Isle of Man holding company formation
The Isle of Man is an internally self-governing dependent territory of the British Crown and whilst it is situated within the British Isles, it is independent of the UK. The Isle of Man is technically a Crown Dependency of the UK but is independent in all matters except in relation to foreign affairs and defence, both of which are the responsibility of the United Kingdom Government.
An Isle of Man holding company is a very popular listing vehicle
Why Isle of Man companies have been so popular as listing vehicles?
One of the main advantages of an Isle of Man company is paying zero tax on trading and investment income in the Isle of Man. The Isle of Man has a customs and excise agreement with the UK. This means that for Value Added Tax, customs, and most excise duties, the two territories are treated as one. So it may be advisable to register an Isle of Man offshore company for VAT if it plans to trade with the UK or EU. The Isle of Man is therefore a very good jurisdiction to incorporate a trading company if you wish to import and export goods into and out of the EU.
Some of the other common uses of the Isle of Man offshore company formation are:
Holding investment, e.g. portfolios, UK commercial property and other company shares – these activities are not taxed;
Simplified trading within the EU due to the zero rate of tax on trading income and the ability to quote an EU accepted VAT number;
Holding intellectual property since the Isle of Man is a signatory to the Paris Convention on Patents and Trademarks.
An Isle of Man Companies Act 2006 offshore company may be incorporated with a single shareholder, which can have a single share with zero par value. A single director is allowed and he/she may be non – Isle of Man resident.
The Isle of Man has an excellent reputation and business infrastructure.
Political and economic stability.
Long established legal system.
The sophisticated and extensive banking system.
0% corporate income tax (depending on certain circumstances for example companies engaged in banking or Isle of Man property transactions may be subject to a 10% tax rate).
Dividends made to non-residents are taxed at 0%.
No withholding tax.
No capital gains tax.
No stamp duty.
No thin capitalization rules.
Losses can be carried forward indefinitely provided continuity of business test is satisfied. There are also provisions for loss relief within groups of companies.
Double tax relief is available for foreign tax paid.
Tax neutrality at the holding company level
A company’s articles of association can be structured in such a way as to meet the expectations of investors and accommodate the requirements of any relevant listing rules;
There are no prescriptive content requirements for offering documents; such documents must simply contain all material information required to enable informed investment decisions to be made by recipients;
Shares can be traded through CREST (or certain other electronic trading platforms) without the need for depositary receipts and can be denominated in any currency;
Distributions (including dividends), shares buy-backs and capital returns may be made subject solely to a resolution of the directors and satisfaction of a statutory solvency test (unless provided otherwise in the company’s articles of association);
Financial assistance may be given without any statutory prohibition or restriction; and
The UK Takeover Code applies to Isle of Man companies.
Access to global capital markets
In relation to LSE Main Market listings, Isle of Man companies are potentially eligible for inclusion in the FTSE Indices, giving access to a larger range of institutional investors.
Isle of Man companies have also been formally included on the Hong Kong Stock Exchange’s approved list of companies and are able to list on its exchanges.
In the words of the Minister of the UK Ministry of Justice, the Isle of Man “leads the way in terms of how small jurisdictions with financial services should operate”.
Other key benefits of the Isle of Man include:
a stable and sophisticated finance industry with highly qualified and motivated professionals in law, accountancy, banking and fiduciary services (the fees for such services typically being very competitive when compared to the cost of similar service offerings in certain other offshore jurisdictions);
a legal system that is based on the principles of English common law;
the Isle of Man is bound by the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards;
an established and well regarded track record of Isle of Man company listings;
quick and simple company incorporation process: incorporation within 2 hours (for expedited service) or 48 hours (for normal service) of documents being lodged with the Companies Registry;
economically and politically stable with substantial financial reserves; and
in the same time zone as London.
Methods of establishing an Isle of Man holding company
In relation to an existing business, a new Isle of Man holding company of the existing group could be established by way of a group re-organisation (usually effected by way of a scheme of arrangement or a share for share exchange) or the existing foreign holding company could be re-domiciled to the Isle of Man (subject to satisfaction of certain conditions).
Tax issues for Isle of Man companies corporate income tax
The corporate tax rate in the Isle of Man (IoM) is zero for all companies except in the case of income from banking, Manx land and property and retail businesses with substantial profits on which tax is payable at a rate of 10%. This means that a company resident in the island will generally not need to pay any corporate income tax on profits earned in the island. Profits earned in other countries will not be subject to Isle of Man tax but they may be subject to tax in those other jurisdictions if the IoM Company is deemed to have a taxable presence there.
Some countries only tax profits under their domestic law if the company earning the income has a permanent establishment in that jurisdiction. A permanent establishment would be a fixed base such as an office or factory, or could be a construction site that continues for a particular period of time. In this case a company from outside that jurisdiction that does not have a fixed base there may not be subject to tax on some income that it earns, however the definition of a permanent establishment in the relevant tax law would need to be studied carefully to make sure of this.
Currently there is a move to tighten up permanent establishment rules and the UK for example has already introduced a diverted profits tax to ensure that companies cannot artificially avoid become liable to tax by circumventing the definition of a permanent establishment in the UK. This means that it will in future be even more difficult for an Isle of Man company to perform any business in the UK and not pay tax there on its income.
The Isle of Man does not charge any taxation on capital gains. This can be useful both for trading companies and for individuals forming Isle of Man companies to hold investments, but care must be taken not to fall within anti-avoidance legislation of other countries such as the UK. The use of artificial schemes to use an Isle of Man company to avoid UK capital gains tax by UK individuals has been combated by the UK government which has powerful anti-avoidance legislation in place.
Nevertheless, in the context of ordinary business activities the absence of tax on capital gains is a useful feature of the Isle of Man tax system and increases the attractiveness of the Isle of Man as a place for investment and doing business.
Exchange of tax information
Generally, the provisions for exchange of tax information worldwide are being strengthened and it is becoming increasingly easy for tax administrations to gain information about the worldwide tax affairs of individuals or companies resident or holding funds in their jurisdiction. The arrangements for the exchange of tax information are contained in double tax treaties or in agreements for the exchange of tax information.
Some international agreements for the exchange of information also exist and the Organization for Economic Cooperation and Development (OECD) is currently encouraging more countries to sign up to international agreements and international standards on transparency and exchange of information. The Isle of Man has committed itself to reaching the international standard on automatic exchange of information by 2016.
General anti-avoidance rules
It is also worth noting that many jurisdictions are introducing general anti-avoidance rules (GAAR) under which transactions considered to be artificial in nature can be disregarded for tax purposes. This means that where purely artificial transactions are set up with the main purposes of securing tax advantage taxation could be imposed on the real transaction or any tax advantage could be disregarded. The UK for example has passed a general anti abuse rule targeting transactions considered to be abusive.
Controlled foreign companies rules
Another point to consider is that the whole subject of CFC rules is currently being considered by the OECD as part of its action plan on base erosion and profit shifting (BEPS). Recommendations are to be made to governments with a view to strengthening these rules to combat tax base erosion. These rules are therefore likely to be strengthened further by all major economies in the future.
We have 2 decades of experience in the incorporation and management of asset holding companies, whether it be for owning property, or for other reasons such as holding an investment portfolio.
We do not simply incorporate Isle of Man companies – we always take a client’s needs and personal circumstances into consideration before deciding upon which jurisdiction of incorporation will be best and most suitable.
Owning your assets through a company can reduce or eliminate the inheritance tax, capital gains tax and income tax, and afford confidentiality (seen as a major benefit for those clients residing in high-risk countries). Asset holding companies can also circumvent the need for the granting of probate, an often time consuming and expensive process, and play a vital role for long term family financial planning.
We are happy to examine possibilities with you for as long as it takes, in order to find the best solution for you and your family.
Please do not hesitate to contact us for more information on how we might be able to benefit you in the ownership of your assets.
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Disclaimer: While TBA & Associates strives to make the information on this website as timely and accurate as possible, the information itself is for reference purposes only. You should not substitute the information provided in this article for competent legal advice. Feel free to contact TBA Customer Services for advice on your specific cases.