Have you adopted an Isle of Man digital tax strategy to support sustainable profit growth for your digital business?

Date 04/07/2024
6 minutes to read
Isle of Man Tax

The Isle of Man is renowned for its favourable business climate, particularly for sectors like eGaming, Esports and Fintech. With a dynamic digital economy, the island offers a tax-friendly environment alongside a burgeoning hub of expert digital consultants. 
Equiom Tax Services Limited, a local tax practice shines a light on the wider tax considerations any aspiring digital business should consider incorporating into their digital tax strategy to support sustainable profit growth. Kevin Cowley and Mark A Hagan, Tax Directors at Equiom Tax Services Limited, offer the following high-level tax thoughts for your further consideration.
The Isle of Man has an attractive tax landscape for businesses, operating its ‘zero/ten’ regime in which the majority of companies are subject to tax at a rate of zero percent unless you have income from certain sources which is subject to positive rates of tax (which were initially set at ten percent, hence the zero/ten regime name). The income sources which are taxable at a positive rate of tax are:

  • Income from Isle of Man properties
  • Banking income
  • Retail income (when profits are above a set threshold, currently £500,000) 

 The Isle of Man currently intends to keep the zero/ten regime in place for the foreseeable future, although large multinational groups should note the Isle of Man’s commitment to complying with the OECD’s BEPS Pillar Two initiative of a global minimum tax rate – this should only affect the largest multinational groups though. 
Avoiding substance abuse
The zero percent corporate income tax rate is of course an attractive proposition for companies who are expecting to make large profits; however, companies which are resident in the Isle of Man must also comply with the Isle of Man’s Economic Substance rules if they have income in a ‘relevant’ sector (including income from Intellectual Property (IP)). In broad terms, this means that they must demonstrate that they have appropriate substance in the Isle of Man to support the generation of profits. This will mean satisfying the Income Tax Division that they have adequate people, premises and activity in the Isle of Man as well as demonstrating that the governance of the company is properly carried on from the Isle of Man. 
In the digital era, companies need to be careful if they are unsure whether income may be deemed to relate to IP or not. There is a nuanced argument in some cases as to whether some types of income are deemed to relate to IP or not, and it is important for companies to take advice if they are unsure how the Income Tax Division would view the income in case such income would bring them into scope of the Economic Substance rules.
Isle of Man resident companies which do receive IP related income must also consider their classification within the Economic Substance rules as to whether they would be classified as a high-risk IP company or just an IP company. In very basic terms, a high-risk IP company is one that acquired its IP from a related party and also receives income for the IP from other related parties. It is, understandably, more difficult for these companies to satisfy the Assessor that they do have adequate substance in the Isle of Man than for a regular IP company. The Income Tax Division automatically assumes that high-risk IP companies do not have adequate substance with the onus placed on the taxpayer to demonstrate otherwise.  
People and international mobility
The Isle of Man’s personal tax system represents an attractive proposition for those seeking to relocate. The higher rate of personal income tax is just 22% which, when coupled with a generous (tax-free) personal allowance of £14,500 and a lower rate banding of 10% for the first £6,500 of taxable income, represents a competitive low income-tax environment. There are no capital taxes in the Isle of Man (either capital gains tax or inheritance tax) which makes a longer term move to the Island appealing. 
In addition to the general low tax environment, there are specific measures designed to encourage employees and entrepreneurs to the Island, notably;

  • The Key Employee Concession – a concessional treatment, awarded on application to the Income Tax Division, which restricts a new arrival’s exposure to Isle of Man income tax for their first 3 tax years  
  • Income tax ‘relocation relief’ for certain expenses incurred by employees and their employer when moving to the Isle of Man
  • A National Insurance ‘Holiday’ scheme

 Equiom Tax Services Limited can help employees to register for Isle of Man income tax and deal with all local tax filing and administrative requirements. We can also provide help in managing an individual’s tax position on exiting their former country of residence. From the employer’s perspective, we can provide input to advise and assist on all areas of payroll and employment related issues, including possible international exposures for mobile employees, confirmation of taxable benefits (if any) and more complex payroll queries.
FinTech and VAT
There are some VAT factors that FinTech businesses should consider which can impact their cost base and VAT compliance requirements. With the sector growing in the Isle of Man, some examples of issues we have encountered include:
•    Exceeding the VAT registration threshold, perhaps inadvertently, as a result of receiving services from overseas
•    Partial exemption considerations and whether a partial exemption special method may produce a more representative VAT recovery percentage than the standard method
•    Place of supply of services – it may be correct for some supplies to be treated as outside the scope of VAT with right to input VAT recovery, resulting in a VAT positive position for the taxpayer, but this can be overlooked
•    Complexity where the nature of services being supplied is open to debate – which is relevant where one type of supply would be taxable while another would be exempt, such as intermediary services
Whilst the Isle of Man’s unique position as part of the UK VAT and Customs area while being outside of the UK for other taxes brings several advantages, it also means that VAT rules are broadly the same as in the UK, and VAT should therefore be carefully considered by any fintech business trading from the Island.
Gaming companies and VAT
It is commonly accepted that the Isle of Man exemplifies a pro-business tax environment. However, there is a common misconception that a 'VAT concession' exists for the benefit of gaming companies. Alas, with the Isle of Man’s VAT legislation mirroring that of the UK and being administered in accordance with United Kingdom guidance and practice notices VAT may represent a significant cost to gaming companies if not managed effectively.
There are specific measures gaming companies may wish to consider in order to optimise VAT relief, notably;

  • Implement an appropriate operational service structure
  • Categorise and apportion operational costs and document VAT relief methodologies
  • Document operational activities and affirm VAT relief entitlement with Isle of Man Customs & Immigration

 Following the simple VAT considerations noted above will enhance VAT compliance and importantly optimise VAT relief, thereby contributing to longer term sustainable profitability. 
Commercial land/property and VAT
Entrepreneurs acquiring commercial land/property on the Isle of Man to facilitate their digital business, would be advised to take professional advice to secure optimal tax and VAT treatment. Typically, from a VAT perspective, dealings in commercial land/property can be standard rated, zero rated, exempt or even outside the scope of VAT depending upon the specific facts and assuming the wrong VAT classification may be costly.
VAT on commercial land/property transactions is a complex area, and great care needs to be taken to ensure that all parties to a property transaction fully understand the implication of VAT on their transaction.
Equiom Tax Services Limited can assist entrepreneurs acquiring commercial land/property through pre-purchase due diligence, transaction structuring and post transaction compliance fillings to ensure an optimal tax and VAT outcome is delivered. 

To find out more, speak to our Tax experts Kevin Cowley or Mark Hagan.

This article has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. This article cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained within this article without obtaining specific professional advice. Please contact Equiom Tax Services Limited to discuss these matters in the context of your particular circumstance. Equiom Tax Services Limited, its partners, employees, and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this article or for any decision based on it.

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