Isle of Man

GENERALLY

The Isle of Man lies in the Irish Sea and virtually in the center of the British Isles. It is 33 miles long and 13 miles wide. English is the official and spoken language. This is perhaps the most politically stable of all the offshore jurisdictions.

Government

The Island is an internally self-governing dependent territory of the Crown which is not part of the United Kingdom. Her Majesty the Queen, as the Lord of Mann, is the Head of State, through the Lieutenant Governor, who is appointed by the Queen for terms of 5 years.

The Island’s (or "Manx") 1,000 year-old Parliament is called the Tynwald, which has two branches: the House of Keys with its 24 popularly-elected members, and the Legislative Council which is a mixture of House of Keys members and appointed officials.

The Tynwald makes its own laws and oversees all internal administration, fiscal and social policies. External issues, such as foreign representation and defense, are administered on the Island’s behalf by the U.K. Government and the Island makes an annual payment for these services. The U.K. government does not legislate for the Island except with the specific consent of the Island’s Government.

The Island has a restricted relationship with the European Union (EU) which extends the EU legal regime to the Island for limited purposes, mostly relating to customs and the free movement of goods.

The Island has its own Income Tax and Customs and Excise services, and it has long been low tax area enjoying independence from the U.K. on matters of direct taxation. There are no capital gains, inheritance or estate taxes, and low corporate and personal taxes. The Island’s Government has positively encouraged economic growth in recent years by creating a tax-friendly atmosphere, and promoting financial services.

Legal System

The Manx legal system is based on the English common-law model, and although British laws do not apply to Manx matters, the final appeal is to the Privy Council in London.

Personal Income Taxes

The Isle of Man is a low tax area with a standard rate of income tax of 15% and a higher rate of 20% depending on the level of income. Certain deductions, such as mortgage interest are allowed. The income tax will be payable if a person is resident on or visits the Island for more than 6 months per year. However, a person who owns real property on the Island will not be liable for income tax if that person does not spend more than 4 months in any two consecutive years on the Island. There are no capital gains, inheritance, estate or gift taxes of any kind.

The Island has only one Double Taxation Agreement, which is with the United Kingdom. However, where income has been withheld overseas there is tax relief for Manx income tax charged on that income.

The Isle of Man does have an agreement to share information relating to tax evasion with certain other nations, including the United States.

Financial Infrastructure

Financial services constitute the largest single sector of the Manx economy, accounting annually for over 35% of all income sources. The Island’s banking industry is dominated by subsidiaries and branches of the main U.K. clearing banks, although many other banks which maintain a presence there. The official currency is Sterling, although deposits are accepted in virtually all currencies.

Tax-exempt private banks may be established by way of the Offshore Banking License.

Manx banks are regulated by the Financial Supervision Commission ("FSC"). The FSC enforces various investor protection legislation, and urges banks to follow the "know your customer" principles.

Significantly, the Isle of Man is probably the only true "offshore" jurisdiction to offer Deposit Protection, which protects 75% of the first £20,000 of a deposit. This extends to deposits of foreign currency as well as Sterling.

The Island has a rapidly-growing insurance sector, primarily captive insurance and offshore life insurance. Manx insurance companies are taxed either at the rate of 20%, or they may seek a complete exemption from taxes under the Exempt Insurance Companies Act of 1981. Insurance companies may also register under the International Business Act of 1994. All insurance companies are regulated by the Insurance Authority.

Communications

The major airport is Ronaldsway Airport which is eight miles from the capitol city of Douglas. There are regular flights to most major cities in the British Isles, but no international links. The communications infrastructure is modern and excellent, and there is daily courier service to the Island from London Heathrow airport.

ISLE OF MAN CORPORATIONS

Name

The names of private limited companies must end with the word "Limited" ("Ltd."), and a public company must end with "Public Limited Company" ("PLC"). Company names are changed by the filing of a special resolution of the company, with the approval of the company Registry. There are, of course, certain names that a company cannot include, such as Insurance, Trust, etc., and companies which use words such as "Worldwide" or "Global" must be able to justify the use of those terms.

Types of Companies

There are four types of Manx companies with limited liability. These four types of companies should not be confused with the four types of companies which exist for tax purposes: "resident", "non-resident", "exempt" and "international".

Public and Private Companies Limited by Shares

These are typical corporations, where the liability of shareholders to a particular company is limited by their equity contributions to it.

Companies Limited by Guarantee

These entities do not have shareholders, but the members are liable for a nominal sum (e.g., £10 each) if the company is liquidated. These entities are used for clubs, societies, etc.

Hybrid Companies

Companies Limited by Shares and Guarantee – These are a weird entity, and probably closer to the Liechtenstein Anstalt ("Establishment") than any traditional type of company. These companies will have an odd mixture of stock and guarantees, and the ownership will be difficult to determine. In theory, you can set these entities up any way you want, with multiple share classes if you desire, and there is no requirement that the identities of the members or shareholders be disclosed. However, although there are U.S. planners who will charge hundreds of thousands of dollars to form these hybrid companies, with claims that they need not be reported as controlled foreign corporations, no tax court case have ever held this, and we have serious concerns that attribution and other rules will apply to treat these simply as controlled foeign corporations, and subject to reporting requirements and certain unusual tax consequences.

Limited Liability Companies ("LLC")

Manx Limited Liability Companies, which are formed under the Limited Liability Company Act of 1996, are modeled on the typical U.S. form. These companies typically have application for non-U.S. citizens who wish to conduct business in the U.S., since U.S. income is earned by the members as "partners" – instead of as shareholders – to minimize the risks of double taxation. Manx LLCs also limit the liability of its members. For U.S. citizens, a Manx LLC is just another form of an offshore corporation, but simpler and cheaper to operate. It is possible to form an "International" (for Manx tax purposes) LLC, so that the company’s tax is limited each year (£300). However, a Manx LLC must be dissolved within 30 years of being formed.

A Manx LLC is formed by registering the company’s Articles of Organization. The LLC must maintain a registered agent in the Isle of Man, which person must be a resident, and a Manx registered office. The Articles of Organization must list the LLC’s member (which may be nominees). An annual return must be filed each year, and the names and addresses of the members and managers must be publicly disclosed. There is no requirement of an annual audit.

Formation

A company is incorporated in the Isle of Man by Application made to the Registrar of Companies. There are several requirements which must be met:

• The company must have a registered office in the Isle of Man

• There must be one or more shareholders

• There must be at least two directors and one secretary

The directors and secretary can be of any residence or nationality, unless the company is an "exempt" company.

Articles of Association

A company is governed by its Articles of Incorporation, which must include:

• The name of the company and the fact that it is a Private company

• The authorized share capital

• The classes of shares

• A statement that the company has limited liability

• The address of the registered office, which must be on the Island

• The number of shares taken by the subscriber, which must be at least one.

Note that there is no requirement of an "object" clause. This is because under Manx law a company has all of the powers and privileges of an individual, including the right to engage in any type of commercial activity.

Equity Shares

There is no generally applicable minimum requirement for share capital of a Manx company, and such capital may be denominated in any currency. However, if the term "International" is used in the name of the company, then capital equal to £100,000 must be paid in within 6 months of incorporation. Companies with certain purposes, such as mutual funds, will be required to have additional capital paid-in.

The issued and outstanding shares of a company may be held "in trust" by nominees, and there is no requirement that the beneficial owners of the company be disclosed. Companies can be owned by Bearer Warrants, which are essentially bearer shares; however, the use of bearer warrants prevents a company from being classified as an "exempt" or "international" company for tax status purposes. Therefore, the use of anonymous shareholders through nominees is suggested.

Taxation

For taxation purposes private companies incorporated in the Isle of Man fall into one of four types. These four types of companies for taxation purposes should not be confused with the four types of Manx companies for liability purposes.

Resident Company

This is a company which is either controlled by residents of the Island, or is managed or controlled in the Isle of Man but has not applied for Exempt Company status. The income tax rate for this type of company is 20% of taxable profits. While this type of company is primarily used for carrying on business in the Isle of Man, the 20% income tax sometimes creates opportunities for tax savings under the double-tax treaty with the United Kingdom. Also, since there are no capital gains or similar taxes, a resident company can be used as a holding company. However, if the company does have income it should also have an annual audit unless dormant.

Non-Resident Company

This is a company which is owned by non-residents, and is neither managed nor controlled in the Isle of Man. There is no income tax on profits, but such company must pay an annual duty (£600). A Declaration of Non-Residency must be filed with the Registrar of Companies.

Exempt Company

This is a company which is owned by non-residents, but is managed and controlled in the Isle of Man. There is no income tax on profits, but such company must filed an Application for Exempt Status and pay an annual duty (£300). All income (except from certain "approved" sources, such as interest income) must come from outside of the Isle of Man. Probably for most offshore clients this is the form of company which will be used.

An exempt company must have at least two directors, one of which must be a Manx resident. The names of these directors are publicly disclosed, so nominees are typically used. Directors’ meetings must be held annually, but may be held anywhere in the world. The company must have a secretary who is an individual and a Manx resident, and must also be a licensed professional (attorney, accountant, etc.). At least two shareholders, who may be other companies, are required. An exempt company is not required to have an annual audit.

International Company

This is a company which meets the criteria of the International Business Act of 1994. An international company may "negotiate" its income tax between 1% and 35%, subject to a minimum, so as to take advantage of applicable foreign tax credit deductions.

Special Status

Any company may apply for special tax status depending upon the type of business it conducts and the benefits which it brings to the Island.

Filing Fees, Capital Duties, and Annual Return

Shares-only companies and some hybrids are subject to filing fees (£40) and certain capital duties (minimum £115, additional £14 per £1,000 over £2,000 with a maximum of £5,000). Additional duties will be required in some cases, as where a trust company is formed.

For all Manx companies, of all types and tax classifications, an annual return must be filed within one month of the anniversary of incorporation, along with a nominal filing fee (£42).

Foreign Companies

Foreign companies may register and conduct business in the Isle of Man, but it must keep a registered office there and pay a registration fee (£60). A foreign company is not required to file an annual return, or any income tax (although it may elect to pay a Value Added Tax for foreign tax credit purposes).

ISLE OF MAN TRUSTS

Manx trust law is based on the English model. Two recent amendments (1995 and 1996) have updated the Manx trust statutes to where they are comparable with second-tier trust jurisdictions such as the Cayman Islands and Bermuda ( the first-tier trust jurisdictions being the Cook Islands and Nevis). Unfortunately, the Isle of Man still has a Rule Against Perpetuities, requiring beneficiaries to be identified, at least by class, although this is lengthened to 80 years.

Registration or identification of a Manx trust is not required, unless the trust holds real property on the Island. The typical initial settlement is £10.

There is no tax liability imposed by the Isle of Man for a Manx trust so long as the settlor and beneficiaries are non-residents, and all the trust income is derived outside of the Island (except for certain "approved" interests and dividends).

TAX WARNING FOR U.S. CITIZENS

U.S. citizens are taxed on their taxable income from wherever it is derived, anywhere in the world. U.S. citizens are also taxed on investments indirectly made through foreign trusts and foreign corporations, including offshore trusts and IBCs. Thus, the fact that an offshore jurisdiction may have low or no taxes does not mean that if a U.S. citizen does business there that he or she will enjoy only low or no taxes on the personal income made. There are simply NO personal income tax advantages, at all, for U.S. citizens to use offshore structures, and anyone who tells you differently is probably telling you a falsehood. Any discussion we make of an offshore jurisdiction's tax laws should be construed only according to the foregoing warning.

BEWARE OF OFFSHORE SERVICE PROVIDERS: There are some offshore service providers who will make wild claims about saving you personal income taxes, so as to convince you to set up an offshore structure. Most of these people don't know the first thing about U.S. tax law, and their representations to you will not help you, at all, if you are caught with an unreported trust, corporation, or bank account. All they really want is your money, and even if you commit tax evasion they are not subject to U.S. law, and so couldn't care less. See Hiding Money Offshore