The Isle of Man is not part of the UK or the European Union but is a British Crown Possession.

History and Background
The Isle of Man (population approximately 80,000) is located in the Irish Sea. It was settled by the Vikings in the tenth century. They established a Norse form of government and laid the Island’s foundations as an independent jurisdiction. The Isle of Man is not part of the UK or the European Union (EU) but is a British Crown Possession. The Queen, as ‘Lord of Mann’, is Head of State. The Island has its own elected government, independent judiciary, and laws. The UK is responsible for defence and international relations.

The currency is the Manx pound; the British pound (GBP) and the Manx pound have parity.

Legal System
Tynwald is the Manx legislature. The Island is a common law jurisdiction. The common law generally follows English law, including equity. Decisions of English courts are not binding on Manx courts, but are highly persuasive.

The principal civil court is the High Court (of which the judges are ‘deemsters’). The main appellate court is the Staff of Government Division, but ultimate appeal lies to the Privy Council based in England. There is a separate criminal legal system.

Sources of Law

Trust Creation and Administration
The creation of private trusts follows English law. Trustee powers of administration are conferred by the trust instrument, the Trustee Act 1961, Trustee Act 2001 and the court. The court has extensive statutory powers in relation to trusts and an inherent jurisdiction to supervise their administration. Trusts can also be created for charitable purposes and, under the Purpose Trusts Act 1996, for non-charitable purposes.

The Settled Land Act 1891 confers powers on a tenant for life of settled land and imposes restrictions and requirements in relation to such land.

Property, Estate and Probate
Manx land law differs markedly in its origin from English land law but now closely resembles English freehold/leasehold law in practice.

Property to which deceased people are entitled for an interest not ceasing at death forms their estate and vests in their personal representatives, who administer the estate.
There is freedom of testamentary succession in the Island. A will must generally be in writing and signed in the presence of two independent witnesses. The witnesses must sign the will in the testator’s presence. Rules permit the formally valid execution of wills under foreign law in some circumstances. Where a will does not effectively dispose of assets, statutory rules of intestate succession apply. Certain persons can apply to the court for provision from an estate of someone who dies domiciled in the Isle of Man where inadequate provision has been made by will or the rules of intestacy.

Manx law governs succession to immovable property; the law of the deceased’s domicile governs their movable property.

Taxation
The Isle of Man is independent in matters of taxation. Its sole direct tax is income tax, but it levies value added tax (VAT) and other customs and excise duties in common with the UK under their ‘common purse agreement’.

Trusts
Manx trust law is based on English common law. The Isle of Man has reproduced the main English trust legislation.

Most Frequently Used Trusts
Manx law can reproduce most kinds of trust used for private or commercial purposes in a familiar form. Manx law also permits the establishment of non-charitable purpose trusts provided that they comply with the Purpose Trusts Act 1996.

Occupational pension schemes and other special forms of retirement benefits schemes for international purposes are often formed using Manx trusts.

There is no restriction on the reservation of powers under trusts to a settlor. Common law principles apply. Excessive retention of powers may mean that the settlor retains effective ownership.

There is no general system for the registration of trusts. Certain pension schemes must be registered, as part of the system of supervision of their administration, with the Insurance and Pensions Authority. Manx resident trustees of a trust with Manx resident beneficiaries (or objects) must report the trust to the Assessor of Income Tax if there is taxable income. Where there are no Manx beneficiaries (or objects), Manx resident trustees are expected to report individual trusts so that a decision may be made as to whether the trustees need to file annual returns (so that non-Manx source income will not be taxed). Charitable trusts must also be registered.

Companies limited by guarantee (with or without a share capital) are sometimes labelled ‘Manx foundations’ and marketed as alternatives to trusts.

Proper Law of a Trust
The Hague Convention on the Law Applicable to Trusts and on their Recognition, 1 July 1985 has been passed into law in the Island.

Where it is chosen as the governing law, Manx domestic law (i.e. without reference to private international law) determines most issues concerning disposition of property on trust, terms of the trust and interests, rights and duties of trustees and beneficiaries.

Foreign laws govern formalities of transfer of non-Manx assets and existence and capacity of a foreign entity. Foreign laws (including laws concerning heirship to property) are otherwise largely excluded from application to Manx trusts.

Creation of a Trust
i. Validly constituted trusts
The same rules concerning constitution and certainty apply as under English law. Trusts may be constituted by inter vivos declaration or by will.

ii. Duration and termination of a trust
The rule against remoteness of vesting applies under Manx law. The perpetuity period can be specified at up to 150 years. Otherwise, the common law period of life or lives in being plus 21 years applies. ‘Wait and see’ rules apply to rescue a disposition on trust that may or may not prove to breach the rule against remoteness. Trust income may be accumulated throughout the perpetuity period.

iii. Beneficiaries
Trusts must, with the exception of purpose trusts under the Purpose Trusts Act 1996 and charitable trusts, have ascertainable beneficiaries who can sue to enforce them.
Beneficiaries under a trust have enforceable rights against the trustees.

iv. Trustees
Trustees are bound by ‘conscience’, in accordance with the rules of equity. Their powers may be conferred by the trust instrument, by statute or by the court. Trust instruments commonly deal with trustees’ appointment, removal and discharge. Statute provides powers of appointment of additional or replacement trustees and for retirement.

Trustees owe fiduciary and other duties, such as duty of care. The Trustee Act 2001 imposes the same statutory duties as those imposed in English law by the Trustee Act 2000 (duty of care, duty to obtain investment advice, duty to consider standard investment criteria, etc).

The normal consequence of a breach of trust by trustees occasioning loss would be an order against the trustees for reinstatement of the trust property. The court also has powers of removal and replacement of trustees.

A beneficiary consenting to any breach by the trustee may be precluded from taking action. A trustee may also be entitled to an indemnity from the interest of a beneficiary at whose instigation a breach was committed.

A trustee is entitled to be indemnified from the trust property for proper expenses, and a lien over it until they are discharged.

The court has statutory power to relieve a trustee from liability for breach of trust where the trustee has acted honestly and reasonably and ought fairly to be excused.

v. Protectors
There is no legislation concerning protectors. Protectors, under Manx law, are creatures of the trust instrument itself. Protectors usually hold a fiduciary position and are bound to exercise their powers for the benefit of the beneficiaries. Protectors acting by way of business are also subject to the regulation of trust service providers.

vi. Role of courts
As well as enforcing trusts at the instance of beneficiaries, courts exercise inherent jurisdiction for administration of trusts. Courts have statutory powers, including appointment and replacement of trustees, conferral of powers to effect transactions, variation of trusts, giving of opinions, advice or directions in administration of trusts. The court has power to grant declarations and to construe documents.

Trust Administration
i. Investment
Trustees owe a duty of care to preserve trust property in accordance with their powers. In addition, the Trustee Act 2001 imposes duties when exercising any power of investment, including an obligation to take advice unless unnecessary or inappropriate.

Trustees are obliged to consider ‘standard investment criteria’: necessity of diversification and suitability of a proposed investment for the trust in question.

If trustees delegate investment management (under their power to do so in the Trustee Act 2001), they must give a written policy statement to the investment manager and ensure that they properly supervise and regularly review the arrangements.

Trust instruments usually confer wide powers of investment. Subject to restrictions in the trust instrument, trustees now have individuals’ powers of investment.

ii. Maintenance and advancement
The Trustee Act 1961 directs the accumulation of income during the minority of a beneficiary, but confers a power to apply it for the beneficiary’s maintenance Education or benefit in the interim. This Act also confers power on trustees to advance up to half of the presumptive share of a capital beneficiary, subject to prior interests.

iii. Variation of a trust
The Variation of Tru/sts Act 1961 allows the court to approve a variation of a trust on behalf of certain persons beneficially interested. The Trustee Act 1961 gives the court power to approve individual transactions not otherwise permitted by the trust instrument. The rule in Saunders v. Vautier applies.

Confidentiality and Disclosure
Trustees are fiduciaries and owe duties of confidentiality. In Schmidt v. Rosewood Trust Limited (2003), the Privy Council held that a beneficiary’s right of inspection of trust documents and to information about a trust is based upon the court’s inherent jurisdiction for administration of trusts. Rights of objects of mere powers are, in principle, as extensive as those of beneficiaries. No one is entitled to unlimited disclosure. Safeguards may be put in place and restricted disclosure may be ordered in future, to protect the confidentiality of beneficiaries, trustees, or anyone else.

Beneficiaries are not entitled to reasons for exercise or non-exercise of dispositive powers.

Rights of Creditors
i. Transfers into trust
Under the Fraudulent Assignments Act 1736, ‘fraudulent Assignments or Transfers of the Debtor’s Goods or Effects’ are void. However, this legislation affects ‘present debts’ only and does not include future debts.

Settlements made within two years (or ten years if the bankrupt cannot prove that the bankrupt remained solvent afterwards) preceding bankruptcy of someone within the bankruptcy jurisdiction of the Island are void as against the trustee in bankruptcy, unless made in consideration of marriage or in good faith in favour of a purchaser or encumbrancer for valuable consideration.

The Bankruptcy Act 1988 obliges Manx courts to assist courts exercising bankruptcy jurisdiction in other relevant jurisdictions under mutual enforcement agreements.

ii. Limitation period
The limitation period under the Limitation Act 1984 for breach of trust is six years from the date on which the cause of action arose. Time does not run against an unborn, minor, or incapable beneficiary or a beneficiary having a future interest (until the interest falls into possession). It also does not run where a trustee has deliberately concealed any relevant fact, until it is discovered, or where the trustee is accused of fraud or conversion.

iii. Rights of trustees and beneficiaries
Trustees have rights of indemnity from, and a lien over, trust property for their proper expenses. Unsecured creditors have no direct right of recourse to trust assets.

Provision for Private Trust Companies
i. Requirements
There is no restriction under Manx law on appointment of a private trust company.

ii. Fees
There are no special provisions.

Other Forms of Legal Entities

Commonly used legal entities
There exist on the Island: companies limited by shares (private or public); companies limited by guarantee (with or without a share capital); unlimited companies; and US-style limited liability companies (LLCs).

LLCs have limited liability and legal personality like companies, but are transparent for taxation purposes. Partnerships (and limited partnerships) can be formed but do not exist as separate legal entities.

Incorporation
Details of directors, secretary, registered office, Memorandum of Association, and Articles of Association are filed and a Certificate of Incorporation is issued. (These requirements will be reduced for the new corporate vehicle when the Companies Act 2006 comes into effect.) To incorporate an LLC, Articles of Organisation are filed, and members enter into an operating agreement. The Registry issues a Certificate of Organisation. Incorporation takes up to 48 hours.

Capitalisation
Company shares may be ordinary, preference, or redeemable, and may carry special rights. The issue of bearer shares has been prohibited, with effect from 1 April 2004. Previously issued warrants to bearer (bearer shares) need to be exercised (and registered shares issued) before holders can exercise their rights (to claim dividends, to vote, etc.).

The Isle of Man does not have its own stock exchange, but Manx law imposes additional requirements on companies (public companies) whose shares may be offered for public subscription.

Promoters who intend to apply for a listing on the Alternative Investment Market often use Manx companies. This is partly because, unlike in some other finance centres, the offer of shares in a closed-ended Manx company is not subject to investment business regulation. There also may be tax advantages to using a Manx (non-UK) company.

Director requirements
Companies have had to have at least two directors who are individuals. If a company holds ‘exempt’ or ‘international’ tax status, at least one director and secretary (holding appropriate qualifications) must be resident on the Island. Individuals who are disqualified as directors or undischarged bankrupts cannot be appointed as directors without leave of the court. Companies incorporated under the Companies Act 2006 will be able to appoint a sole director, including a corporate director (subject to certain requirements).

Disclosure and other requirements
Directors have had to prepare annual accounts (half-yearly for public companies). They have had to be audited unless the company is exempt under regulations. Private companies are not obliged to file accounts. Directors must complete and file annual returns (with fee of GBP60). Companies incorporated under the Companies Act 2006 are required to maintain records rather than to prepare accounts, and general filing requirements are reduced.

Taxation
Until now, non-residents have enjoyed ‘ring-fencing’ from taxation of income not afforded to Manx residents. There are two major developments due to the EU Taxation Package. Zero rate of corporate tax has been applied to most companies from 5 April 2006, with a ten per cent rate on defined regulated businesses, principally core banking businesses. The current exempt and international tax regimes will be abolished with effect from 6 April 2007.

In response to the EU Savings Directive, the Island has opted not to apply automatic exchange of information, but to adopt withholding tax on interest payable to EU resident individuals on the same terms as Austria, Belgium and Luxembourg for a seven-year transitional period, unless such individuals opt instead for their details to be disclosed.

Tax System
i. General concepts of tax liability
The Island levies no death or estate duties, gift taxes, capital transfer tax, capital gains or wealth tax, inheritance tax or stamp duties. (Taxation is being contemplated, however, in respect of capital profits arising from land in the Isle of Man.)
The sole direct tax in the Isle of Man is income tax. National insurance contributions (where applicable) are levied at equivalent rates to those in the UK.
Customs and Excise collect duties and VAT arising in the Island, applying the same import and export controls as those in the UK. There are thus no fiscal customs barriers between the UK and the Island.

ii. Rates and exemptions
Income tax is charged on a Manx resident’s worldwide income and on a non-Manx resident’s Manx source income. For the year from 6 April 2005 to 5 April 2006, income tax of individuals is levied at ten per cent on the first GBP10,300 of income and at 18 per cent for any further income. Married couples are taxed jointly (unless they elect for separate treatment). Where payable, Manx source income arising to non-resident persons is also charged at 18 per cent or, in the case of trading income arising in the Isle of Man to a non-Manx resident company, ten per cent.

Relief is given for loan interest paid, pension contributions, life assurance premiums, charitable donations, and payments under covenant. Individuals receive a generous personal allowance. Non-residents do not receive a personal allowance.

Trading companies pay ten per cent on the first £100,000,000 of taxable income and 15 per cent on the remainder. Income tax for non-trading companies is charged at 18 per cent.

Exempt companies and international LLCs, and their members, are exempt from income tax.

International companies may apply to be assessed on income at a chosen rate of taxation up to a 35 per cent maximum. Tax accounted for by international companies on payments to members or directors confers a refundable tax credit on exempt companies. Limited partners in international limited partnerships are not liable to pay income tax on partnership income. There are restrictions on what income can arise in the Isle of Man for these exemptions and limitations to apply.
Certain companies formed under a previous taxation regime (‘non-resident companies’) are not subject to taxation on non-Manx source income, but pay annual non-resident company duties of £1,000. There is now a moratorium on their creation, and they are expected to be phased out totally.

iii. Tax evasion and avoidance
The Island respects international standards, is committed to the Organisation for Economic Co-operation and Development’s (OECD) global standard of exchange of information and condemns tax evasion. Responding to the EU Taxation Package, the Island has introduced a transitional withholding tax applicable to EU resident individuals. Taxpayers may opt instead for disclosure of their details.

The Assessor of Income Tax has statutory power to avoid artificial avoidance of Manx income tax.

iv. Taxable period and filing requirements
The tax year runs from 6 April to 5 April. The period of assessment for individuals is based on current year income. Companies are generally assessed on income of the preceding year. Individuals and companies must submit annual returns.

International
i. Non-resident shareholders and trusts for non-residents
Non-residents are generally liable to pay Manx income tax at a rate of 18 per cent on all income arising in the Isle of Man or from an Isle of Man source. They have no personal allowances.
Manx resident trustees of a trust of which the settlor and beneficiaries (or objects) are Manx resident are liable to Manx income tax at 18 per cent on worldwide income not distributed to beneficiaries. Where the settlor and beneficiaries (or objects) are non-residents, the trustees will not be liable to pay income tax, provided that the income arises outside of the Island or arises from certain sources.

ii. Non-resident withholding taxes
Deductions are made at source for non-residents at 18 per cent on Manx source income other than bank interest, building society interest and dividends from certain companies. Interest paid to EU-residents may, however, be subject to withholding tax under the Savings Directive.

iii. Tax treaties
A double taxation agreement exists between the UK and the Isle of Man whereby individuals who have income from sources in the UK are entitled to relief.

A second agreement, with the US, exempts gross income derived from the international operation of ships by Isle of Man residents and corporations.

Equivalent exemptions are granted by the Isle of Man.

In the absence of an agreement, unilateral relief is given for any income that suffers foreign withholding tax. The amount is based on the lower of the foreign tax or Manx tax charged on the income.

The Isle of Man entered into an exchange of information agreement with the US in October 2002, on a request for information basis.

Other Relevant Matters

Anti-money laundering rules
The Island has applied Know Your Client Rules since 1985, and its first anti-money laundering legislation was introduced in 1987. In 1998, the Anti-Money Laundering Code (Code) was passed and applied to many forms of business, including acting as trustee and providing corporate services. Failure to comply with the Code is an offence. There are also offences of laundering proceeds of crime and terrorist funds.

Company service provider regulation also imposes requirements.

Trustee regulation
The Fiduciary Services Act 2005 which took effect in July 2005 provides for regulation and licensing of professional trust service providers. Any person who, by way of business, carries on (or holds themselves out as carrying on) activities of acting as a trustee, a trust corporation, a ‘protector’ (or similar post) or an enforcer of a purpose trust or of providing trust administration services, must (1) be licensed and (2) comply with regulatory codes. Private trust companies are not in themselves regulated.