Isle of Man
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 it 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.
For accounting periods commencing on or after 1 January 2019 legislation is in place to ensure that corporate entities satisfy a 'substance test' in the Isle of Man. The legislation is targeted at those companies in the Island that receive income from certain 'relevant activities' identified by the European Union but that do not have any real economic activity and substantial economic presence in the Island.
All companies with activities and income in a 'relevant sector' in an accounting period will be required to demonstrate that they have adequate substance in the Island.
Relevant sectors are defined as follows:
- Fund management
- Finance and leasing
- Distribution and service centres
- Operation of a holding company
- Holding intangible property (intellectual property)
To satisfy the adequate substance requirements a company must demonstrate that it:
(a) is directed and managed in the Island;
(b) has an adequate number of (qualified) employees proportionate to the level of activity carried on in the Island;
(c) has adequate expenditure proportionate to the level of activity carried on in the Island;
(d) has an adequate physical presence in the Island; and
(e) conducts core income-generating activity (‘CIGA’) in the Island
If a company in a relevant sector does not meet the economic substance requirement in an accounting period, it will be subject to sanctions including financial penalties which will be levied in respect of each period in which the company fails to meet the requirements. The level of financial penalty will increase in cases of repeated periods of failure and the company may ultimately become subject to a winding up order.