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 December 2000 the OECD announced the Isle of Man's commitment to eliminate harmful tax practices by 31 December 2005 which has secured the jurisdiction's deletion from the OECD list of countries deemed to possess "harmful" tax practices.
The OECD said it welcomed the commitment, which includes undertakings in favour of transparency, non-discrimination and effective co-operation.

Offshore operations may take place within the following forms:

Exempt Private company

Branch

Limited Partnership

LLC Limited Liability Company

international Company

International limited Partnership

Captive Insurance Company

Trust

In June 1999 the Manx Government placed a moratorium on the formation of Non-Resident Companies; the future of existing companies with non-resident status has yet to be determined. In December 2000 the Island published the terms of its commitment to the OECD which included a statement that International Companies in their current form, Non-Resident Company Duty companies and Share Warrants to Bearer will be abolished. No timetable has been established for these moves, and the announcement was made before US resistance to the OECD forced the organisation to back off some of its proposals including those for 'non-discrimination' and upwards harmonisation of tax rates.

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 £430 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 = £1,200). 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 .

The International Limited Partnership, which is analogous to the International Company, pays £400 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.

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.

The Company Limited by Guarantee, and its sibling, the Company Limited by Guarantee and having Shares, have existed since the earliest days of Company Law over 135 years ago. They are essentially mutual companies, and as such have historically been used essentially for charitable and non-profit purposes.

In the last thirty years, they have been increasingly used for private family foundations instead of discretionary trusts, since they are readily intelligable to persons from a non-equitable legal background, and avoid most of the problems associated with trusts. In addition, they have been used for proprietary and members' clubs in the international leisure and timeshare resort industry, where they meet all the requirements of modern EU (and Spanish) law, as well as for other social organisations.

They have also been used for tax planning, making use of the extraordinary flexibility in relation to ownership and capital that such companies can provide. The Isle of Man is one of the leading jurisdictions for this form of company, not because it is unique to the Isle of Man, but because it was in the Isle of Man that all the development work has been done in the last three decades.

The Income Tax (Exempt Companies) Act 1984 (as amended) provides exemption from Income Tax to a private company which is owned by non-residents, does not engage in any activity on the island (with minor exceptions), and has no source of income in the Isle of Man other than income from money invested with the Isle of Man Government or from banks licensed by the Treasury.

One of the company directors must be resident in the Isle of Man. Additionally, the secretary of the company must be a Manx resident and hold a qualification as required by the Act. The exemption will require annual renewal. The granting of exemption does not affect the liability of a company to deduct and account for income tax under the Income Tax (Instalment Payments) Act 1974.

To make a first-time application for exemption a company is required to complete forms TEC1 (signed by a director of the company) and TEC1(u), signed by a Manx-resident director of the company. The completed forms should be submitted to the Income Tax Division together with the appropriate fee: £400 if the application is received not later than 30th June in the year of assessment; £1200 if the application is received after 30th June but not later than 30th September.

From 6 April 2001 the annual duty payable by a Manx exempt company will increase by £30 to £430

Limited Liability Companies were introduced by the Limited Liability Companies Act 1996. A Limited Liability Company (LLC) must have at least two members whose liability is limited to the extent of the capital they contribute to the company.  

Profits are divided among the members and are taxed in their hands, as for a partnership. An LLC does not have directors or a secretary, but it must have a registered agent on the island. The life of an LLC is limited to thirty years. LLCs are governed by articles of organisation and not memorandum and articles of association.

The International Company (IC) was introduced by the International Business Act 1994. In effect this form broadens the concept of the exempt company. IC status can be acquired by a Manx-registered company (including public companies and limited liability companies) or by a foreign company registered on the island. International Companies are excluded from the same activities on the island as exempt companies (see above). The income and receipts of an IC (other than local bank deposit or approved investment income) have to be derived from outside the island, or from dealings with other ICs. An IC must have a resident director and secretary (or agent in the case of a Limited Liability Company).

The International Company legislation is particularly aimed at helping finance sector companies. The rates of tax payable are negotiated between the company and the Manx authorities, but will not be less than the annual duty of £1,200 (more if the application is filed late). As with exempt companies, the status of International Company has to be applied for each year.

The Isle of Man's commitment to the OECD includes abolition of this form by 2005; but it is not clear whether or when this will actually take place.

If a foreign company intends to establish a branch or a permanent place of business in the Isle of Man, it is subject to Part XI of the Companies Act 1931, which provides for registration on the island. Within one month it must deposit with the Registrar a certified copy of its Memorandum and Articles of Association, a list and particulars of its directors and company secretary, and details of one or more resident individuals authorised to receive notices and communications.

Once registered, the foreign company will be treated in the same way as a Manx company, and can take exempt or international status if appropriate.

A Manx-registered company can apply to be non-resident if its central management and control is exercised from a foreign base. It will only be liable to income tax if there is any income from the Isle of Man apart from bank interest.

To obtain Non-Resident status a Declaration of Non-Residency has to be filed with the Registrar of Companies. A flat duty of £775 has to be paid annually upon filing of the annual return with the Registrar of Companies. From 1 June 2001 the flat duty for a non-resident company, which has to be paid annually upon filing of the annual return with the Registrar of Companies, will be increased by £30 to £830.

Limited partnerships are also governed by the Partnership Act 1909. They must be registered as such, or they may be deemed to be general partnerships. Partners may be individuals or companies.

A limited partnership consists of one or more general partners with unlimited liability, and one or more limited partners, who are liable only to the extent of their capital contributions. A limited partner does not take part in the management of the partnership and is not entitled to dissolve the partnership by notice. Limited partnerships may have up to twenty partners; but in banking only up to ten partners.

An International Limited Partnership (ILP) is similar in structure to a Limited Partnership and was introduced by the International Business Act 1994. The general partner must be a Manx-resident company and must comply with the requirements for a company to be an International Company (see above); the limited partners must either be non-resident or must be themselves International Companies.

The status of International Limited Partnership has to be applied for each year, with payment of a £400 fee, and the Assessor issues a certificate. On demand, an ILP must produce its accounting records to the Assessor. There is no limitation on the number of partners in an ILP, and this format is suitable for collective investment vehicles, among others.

The law of trusts is based on the English law and is governed by the following acts: the Trustee Act 1961 as amended; the Variation of Trusts Act 1961; the Perpetuities and Accumulations Act 1961; the Trusts Act 1995; and the Purpose Trusts Act 1996.

The Trusts Act 1995 establishes that both for Manx trusts and for foreign trusts migrating to the island, Manx law is conclusive and will overcome any forced heirship provisions emanating from civil law jurisdictions. The Isle of Man adopted the Hague Convention in the Recognition of Trusts Act 1988, albeit with some modifications.

Trust documents are in English, and there are no requirements for registration; there is no stamp duty. The normal perpetuity period of a Manx trust is 80 years. There are no restrictions on the accumulation of income during the perpetuity period.

Trusts used for Investment Funds (Unit Trusts) are governed by the Prevention of Fraud (Investments) Act 1968, which contains prudential rules among others.

The Isle of Man law of trusts is based on English law and is to be found in the following acts:

Trustee Act 1961

Variation of Trusts Act 1961

Perpetuities and Accumulations Act 1968 (adoption of the Hague Convention)

Recognition of Trusts Act 1988

Trusts Act 1995

Purpose Trusts Act 1996

In addition, being a common law jurisdiction, there is a considerable amount of case law (mainly English) which is persuasive authority for the Manx courts. The distinctions between English law and Manx trust law arise principally from the fact that the Isle of Man has not adopted certain provisions of English trust law, for example, those relating to restrictions on accumulation of income.

Appeal from the Isle of Man courts is to the Privy Council in London.

Trusts do not need to be registered unless they involve real estate on the island, when settlements inter vivos must be registered. However, Unit Trusts (Collective Investment Schemes) are subject to various special requirements under the Financial Supervision Act 1988. There is no stamp duty.

There are no statutory accounting or auditing requirements and there is no need to file tax returns. It is possible to obtain an advance clearance from the relevant registry based on a draft trust deed so that the identity of the settlor and the beneficiaries can be kept totally confidential.

The maximum perpetuity for Manx trusts is 80 years. There are no provisions for non-recognition of foreign judgements; asset protection trusts are not available.

Recent legislation in the form of the Trusts Act 1995 has secured the position of trusts established in the Isle of Man in the face of challenges in the applicable governing law by other jurisdictions, particularly in the area of 'forced heirship'.

Trustees are not licensed or supervised by the Financial Supervision Commission, unless the fiduciary carries on business in investment, banking or insurance, in which case licences are required under those headings. Where this is the case the Financial Supervision Commission (1-4 Goldie Terrace, Upper Church Street, Douglas, Isle of Man 1M99 1DT) acts as the statutory regulator.
As in other jurisdictions whose trust law follows the English pattern, a beneficiary of the trust may apply to the court to stop a trustee from dealing with trust assets in an unauthorised manner. Loss as a result of an authorised conduct will result in the trustee being responsible for making the loss good. The asset value of the trustee is therefore an important consideration.

Where a breach of trust is committed by a corporate trustee, every person who at the time of breach was a director of the trustee may be deemed, in certain circumstances, to be guarantor of the trustee (ie personally liable) in respect of damages awarded by the court. Principles of constructive trusteeship also apply.

Banking is regulated by the Banking Act 1975 which governs licensing of banks and inspection of bank records as well as the control of advertising and other activities. Regulation is exercised by the Financial Supervision Commission under the Financial Supervision Act 1988.

The licensing policy that the Commission adopts for the banks is based upon the fact that the Island has no lender of last resort and is too small to shoulder high risk, or start-up, operations. Thus, licences are only issued to subsidiaries, or branches, of existing banks licensed in jurisdictions which subscribe to the international concordat on banking supervision. Applicants must have an established track record of at least five years' profitable operation and the ownership and management approved. All beneficial interests of 5% or more must be disclosed. In addition, the Commission requires the written consent of the licensing and supervisory authority from the bank's own jurisdiction.

Banks are licensed either as domestic or offshore institutions. Domestic licenses are only issued to subsidiaries, or branches, of existing banks licensed in jurisdictions which are considered by the Commission to exercise proper licensing and supervision in accordance with the principles of the international Concordat on banking supervision. Applicants must have a profit record covering at least 5 years, and ownership and management must be acceptable to the Commission. The Commission requires written consent from a bank's home supervisor, and expects the home supervisor to exercise consolidated supervision over the bank concerned.

Offshore Banking Licenses are issued subject to the same tests as domestic licenses, but on the basis that the applicant bank will operate through managed units, ie it will not have staff or office on the island, but will appoint a local licensed bank as its manager. An offshore banking institution must agree its intended activities with the Commission before the licence is granted; these may not include transacting business with Manx residents (other than banks).

The FSC has a system of supervision based on quarterly or half-yearly financial returns. This is reinforced by annual audited accounts which must be audited by qualified accountants who have effected professional indemnity insurance currently at £10 million.

Details of the banks that are licensed and supervised by the Financial Supervision Commission are listed in a public register maintained by the Commission at its offices.

All banking licence holders are required to participate in the Depositors Compensation Scheme. The FSC is the Scheme Manager. The Banking Business (Compensation of Depositors) Regulations 1991 extends to all licensed banking institutions, except those listed by name in the Schedule. Deposits are protected up to 75% of the first £20,000 per depositor and the Scheme extends to the sterling equivalent of foreign currency deposits. Compensation is not available with regard to secured deposits or deposits which had an original term to maturity of more than five years.

The Scheme was successfully operated in respect of the default of BCCI which had a branch in the Isle of Man. The Scheme was successfully operated in respect of the default of BCCI which had a branch in the Isle of Man. To date a total of £42.8 million has been received from the liquidators, representing 60 cents on the dollar. Of this, £19.4 million has been paid to claimants. The remaining £23.44 million formed part of the general pool of funds held by the FSC and enabled repayments of £23.47 million to banks — equivalent to 100 per cent of the total levies imposed on them to date.

In June 2000 the Isle of Man Government wrote a 'Letter of Commitment' to the OECD's Financial Action Task Force in which it promised to comply with international standards of transparency and mutual assistance. The Government has not revealed what specific legislative consequences may follow, but it is supposed that there may be some changes to company law, and a strengthening of international treaty obligations which may be reflected in domestic law

In September 2000, an inter-governmental report was published by the Offshore Group of Banking Supervisors and the Financial Action Task Force (FATF) which praised the Isle of Man authorities for their successful endeavours in countering money laundering and related criminal activities with a 'robust arsenal' of pro-active initiatives. The report examined the effectiveness of the island's legislation, regulations and administration activities directed against money laundering. The authors were particularly impressed with plans to strenghten company sector regulations, saying that these enabled the Island to be 'at the forefront of international efforts to prevent the abuse of company structures for criminal purposes.'

The report also welcomed the creation of a new financial crime unit which draws on the combined efforts and expertise of the police, customs and regulators with a pro-active enforcement strategy. And financial professionals and institutions on the island have also been praised by the report - it says that the financial sector has a 'good compliance culture' which allows it to quickly highlight potentially suspicious transactions.