be resident (when all income will be taxed) income is simply split according to its source and taxed or not accordingly.

Employment and Residence

There are no special privileges for the employees of non-resident or offshore entities on the Isle of Man. See Personal Taxation – Residence and Liability for Taxation and Labour Regulation – Work Permits for further information.