The Isle of Man is an attractive place to anchor a business, offering a stable economy; zero per cent corporation tax; no capital gains tax, inheritance tax or stamp duty; a sophisticated infrastructure; an established financial services support industry; a large number of inter-governmental agreements; and, above all, a supportive, responsive and forward-thinking government.
The Isle of Man is a self-governing Crown Dependency with the oldest continuous parliament in the world. The Programme for Government published by the Council of Ministers following the most recent election sets out three strategic objectives: (1) an inclusive and caring society; (2) an Island of enterprise and opportunity; and (3) a financially responsible government1.
The Isle of Man Financial Services Authority (IOMFSA) is now well established as the Island’s financial services regulator, replacing the Financial Supervision Commission (FSC) and the Insurance and Pensions authority, which merged in late 2015 to provide a more cohesive approach to regulation in the Isle of Man and simplify compliance for the many financial services businesses that were previously regulated by both authorities. The IOMFSA has been active in recent years both in amending legislation to better suit the financial services industry and in taking enforcement action, particularly in respect of seeking to wind up funds and disqualifying persons unfit to act as directors2.
The Isle of Man prides itself on being responsive to international needs while maintaining a business-centric approach. Following the Fifth Round Mutual Evaluation Report of the Council of Europe’s Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL), the Isle of Man government has been working to address the improvements recommended3. The Anti-Money Laundering and Other Financial Crime (Miscellaneous Amendments) Act 2018 introduced additional record keeping and filing requirements for foundations and new obligations on trustees aimed at combatting money laundering and terrorist financing risks.
There were changes to the Isle of Man funds regime towards the end of 2017 with some closed-ended investment companies brought within the definition of a collective investment scheme and so within the scope of the Collective Investment Schemes Act 20084. This should not affect existing companies (provided they do not make any future public offers) and there are safe harbours where shares are no promoted to the public. Closed-ended investment companies whose shares are listed on a recognised stock exchange are also kept outside of the collective investment scheme regime. Additionally an exemption was introduced to allow for the use of an Isle of Man exempt manager, exempt asset manager and/or exempt investment advisor who is not regulated by the IOMFSA (subject to certain conditions)5. The IOMFSA also issued a guidance note on the governance of collective investment schemes6.
Significant changes are also underway to update the Isle of Man’s insurance legislation in line with international standards with the Insurance (Amendment) Act 2017 being applied in stages.
Isle of man regulatory framework
The functions of the IOMFSA include:
- the regulation and supervision of persons undertaking regulated activities specified in the Financial Services Act 2008 (FSA08);
- the regulation and supervision of persons undertaking regulated activities in respect of insurance and pensions, in or from the Isle of Man;
- the regulation and supervision of collective investment schemes within the meaning of the Collective Investment Schemes Act 2008 (CISA);
- the regulation and supervision of retirement benefits schemes within the meaning of the Retirement Benefits Schemes Act 2000; and
- the conduct of investigations into any potential liability arising from breach of AML/CFT legislation by persons undertaking regulated activities.
Under the FSA08, a person must not carry on, or hold themselves out as carrying on, a regulated activity in or from the Isle of Man without a licence issued by the IOMFSA unless an exclusion (found in the Regulated Activities Order 2011 (as amended) (RAO)) or an exemption (set out in the Financial Services (Exemptions) Regulations 2011 (as amended)) applies. Regulated activities fall into eight classes, with each having further sub-classes of activity set out in the RAO for which an applicant to the IOMFSA may be licensed to carry out. These classes are: deposit taking; investment business; services to collective investment schemes; corporate services; trust services; operating crowdfunding platforms; management or administration of another person holding a licence issued under the FSA08; and money transmission services.
While investment advisers, stockbrokers and administrators delivering services for one or more collective investment schemes (CISs) must be licensed under the FSA08, the funds themselves are subject to the CISA and secondary legislation made thereunder. Promotion of CIS in the Isle of Man is generally prohibited under the CISA, other than to experienced investors.
Funds incorporated in the Isle of Man will fall into one of the categories outlined below.
Authorised scheme7
The authorised scheme is a highly regulated form of CIS that is intended for retail distribution. An authorised scheme must be approved by the IOMFSA before launch and is required to have an Isle of Man-based licensed manager, and an independent fiduciary custodian appropriately regulated in a jurisdiction acceptable to the IOMFSA. There are detailed rules that apply to authorised schemes, which have their origin in the Undertakings for Collective Investment in Transferable Securities Directive, including restrictions on the types of investment that may be acquired, leverage and hedging policies and investment concentration, and concerning the content of the CIS’s constitutional documents and offering document. The prohibition on promotion of CISs does not apply to authorised schemes, which are suitable for selling directly to the general public.
An authorised scheme is an alternative investment fund under the Alternative Investment Fund Managers Directive 2011/61/EU. In European Economic Area jurisdictions that allow national private placement and where a relevant memorandum of understanding is in place, an authorised scheme may be sold providing all domestic requirements are met. In order to be sold in the UK, an authorised scheme must apply for individual recognition under the Financial Services and Markets Act 2000 (an Act of Parliament). Reciprocal arrangements operate between the Isle of Man, Jersey, Guernsey and Ireland in respect of authorised schemes. Authorised schemes are also subject to a fast-track approval procedure in Hong Kong and Australia, and the Japanese Securities Dealers’ Association have agreed that authorised schemes that have been recognised in the UK are eligible for promotion to Japanese residents8.
Regulated fund9
While the regulated fund is not as highly regulated as an authorised scheme, it also requires pre-approval from the IOMFSA and is subject to rules concerning its constitutional documents and offering document. Although the investment policies of regulated funds are not subject to the same constraints as authorised schemes, the fund will only be approved by the IOMFSA if it is satisfied that the policy is suitable and appropriately disclosed to investors. A regulated fund must have an Isle of Man-based licensed manager and a fiduciary custodian that is appropriately regulated in a jurisdiction acceptable to the IOMFSA. Regulated funds are aimed at retail investors or markets requiring a fiduciary depository and are generally sold by independent financial advisers.
Full international scheme10
The full international scheme has been superseded by the regulated fund and can no longer be established; however, a number continue to exist. A full international scheme must have an Isle of Man-based licensed manager and comply with detailed rules regarding the content of its constitutional documents and offering document.
Qualifying fund11
While the qualifying fund must report and make post-event notifications to the IOMFSA, it is not subject to regulatory pre-approval. Although there is no prescribed minimum initial investment, investors must be ‘qualifying investors’. Essentially, investors who are not professional or institutional investors must have their expertise certified by a financial adviser. An Isle of Man-based licensed manager is required, as is a custodian appropriately regulated in a jurisdiction acceptable to the IOMFSA. There are no restrictions on investment, borrowing or hedging policies but the offering document must disclose all material information that an investor would reasonably expect to be disclosed. Qualifying funds may not be widely promoted and are normally sold through independent financial advisers to qualifying investors.
Specialist fund12
Like the qualifying fund, the specialist fund is not subject to regulatory pre-approval by the IOMFSA, but must make post-event notifications. The specialist fund is aimed at institutional and non-retail investors and must have a minimum subscription of at least US$100,000. Investors must certify that they are sufficiently experienced to understand the risks associated with investment and must fall into one of the categories of permitted investor, including professional investors, public bodies, affiliates of the fund’s promoters and managers, and individuals with a net worth in excess of US$1 million. There is no formal requirement for a specialist fund to have a custodian, although it must have a licensed fund administrator based in the Isle of Man or in another jurisdiction approved by the IOMFSA. There are no restrictions on investment, borrowing or hedging policies but the offering document must disclose all material information that an investor would reasonably expect to be disclosed.
Professional investor fund13
These funds can no longer be established but a number continue to exist and are similar to the specialist fund.
Experienced investor fund14
These funds were similar to the specialist fund but without a minimum subscription level. They can longer be established but a number continue to exist.
Exempt scheme15
An exempt scheme is a CIS that falls outside of the scope of regulation as a private arrangement, provided that it does not offer its securities to the public or any section of the public in any part of the world (and contains a prohibition to that effect in its constitutional documents), has fewer than 50 participants at all times and does not imply in any way in its constitutional documents that it is regulated in the Isle of Man. These are by far the most popular form of open-ended fund.16
Foreign funds
CISs incorporated outside of the Isle of Man may apply to the IOMFSA to become ‘recognised schemes’, which may be promoted to the general public in the Isle of Man, either by way of an application for individual recognition or a notification under a general regime open to CISs incorporated in the UK, Ireland, Jersey, Guernsey or Luxembourg.17
There are also over 80 CISs domiciled overseas, which are administered in the Isle of Man by administrators licensed by the IOMFSA, the most common being from the Cayman Islands with 59 such funds known to the IOMFSA as at 31 March 2018, this is a notable increase from the figures released by the IOMFSA in December 2016 which stood at 48.18
Common asset management structures
The Isle of Man offers a full range of vehicles for use as fund structures including open and closed-ended investment companies, protected cell companies, limited partnerships and unit trusts. Companies and limited partnerships are registered with the Isle of Man Companies Registry, whereas there is no public register of trusts.
There are two co-existing company regimes in operation in the Isle of Man, with the Companies Acts 1931–2004 providing a more traditional form of company (a 1931 Act company) and the less prescriptive Companies Act 2006 offering a very popular form of company (a 2006 Act company). Some of the key features of 2006 Act companies include: no requirement for authorised share capital; no capital maintenance requirements (subject to satisfaction of a statutory solvency test); no prohibition of financial assistance; reduced compulsory registry filings; less prescriptive accountancy requirements; no distinction between public and private companies; and no requirement to hold an annual general meeting. A company incorporated as a 1931 Act company may re-register as a 2006 Act company to take advantage of the simplified regime; however, re-registration in the other direction is not available and it should be noted that an authorised scheme cannot be constituted as a 2006 Act company.
Also available are protected cell companies (PCCs), which can be incorporated as either 1931 Act companies or 2006 Act companies. Assets and liabilities can be attributed to a particular cell of the PCC and kept separate from one another, so each cell can be used as a separate sub-fund and share class. By segregating the interests of investors and other stakeholders within each cell, PCCs provide a low-cost and quick-to-launch means of creating legally robust new sub-funds. The Isle of Man also offers incorporated cell companies where each cell is a separate legal entity, however these are currently only available for insurance purposes and there are no such entities registered at the Companies Registry as yet.
Limited partnerships offer flexibility and tax transparency while retaining limited liability for investors. A general prohibition against a limited partnership consisting of more than 20 persons does not apply in the case of a CIS.19 Since the introduction of the Limited Partnership (Legal Personality) Act 2011, limited partnerships may be registered in the Isle of Man as a body corporate with separate legal personality.
The trust is an important feature of Manx common law that is also supported by legislation, with unit trusts being popular fund structures. The Trust (Amendment) Act 2015 made Manx trusts even more flexible by, among other things, abolishing the requirement for a trust to have a perpetuity period.
The Isle of Man also offers foundations and limited liability companies, but these are not generally used as fund vehicles.
Main sources of investment
While the Isle of Man does have business links across the globe, its closest links are with the UK, with over half of the Island’s licensed deposit takers having the UK as their ultimate country of origin of their banking group.20At 31 March 2018, 29 per cent of non-bank customer deposits originated from the UK, 35 per cent from the Isle of Man and just 4 per cent from North America.21
The Isle of Man has not been immune to the effects of the crash of 2008 and onwards. Total deposits have fallen from £58.133 billion at December 2008 to £36,562 billion at March 2018.22 At March 2018 there were just 14 licensed deposit-takers, whereas at the end of 2010 there were 34.23
Whilst property is still by far the largest asset class for funds administered in the Isle of Man with around 80 funds shown in statistics published by the IOMFSA, it is notable that the figure has dropped from around 100 funds from the March 2017 statistics. The next category recorded by the IOMFSA in March 2018 was private equity funding, a change from the previous year which was ‘mixed’ tiers, including equities, derivatives, hedge, equities, derivatives, options, bonds, shares and cash and absolute return investments.24
On 31 December 2016 Isle of Man licensed life assurers had £66.6 billion of funds under management, with non-life insurers having £6.56 billion under management, both up on the previous year.25
The total number of Isle of Man companies under administration by licensed corporate and trust service providers (TCSPs) fell slightly in 2016–2017, although the number of 2006 Act companies administered in the Isle of Man increased while the number of 1931 Act companies decreased as this more traditional form of structure falls from favour.26 The number of trusts administered by TCSPs fell by5 per cent in the 2016–2017 period.27
Key trends
A particular focus has been placed by the regulators on monitoring, reviewing and updating the Island’s AML/CFT requirements for businesses operating in the financial services industry. As banking groups carry out wide reviews of their global operations, this is having a direct effect on the Isle of Man, with some banks leaving the Island and surrendering their deposit-taking licences. In addition, as banks prepare for the European ring-fencing regime there has been a number of banking group restructurings.
The Isle of Man has a proven record of delivering assistance to consumers when faced with financial catastrophe. The Isle of Man Depositors’ Compensation Scheme (DCS) was activated on 27 May 2009 in respect of the insolvency of Kaupthing Singer & Friedlander (Isle of Man) Limited, and depositors have now received 100 pence in the pound plus interest.28 In addition, the manager of the DCS fund established in 1992 in respect of the Bank of Credit and Commerce International, resolved to terminate the fund in 2015 with the final payments having been made in August 2012.29 The Isle of Man’s depositors’ compensation scheme arrangements may be updated again, with the Isle of Man Treasury having stated that it will continue to develop policy for a revised scheme and to establish a more effective framework covering all areas of deposit insurance including a special resolution regime for banks.30
Sector regulation
Insurance
The law concerning insurers (both those incorporated in the Isle of Man (authorised insurers) and those incorporated elsewhere but operating in the Isle of Man (permit holders)) and insurance intermediaries is found principally in the Insurance Act 2008, the Insurance Regulations 2018 and the Insurance Intermediaries (General Business) Regulations 1999.
It is an interesting feature of Manx insurance law that a person does not need to have an insurable interest to effect a contract of assurance,31 which has helped give the Island’s life assurance industry a unique selling point and global appeal.
Pensions
The Retirement Benefits Scheme Act 2000 is the principal piece of legislation governing the operation and regulation of pensions in the Isle of Man. Almost all pension schemes in the Isle of Man must be registered with IOMFSA, however, the Retirement Benefits Schemes (Excepted Schemes) Regulations 2001 provide some exemptions. The Isle of Man has had legislation since 2001 to facilitate the creation of international pension schemes, which can be established by employers carrying on business outside the Isle of Man for the benefit of their non-Isle of Man resident employees. The IOMFSA has been considering ways to enhance the Isle of Man’s regulatory framework for private pension schemes and pension providers.32
Real property
Other than activities that fall under the remit of the IOMFSA as insurance or pensions activities, there are no specific rules that apply to funds by reason of their underlying property or investment policy and objectives (subject of course to general restrictions within the regulations for authorised schemes, regulated funds and full international schemes).
Hedge funds
Other than activities that fall under the remit of the IOMFSA as insurance or pensions activities, there are no specific rules that apply to funds by reason of their underlying property or investment policy and objectives (subject of course to general restrictions within the regulations for authorised schemes, regulated funds and full international schemes).
Private equity
Other than activities that fall under the remit of the IOMFSA as insurance or pensions activities, there are no specific rules that apply to funds by reason of their underlying property or investment policy and objectives (subject of course to general restrictions within the regulations for authorised schemes, regulated funds and full international schemes).
Isle of man tax law
The Isle of Man operates a very favourable tax regime, with no capital gains tax, no inheritance tax and no stamp duties. While corporation tax does exist, it is levied at zero per cent, save in respect of income derived from deposit-taking activity (subject to a 10 per cent rate) and from real estate in the Isle of Man (subject to a 20 per cent rate). This means that a corporate fund vehicle will automatically benefit from a zero rate of corporation tax without having to apply through an exemption process, as will its Isle of Man-based fund manager and administrators.
Investors will be subject to tax on their dividends and capital gains under the laws of their home jurisdictions. The Isle of Man has a number of double taxation treaties and tax information exchange agreements in place that reduce the risk of any double charge. The Isle of Man has signed intergovernmental agreements to improve international tax compliance with both the UK and the USA amongst many others, and has been proactive in developing measures for compliance with The Foreign Account Tax Compliance Act and the Common Reporting Standard.
Fees charged by fund administrators and investment managers based in the Isle of Man in respect of services to CISs (other than exempt schemes) are not subject to VAT. Fees payable in respect of an exempt scheme are subject to VAT, but if the fund is established in a jurisdiction outside the scope of VAT then no VAT will be charged.
Outlook
Although the Isle of Man is not part of the UK, and its population had no vote in the UK’s referendum to leave the EU, Brexit will affect the Island. The Isle of Man is not a member of the EU but under Protocol 3 of the UK’s Act of Accession the Isle of Man is part of the customs territory of the EU so enjoys free movement of goods. The Isle of Man’s relationship with the EU is therefore dependent upon the UK’s membership of the EU and legislation will be needed to address the impact of Brexit on the Island. Where EU laws have been adopted by the Isle of Man, this has largely been through the European Communities (Isle of Man) Act 1973 (1973 Act) which allows for the implementation of EU laws and gives some EU legislation direct effect. A European Union (Withdrawal) Bill (largely based on the UK’s withdrawal Bill) has been proposed to repeal the 1973 Act whilst preserving statutory documents made under it, preserve EU instruments which fall within the scope of Protocol 3 and continue to allow EU instruments to voluntarily be applied to, or implemented in, the Isle of Man where it is useful to do so.33 Whilst the Isle of Man is not party to the UK’s Brexit negotiations with the EU there has been “an unprecedented level of engagement between the UK Government and the Isle of Man Government” about the implications of Brexit on the Island.34
The topic of beneficial ownership has been in the news recently, with some UK MPs suggesting that the Isle of Man and other Crown Dependencies should be forced to have publicly accessible registers of beneficial ownership of companies. Currently the Isle of Man has a register of beneficial ownership of companies which can be provided to law enforcement and tax authorities but is not open to inspection by the public. The Island’s Chief Minister has indicated that this will remain the case for the time being at least, until a public register becomes the international standard.35
First published by The Law Reviews, September 2018.
Locations
Services
Corporate, Banking & Asset Finance, Fund Finance, Fund Governance, Corporate Finance, Funds & Investment Services, Insurance & Reinsurance, Listing Services, Mergers & Acquisitions
Sectors
Banking & Financial Services, Funds & Investment Services, Insurance & Reinsurance, Private Equity
