It has been widely recognised for several years that the Isle of Man is one of the leading centres in the world for offshore financial services. With the introduction of radical new tax and companies legislation it can now be argued that the island is leading the way for other well regulated centres for international finance to follow. The big question for all the other jurisdictions is: do they have the financial strength to keep up?
The Isle of Man is an internally self governing dependent territory of the British Crown, not forming part of the United Kingdom and whilst enjoying a special relationship with the European Union, it is not a member state or an associate member. Such independence, together with its size (33 miles long, 13 miles wide with a population of around 80,000) and a dynamic government, have meant that the island has been able to expand into other up and coming industries such as e-business, space commerce, civil aviation, the film industry and funds management. The result has been that the Isle of Man has had 21 years of unbroken economic growth, which in the past 10 years has averaged six per cent – compared with the European Union average of only 2.4 per cent – and unemployment levels are below 1.5 per cent. At the same time, the island has been able to maintain its coveted AAA credit rating from both Standard and Poor’s and Moody’s credit rating agencies since the year 2000.
Despite all this the island is not complacent and is continually considering new initiatives to enhance its attractiveness and to encourage inward investment in activities which will create employment opportunities and generate income. The Isle of Man has over the last year introduced forward thinking e-gambling and companies legislation, a radical new tax strategy and after much consultation and planning has now brought into force the Human Rights Act 2001 which incorporates the European Convention on Human Rights into Manx law. Further legislation to cover civil aviation, foundation style entities and pensions provisions are envisaged for 2007.
In response to recent OECD and EU initiatives, the 2006 Isle of Man budget implemented the Isle of Man tax strategy which has been the subject of much planning and consultation over the past five years. The result is an innovative and proactive corporate income tax strategy which will undoubtedly strengthen the island’s competitive position internationally and has placed the Island at least two years ahead of its main competitors.
With effect from 6 April 2006, the general rate of corporate income tax in the Isle of Man is zero per cent (except for income derived from land and property in the Isle of Man and income arising from banking business, which will be taxed at the higher rate of 10 per cent – although plans are afoot to introduce a tax cap for banking business as well).
The Isle of Man Treasury Minister has also confirmed that the Isle of Man government has no intention of introducing capital gains tax in the Isle of Man and there will continue to be no stamp duty or inheritance tax.
Another new concept introduced by the 2006 Isle of Man budget is the cap of £100,000 on an individual’s income tax liability, which commenced on 6 April 2006. This cap will be available, on application to the assessor, for all individual taxpayers, both current residents and new residents. (The standard rate of income tax on the Island is 10 per cent with a higher band of 18 per cent and a £20,000 personal allowance). This particular change has already seen an influx of high net worth entrepreneurs moving to the Island.
In light of the above implementations, the Isle of Man has also amended and widened the audit exemption thresholds. As a result a company will now fall within the definition of an ‘audit exempt company’ in any financial year if at least two of the following three conditions are met:
it employs no more than 50 persons at any time during that year; and
A private company will also continue to fall within the definition of an ‘audit exempt company’ in any financial year if all its members are directors and it exists wholly for the purpose of holding shares, securities, other investments or land and is not regulated.
Companies Act 2006
Traditionally, Isle of Man company legislation has been based on English company law statutes. The new Isle of Man Companies Act 2006, which came into force on 1 November 2006, (the Act) introduces a new simplified corporate vehicle into Isle of Man law. The new corporate vehicle follows the international business company model, which is available in a number of offshore jurisdictions.
The New Manx Corporate Vehicle (the NMV) will be attractive to businesses as they will enjoy more flexibility and will be easier to administer than previous Isle of Man companies.
The Act does not distinguish between public and private companies and (subject to any restrictions in a company’s memorandum or articles of association) any type of company under the Act will be able to offer its securities to the public. If a company does issue an offering document the criteria with which the offering document must comply are far less prescriptive than the traditional prospectus requirement which previously applied.
A company incorporated under the Act will not need to classify its assets as income or capital. Instead, the Act will allow a company to distribute its assets to its members(whether by way of dividend, buy back or redemption of shares or otherwise), provided that the directors of the company are satisfied that the company will, immediately after the distribution, be able to pay its debts as they become due in the normal course of its business, and the value of its assets exceeds the value of its liabilities (the solvency test).
A company will be able to reduce its share capital in any way, without the need for sanction of the court, provided that the directors are satisfied, on reasonable grounds, that the company will immediately after such reduction, satisfy the solvency test. Essentially, the doctrine of capital maintenance has been removed along with the prohibition on a company providing financial assistance.
The Act introduces substantially reduced compulsory filings. In addition companies are not required to hold annual general meetings and members meetings will be allowed to be held at such time and in such places, within or outside the Isle of Man, as the convener of the meeting considers appropriate.
In addition the Act also provides an extensive new range of member protection provisions such as the ability to appoint an inspector to investigate the company’s actions.
As you would expect from a well regulated jurisdiction each NMV will be required to have an Isle of Man regulated registered agent who holds an appropriate licence issued by the Isle of Man Financial Supervision Commission.
In line with the island’s moves towards diversification of industry, the Isle of Man government is currently preparing for the take off of an Isle of Man Aircraft Register. It is intended that the aircraft register will initially focus upon private aircraft owners and companies with their own aircraft, rather than commercial aircraft used for public transportation. The government’s commitment to this initiative was demonstrated in April 2006 with the appointment of the Island’s first director of civil aviation, who has been tasked with the implementation of the register. Legislation to enable the register to be established is currently being drafted and it is anticipated that there will be an operational aircraft register by spring 2007. The model for the register is likely to follow the Island’s already successful shipping registry.
International insolvency law
The Isle of Man recently played its part in concluding a long running case in respect of an insolvent group of companies. In doing so the Manx court (in the guise of the Privy Council) has rendered a landmark decision in clarifying the law of international cross border insolvency and the circumstances in which courts can assist each other in this area.
In its judgment of 16 May 2006, relating to an appeal by Cambridge Gas Transport Corporation, the Privy Council set out the boundaries by which courts in common law jurisdictions can give assistance in insolvency situations at the request of a foreign court.
The Privy Council judgment arose out of proceedings originally commenced in January 2004 in the US Bankruptcy Court Southern District of New York by the Navigator group of companies with combined debts of over US$300m. The Navigator Companies were incorporated on the Isle of Man but the majority of their creditors were located in the US. The US Bankruptcy Court ordered the implementation of a plan proposed by the creditors for the re-organisation of the group so as to place them in control of the creditors in satisfaction of the debts due to them (a ‘debt for equity swop’). To achieve this the US Bankruptcy Court issued a Letter of Request seeking the assistance of the Manx Court, which, inter alia, involved assistance with the transferring of shares.
The Manx Appeal Court (Staff of Government Division) held that the Manx Court did have the ability to accede to the request from the US Bankruptcy Court and this decision was the subject of appeal by Cambridge Gas Transport to the Privy Council. In summary, the Privy Council considered that it would not be unfair for the US reorganisation to be carried into effect and that it would be right for the Isle of Man to assist in the transfer of the shares to the creditors.
In reaching its decision the Privy Council stated that bankruptcy or insolvency proceedings constituted a separate category of case to which the usual rules of private international law concerning the recognition and enforcement of judgments did not apply. Bankruptcy and insolvency proceedings did not determine or establish the existence of rights, as would be the case of most judgments, rather they provided a mechanism for enforcement against the property of the debtor (company or individual) by creditors.
Already this judgment is being quoted and relied upon in the English House of Lords and the decision will dispel any uncertainty about the ability of the Isle of Man to play its part in international insolvency situations including, as in this case, to the benefit of creditors of hugely insolvent companies.
The Isle of Man is now at the forefront of the offshore world and with its continual consideration of new initiatives to enhance its attractiveness and to encourage inward investment, it is only going from strength to strength. A recent Quality of Life Survey conducted by MORI showed there is a 93 per cent satisfaction with the quality of life on the island, significantly higher than that found in other jurisdictions. This demonstrates that not only is the Isle of Man an advantageous place to conduct business, it is also regarded as a great place to live.
Nick Verardi Partner and Group Head of Corporate & Commercial Team