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Income Tax in Isle of Man



Personal Income Tax

Who is liable. Residents are subject to tax on worldwide income. Nonresidents are subject to tax on income from Isle of Man sources only.
Individuals are considered resident in Isle of Man if any of the following conditions applies:
· They are present for six months or more during the tax year.
· They are present for an average of 90 or more days per tax year over a period of four or more consecutive years.
· The individual’s specific circumstances indicate “a view or intent to establish residence.” The Assessor of Income Tax considers several factors in determining the applicability of this condition.

Certificates of residence can be provided if the Assessor of Income Tax is satisfied that the conditions of residence are fulfilled.

Income subject to tax. The taxation of various types of income is described below.

Employment income. An employee is taxed on remuneration and benefits received during a tax year (ending on 5 April). Taxable benefits include company cars and accommodation.
Education allowances provided by the employer to its employees’ children 18 years of age and under are taxable for income tax and social security purposes.

Self-employment and business income. Self-employment income includes income from a trade, profession or vocation. A self-employed individual is assessed on business profits. In general, the assessment for a particular year is based on business profits earned during an accounting period ending in the current tax year. For tax purposes, profits are usually determined in accordance with normal accounting principles, subject to certain adjustments.

Investment income. For tax purposes, investment income, including dividends, interest, royalties and rental income, is included in an individual’s total income. Double tax relief is granted on income subject to withholding tax in another country.

Relocation of key employees. If an individual is contractually obligated to take up residence in the Isle of Man to facilitate the process of starting up a new business or the diversification or expansion of an existing one and if the necessary approval is obtained, the individual and his or her jointly assessed spouse can be subject to income tax on Manx-source income only for the first three years of residence. For the company, financial assistance may be granted for any reasonable relocation package that needs to be incurred with respect to the new business.

Personal service companies. Effective from 6 April 2014, deemed employment provisions apply if an individual provides services to a client and if the services are not performed under a contract between the worker and client, but under an arrangement involving a third-party company. If the services had been provided under a contract directly between the worker and client and if the worker would have been an employee of the client, deemed employment exists. As a result, the worker is treated as an employee of the client and not the third party.

Taxation of employer-provided stock options. The Isle of Man has no specific legislation addressing the taxation of employer-provided stock options. In practice, any benefit received is taxable on grant rather than exercise. A capital gain that arises at the exercise of the option is not taxable. Clearance can be obtained in advance with respect to the taxation of specific options in the Isle of Man.

Deductions

Deductible expenses. Expenses are deductible if they are incurred wholly, exclusively and necessarily in the performance of employment duties. No allowance is available for travel between home and work or for office attire. Allowable expenses include membership fees of approved professional bodies and contributions by an employee to a personal pension scheme. The maximum deduction in a tax year for contributions to a personal pension scheme is GBP300,000, or 100% of relevant earnings, whichever is less. The Isle of Man does not provide for a lifetime allowance with respect to benefits from personal pension schemes.

Tax relief for the expenses listed below is granted through a 10% reduction of the individual’s tax liability. The 10% tax reduction is granted on the lower of the amount paid or the maximum amount permitted. The following are the relevant expenses:
· Mortgage and loan interest payable to an Isle of Man lender, up to a maximum amount of GBP5,000 (GBP10,000 for married couples or civil partners who are jointly assessed)
· Private medical insurance premiums for residents 60 years of age and older, up to a maximum amount of GBP1,800
· Charitable donations, up to a maximum amount of GBP7,000
· Payments made under Educational Deeds of Covenant, up to a maximum amount of GBP5,500. (An Educational Deed of Covenant is an irrevocable covenant for the benefit of a person between 18 and 25 years of age who is undertaking a course of higher education. The covenant must be entered into before 6 April 2011 and made by a parent or grandparent of the donee, and the donee must be within the qualifying age band when the covenant is made and when the payment is made.)
· Nursing expenses incurred in caring for a dependent relative, up to a maximum amount of GBP12,500

Personal deductions and allowances. The following personal allowances apply for the tax year ending 5 April 2018.

Type of allowance  
Amount (GBP)
Single allowance    
12,500
Married couples’ and civil partners’ allowance
25,000
Single parent
6,400
Blind person (additional)
2,900
Disabled person (additional)
2,900

Business deductions. Expenses incurred wholly and exclusively in producing self-employment or business income are deductible. The following expenses are not allowed for tax purposes:
· Depreciation
· Costs of a capital nature

Although costs of a capital nature are not deductible, capital allowances (tax depreciation) are deductible in computing taxable profits. Capital allowances include a 100% first-year allowance for plant and machinery and a 25% annual allowance on a reducing-balance basis for cars. The car allowance is limited to an annual maximum of GBP 3,000.
A 100% first-year allowance is available for qualifying expenditure incurred to acquire, extend or alter qualifying industrial buildings, agricultural buildings and tourist premises.

Rates. The following are the income tax rates for resident individuals for the tax year ending 5 April 2018.

Taxable Income
Tax (GBP)
Rate on excess (%)
From (GBP)
To (GBP)
0
6,500
650
10 (lower rate)
6,500 
-
-
20 (higher rate)

The 10% rate applies to the first GBP6,500 of income for each individual above their personal allowance. Married couples and civil partners wishing to be taxed jointly must make an election. If an election is made, the 10% rate applies to the first GBP13,000 of joint income in excess of the married couples’ and civil partners’ allowance (GBP25,000 for the tax year ending 5 April 2018).

A cap on an individual’s annual tax liability is available on application. The maximum amount of income tax payable by an Isle of Man resident taxed under the tax cap is GBP125,000 (GBP250,000 for married couples electing to be taxed jointly) for the year ended 5 April 2018, regardless of the amount of his or her worldwide taxable income.
Effective from 6 April 2014, a resident individual or jointly assessed married couple or civil partners must make an election in order for the tax cap to apply. If an election is approved by the Assessor of Income Tax, it will apply for five consecutive tax years at the amount applicable for the first year of election.

Nonresidents are taxed at a rate of 20% on all income arising in the Isle of Man. Nonresidents are not entitled to a personal allowance. The tax liability of nonresidents with respect to certain types of income is limited to the income tax deducted at source, if applicable.

Relief for losses. Business losses may be carried forward and offset against future profits from the same trade or, carried back to the immediately preceding year and offset against profits from the same trade. Business losses can also be offset against other personal income in the current or preceding year. Business losses incurred in the first four years of assessment may be carried back against other income. On the permanent discontinuance of a trade, a terminal loss may be carried back and offset against profits from the same trade in the three preceding years of assessment. Certain restrictions apply.



Corporate Income Tax

Companies resident in the Isle of Man are taxed on their worldwide income and are required to file an annual income tax return reporting worldwide taxable profits calculated in line with local legislation and practice.

A non-resident company incorporated outside the Isle of Man but having a place of business or a permanent establishment (PE) on the Isle of Man will be taxed on the profit attributable to the Isle of Man establishment. There are three rates of corporate income tax (CIT).
The 10% rate applies to income from:
· a banking business carried on in the Isle of Man on the basis of a deposit taking licence issued by the Isle of Man Financial Supervision Commission, and
· retail activities (i.e. the sale of goods to consumers through retail premises) carried on in the Isle of Man, but only if that income exceeds 500,000 Isle of Man pounds (IMP) in the year.
The 20% rate applies to income from real estate situated in the Isle of Man.
The 0% rate applies to all other income.

Where an election is made, certain companies subject to Manx income tax at the standard 0% rate can elect to pay tax at the 10% rate. The general rules for the calculation of taxable income are the same whether a company is liable to tax at 0%, 10%, 20%, or a combination of these rates. Both resident and non-resident companies are taxed on their income at the same rates.
Unilateral relief from double taxation in respect of foreign-source income is given by way of tax credit.

Local income taxes

There are no profit based taxes levied by local government in the Isle of Man. However, commercial business rates are payable. Premises are assessed and given a ‘rateable value’ that forms the basis of the annual rates charge levied.

Residency Rule

A company incorporated in the Isle of Man is automatically resident for tax purposes and must therefore file an annual income tax return, whether it pays tax at 0%, 10%, 20%, or a combination of these rates. A company that is incorporated elsewhere will be considered resident in the Isle of Man if it is 'managed and controlled' in the Isle of Man, and will be taxed on its worldwide income accordingly. 'Managed and controlled' is generally interpreted as being the place where the board of directors meets, although this is not always conclusive.
In cases where a company is resident in a country with which the Isle of Man has a tax treaty, then a tie-breaker may operate to determine residence.

Note that a company that is incorporated in the Isle of Man will not be resident if it can prove to the satisfaction of the Assessor that:
· its business is centrally managed and controlled in another country
· it is resident for tax purposes under the other country's law
· either it is resident for tax purposes in the other country under a DTA in which a tie-breaker clause applies or the highest rate at which any company may be charged to tax on any part of its profits in that other country is 20% or higher, and
· there is a bona fide commercial reason for its residence status in the other country, which is not motivated by a desire to reduce Isle of Man tax.

Permanent establishment (PE)

A place of business includes a PE, such as a branch office or shop, factory, workshop, or mine. The definition of a PE is not set out in statute, and, in cases where the company is resident in a country with which the Isle of Man has a DTA, the terms of the agreement will determine the company’s residence.

Taxable Income

The general rules for the calculation of taxable income are the same whether a company is liable to tax at 0%, 10%, 20%, or a combination of these rates.

Inventory valuation

Inventories are generally stated at the lower of cost or market value. Any method of valuation that accords with sound commercial principles is acceptable for tax purposes, provided it is adopted consistently at the beginning and end of the accounting period and does not conflict with tax law. In practice, inventories are normally valued for tax purposes at the lower of cost or net realizable value. A first in first out (FIFO) basis of determining cost where items cannot be identified is acceptable, but not the base stock method or the last in first out (LIFO) method.

In general, the book and tax methods of inventory valuation must conform.

Capital gains

There is no capital gains tax in the Isle of Man.

Dividend income

Dividends are taxed at the standard rate of 0%. Dividends received from Isle of Man companies do not suffer withholding tax (WHT).

Banking income

Licensed banks are taxed at 10% on income from deposit taking, any related activities, and interest earned from the investment of regulatory reserves only. Income earned on capital and reserves in excess of the regulatory capital, group funded lending, fiduciary deposits, assurance, insurance, custody, trust, and corporate services is not classified as banking business and is taxed at the 0% rate. General expenses are allocated against 0% and 10% income streams on a pro rata basis.
The 20% rate applies to income earned by banks from real estate situated in the Isle of Man.

Royalty income

Royalties are taxed at the standard rate of 0%.

Rental income

Companies with profits arising on rental income in respect of land or property situated in the Isle of Man are charged to income tax at a rate of 20%. This rate applies whether or not the company is resident in the Isle of Man.

Foreign income

Resident corporations are liable to tax on their worldwide income (albeit the relevant rate of tax is often 0%).

Deductions from Income

Relief is given in calculating the taxable profit of a company if the expense is incurred in the normal course of the business and is incurred wholly and exclusively for business purposes. However, certain expenses that are deducted in the computation of profits are not allowable for tax purposes. These include depreciation, unpaid but accrued pension and bonus payments, certain lease payments, and customer entertainment costs.

Depreciation

Depreciation charged in accounts in not allowable for tax purposes. Instead, relief for depreciation is given using 'capital allowances' based on a reducing-balance method. Plant and machinery, tourist premises, industrial buildings, commercial buildings within a designated area, fish processing buildings, and agricultural buildings and works have an initial allowance of 100%. There are restrictions on allowances for expensive motorcars. Isle of Man government grants are not taken into account in determining the amount of expenditure on which allowances may be given. Tax depreciation is not required to conform to book depreciation. Upon disposal, allowances will be reclaimed on the sale proceeds, restricted to cost.

Goodwill

No relief is given against trading profits for the purchase of goodwill.

Start-up expenses

Start-up expenses incurred in the three years prior to the commencement of trading, which would have been deductible as a trading expense if incurred after the commencement of trading, are treated as a loss arising in the year trading commenced, and relief for these losses can be claimed, subject to the normal loss-relief rules.

Interest expenses

Interest paid to lenders subject to Isle of Man tax is allowable in full. Interest paid to lenders not subject to Isle of Man taxation is allowable if it is incurred in the normal course of the business and is wholly and exclusively for business purposes. Only interest charged at a reasonable commercial rate will be allowed as a deduction.

Bad debt

Relief against trading profits is only available in respect of specific bad debts. General provisions are not allowable.

Charitable contributions

Broadly, trading companies are able to claim a deduction for donations made to charities, subject to a maximum of IMP 15,000 or 1% of their taxable income, whichever is greater.

Fines and penalties

No relief is available for any payments made in respect of fines or penalties, whether related to income tax compliance or otherwise.

Taxes

Business rates, as detailed under Local income taxes in the Taxes on corporate income section, are deductible when calculating net taxable profit.

Net operating losses

Losses can be carried forward indefinitely against future profits from the same trade. Trading losses incurred may be carried back against preceding year profits. There are additional rules that apply in the opening years of trade. Terminal losses in the last year of trade can be carried back against profits for the previous three years.

Payments to foreign affiliates

There is no formal transfer pricing regime in the Isle of Man, and payments made to foreign affiliates, such as royalties, management charges, and service fees, are deductible under normal principles. If, however, the Assessor of Income Tax is of the opinion that the main purpose, or one of the main purposes, of any transaction is the avoidance or reduction of tax liability, assessments may be made to counteract that avoidance or reduction.


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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.

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This blog is Created by CA Anil Kumar Jain.