Isle of Man: Legislative Changes

The Isle of Man has a 25 year record of unbroken growth and at the end of 2008 it was announced that the Island had retained its ‘AAA’ rating from Standard & Poors and Moody’s external ratings agencies.

The 2008/09 budget sought to strike a balance in a challenging economic environment by offering support for the economy and avoiding tax increases or public service cuts. The zero rate of corporate income tax introduced in the 2006 budget remained unchanged, with the higher rate of 10 per cent continuing to apply only to income arising from banking business carried out by Isle of Man licensed banks and to income derived from Isle of Man land and property.

2008/2009 has seen a range of new legislation introduced in the Isle of Man, with the key developments being in the areas of financial services regulation and company law.

Constitutional Position of the Isle of Man

The Isle of Man is a self-governing dependency of the British Crown. It does not form part of the United Kingdom (UK). By long standing constitutional convention, the Island has complete autonomy in relation to domestic affairs, including taxation and business law.

The Island is not a Member State of the European Union (EU). Under Protocol 3 to the Act of Accession, whereby the UK became a Member State, EU rules only apply to the Isle of Man in relation to a limited range of matters. Accordingly, EU directives on tax harmonisation, company law and financial services do not apply in the Isle of Man.

The Island is a common law jurisdiction and its legal traditions draw heavily on those of England, so much so that English case law is of high persuasive authority in the Isle of Man. This legal stability gives the jurisdiction the commercial legal certainty long associated with the English legal system, combined with the flexibility of an international financial services centre.

Financial Services Legislation

The Isle of Man Financial Supervision Commission (FSC) is responsible for the regulation of the majority of the financial sector, namely banks, building societies, investment businesses and fiduciary service providers. Until 1 August 2008, each category of financial services provider had been subject to separate, independent legislation and regulations providing for different categories of licence.

On 1 August 2008, the Isle of Man Financial Services Act 2008 came into force. The Act consolidates the regulatory regime in respect of each of the categories under one Act, providing transparency and significant simplification. This is particularly so in the case of financial service providers who held more than one type of licence under the old regime. The Financial Services Act 2008 was accompanied by consolidated secondary legislation and a new Rule Book.

The new Act and Regulations were the subject of much consultation between the FSC and licenceholders, reflecting the Government’s objective to ensure that any new rules were workable and represented a practical balance between regulatory constraints and the freedom required to promote business growth. The result is a transparent and user-friendly regulatory environment which meets international standards.

Insurance Act 2008

The Isle of Man Insurance and Pensions Authority is responsible for the regulation of the Island’s insurance sector. A new Isle of Man Insurance Act 2008 came into force on 1 December 2008. The Act consolidated and repealed a number of earlier Acts and is now the primary legislation dealing with the regulation of authorised insurers, permit holders (foreign insurers), registered insurance managers and registered insurance intermediaries. The new Act is both clear and comprehensive and ensures that the Island has an appropriate and up-to-date regulatory framework.

Companies (Amendment) Act 2009

The Companies (Amendment) Act 2009 came into force on 1 September 2009. The Act primarily amends the Companies Acts 1931-2004, the Companies Act 2006 and the Limited Liability Companies Act 1996. The amendments were made at the request of industry practitioners and in order to update the legislation to reflect evolving international standards (relating in particular to IOSCO and the IMF). The main amendments to note are:

• simplification of the prescriptive prospectus requirements for a company incorporated under the Companies Acts 1931-2004 (1931 Act Company);
• new powers to enable the FSC to issue directions to a company if it becomes aware of matters which give it reasonable cause to believe that a statement included in a prospectus is untrue or misleading or that a prospectus has been issued in contravention of, or otherwise than in compliance with, a provision of the Act;
• changes to accounting requirements and clarification of auditor qualification requirements;
• repeal of the prohibition on private 1931 Act Companies giving financial assistance;
• introduction of a power to enable the FSC to make regulations allowing for treasury shares; and
• clarification of accounting record requirements for companies incorporated under the Companies Act 2006.

Company Officers (Disqualification) Act 2009

The new Company Officers (Disqualification) Act 2009 came into force on 18 June 2009. The new Act places all provisions dealing with the disqualification of officers of a company into one statute. The following are officers of a company for the purposes of disqualification under the new Act:

• a director, secretary or registered agent (this includes a registered agent under the Companies Act 2006 and a registered agent under the Limited Liability Companies Act 1996);
• a liquidator;
• a receiver;
• a person holding an office under any relevant foreign law analogous to any of the offices specified above in respect of a company; a person who, in any way, whether directly or indirectly, is concerned or takes part in the promotion, formation or management of a company.

Under the new Act, either the FSC, the official receiver, a liquidator or any past or present member or creditor of a company in relation to which a person has engaged in conduct rendering him unfit to be an officer, may petition the court for a disqualification order. Previously, under the old disqualification legislation, only the FSC could petition the court for a disqualification order.

In addition to disqualification orders, the Act introduces the new concept of ‘disqualification undertakings’ which have been available in the UK for some time. This is an undertaking by a person that they will not, for a period of time, be an officer of a company without the leave of the court or the FSC. Only the FSC can accept a disqualification undertaking. 

Isle of Man Companies and Capital Markets

Isle of Man companies continue to represent a growing number of the new applicants to AIM, PLUS and the Main Market, as an increasing number of businesses realise the significant advantages of using an Isle of Man vehicle to access capital markets in the UK. According to Hemscott’s report on AIM company registrations, June 2009, Isle of Man companies make up the largest share of the non-UK AIM companies’ market capitalisation.

Isle of Man closed-ended companies (ie companies which do not provide their investors with a right of exit) are not subject to ‘fund’ regulation in the Isle of Man and are instead treated in the same way as any other company for regulatory purposes. Accordingly, there are a number of important advantages to using an Isle of Man company for accessing capital markets, including:

• no regulatory pre-approval requirements or fees in the Isle of Man;
• no requirement for a licensed fund manager, administrator and/or custodian to be appointed;
• no prescriptive requirements as regards board composition;
• no restrictions on asset classes, investment strategy or leverage;
• shares in an Isle of Man company can be traded through CREST.

Extension of Takeover Panel Provisions to the Isle of Man

On 1 March 2009, Chapter 1 (The Takeover Panel) of Part 28 (Takeovers Etc) of the English Companies Act 2006 has been extended to the Isle of Man with the appropriate modifications. As a result of the extension of Chapter 1 of Part 28 to the Isle of Man, the Takeover Panel has been put on a statutory footing in relation to its regulation of relevant takeovers and mergers involving Isle of Man companies. Accordingly, the rules set out in the Takeover Code will also have a statutory basis in relation to the Isle of Man.

Funds Update

The establishment and operation of investment funds in the Isle of Man is now governed principally by the new Collective Investment Schemes Act 2008 and the Financial Services Act 2008, both of which came into force on 1 August 2008.

The Isle of Man’s low tax status, political and economic stability and proximity to the key markets of Europe make it a compelling and cost-effective alternative for the domicile of investment funds. With a wide range of fund service providers and a sophisticated professional and banking infrastructure, the Isle of Man offers a solution for all fund promoters. The Isle of Man has a full suite of fund options ranging from fully regulated, retail-focused ‘authorised schemes’ to private fund arrangements that fall wholly outside the scope of regulation. Between these extremes are a range of unapproved funds that are subject to varying degrees of structural regulation.

The Isle of Man Fund Management Association has been working closely with the FSC to ensure that the Island is best placed to attract new fund business and, in particular, private equity business. The Isle of Man specialist fund type is the vehicle most commonly used for this type of fund business. The regulations governing the establishment of specialist funds have recently been amended to ensure that promoters and sponsors wishing to establish private equity schemes in the Isle of Man have as much flexibility as possible when establishing a scheme.

Aircraft Register

The Isle of Man Aircraft Register became operational on 1 May 2007. In the two years since its launch, the Register has gone from strength to strength. That an appetite existed for a reactive, well-regulated private register in a European friendly time zone has been evidenced by its success. The Register boasts a current compliment of 154 registered aircraft to date which include an Airbus 340 and, recently, an Embraer Phenom 100 – the first of its type to be registered in Europe.

At the beginning of May 2009, the Aircraft Registry announced its collaboration with IBA Group Limited for the provision of temporary registration services for inactive commercial aircraft, which will be ‘parked’ for the duration of their registration on the Register as private aircraft. Due to the current economic climate there has been a need for a safe, neutral register for aircraft which are the subject of repossession by lenders or are simply between leases. The Register satisfies this requirement by providing the reassurance of a familiar statutory environment in a common law jurisdiction with stringent regulation whilst also being fiercely competitive on costs.

Tax Information Exchange Agreements (TIEAs)

As part of the OECD’s initiative on harmful tax practices, it has set internationally agreed standards on transparency and exchange of information on tax matters. One way in which these internationally agreed tax standards may be met is by countries entering into TIEAs. TIEAs are agreements entered into between countries which allow governments to enforce their domestic tax laws by exchanging, on request, information relevant to tax matters covered by the arrangements.

The Isle of Man signed its first TIEA with the United States (US) in 2002. A further TIEA with the Netherlands was signed in 2005, followed by seven TIEAs with the Nordic countries in 2007. Since then the Isle of Man has signed TIEAs with the United Kingdom (UK), Ireland, Australia, Germany, France and New Zealand. The Isle of Man has also signed double taxation agreements with Estonia and Belgium based on the model published by the OECD.

On 2 April 2009, the OECD issued a progress report on the implementation of the internationally agreed tax standards. The Isle of Man, along with jurisdictions such as the UK, the US, France and Germany, was on the ‘white list’ of jurisdictions that have substantially implemented the internationally agreed tax standards.

Conclusion

The Island continues to offer a low tax business environment, political and economic stability and geographic proximity to the City of London and the rest of Europe. In addition, the Island has built up a sophisticated professional infrastructure with a deserved reputation as a well-regulated jurisdiction. All of these factors, combined with a ‘can do’ business environment and close cooperation between the public and private sectors, ensure that the Island continues to meet the expectations of those choosing to do business here.

However, the Island is not complacent about its future. The Isle of Man recognises the need to ensure that it continues to achieve a high level of compliance with evolving international standards. In view of the current economic climate, international financial services centres will remain in the spotlight and will continue to have their financial services regulation, anti-money laundering legislation and financial stability assessed by international organisations against internationally accepted benchmarks. Most recently, the IMF has just published a favourable report on the Isle of Man following its assessment of the Island by an IMF team in September 2008.

Appleby
Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Hong Kong, Isle of Man, Jersey, Mauritius, Seychelles and Shanghai.