How to reduce tax and increase value by setting up

A Practical Guide …
How to reduce tax and
increase value by setting up
your technology business in
the Isle of Man
© MK Ventures Ltd. All Rights Reserved.
1.0 Introduction
1.1
1.2
1.3
1.4
1.5
Tax is a business cost like any other and if
your business is profitable then it’s a very
significant one. Typically corporate tax rates
are between 25% and 35% depending on
where your business is incorporated.
Of course, setting up a Technology Business
tax efficiently in a low tax jurisdiction can
significantly reduce its tax exposure and
increase its value. There is a lot of press
publicity about this topic at the moment so
you may already be aware that companies
like Google, Amazon & Apple successfully
minimize their tax exposure by setting up
their headquarters either offshore or in
other low tax onshore jurisdictions like
Ireland and Luxembourg. This allows them to
trade WITH the UK rather than IN it.
The outline set out in this guide and the
structure diagram in section 8.0 explains in
brief how they achieve this.
Tax and morality? Some consider reduction
of tax liabilities immoral — for others
morality doesn’t come into it. It could be
argued that Government’s waste much of
the tax money anyway. Our view is that the
question of tax collection and morality
simply don’t belong together but we don’t
propose to preach on the subject. Those
interested in this subject should read this
article.
2.0 Technology Business
Premier League
2.1
The Isle of Man is one of the best places on
the planet to headquarter a technology
business. Aside from the obvious tax
advantages — the Isle of Man enjoys a zero
per cent rate of corporate tax — we also
enjoy an excellent technology infrastructure,
a business minded Government and one of
the highest qualities of living in the world.
This short guide is divided into sections as
follows:

3.0 Outlines and explains some of the key
tax issues that require consideration.

4.0 The Real Financial Benefits — it’s all
about the money!

5.0 The Isle of Man and Intellectual
Property.

6.0 Sets out some of key non tax
advantages of the Isle of Man

7.0 How it works in Practice.

8.0 Suggests a typical structure for an Isle of
Man based Technology business.

9.0 Provides links to further relevant
reading.
This guide does not constitute tax advice and
no reliance can be placed on its contents
which are only intended to be illustrative in
nature.
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3.0 Outline and Explanation of
Some of the Key Tax Issues
3.1
This guide focusses on corporate tax matters
but for the sake of completeness it should
be noted that personal tax issues relating to
shareholders and directors should also be
considered and planned for if a tech
business is to successfully relocate to the Isle
of Man. These are specific to the
circumstances of the individual and detailed
consideration is outside the scope of this
guide.
3.2
There are a number of reasons why
‘Technology’ businesses are better able to
migrate to offshore zero corporate tax
environments compared with traditional
types of business.
3.3
Firstly, traditional businesses tend to rely on
a fixed place of business — called a
'Permanent Establishment' (PE) to generate
their profits; this may be a factory, an office
or a shop. It is difficult for such businesses to
escape corporate tax because tax systems
like those in the UK have evolved to tax
Permanent Establishments. Technology
businesses are different because the
business often takes place on the Internet
and servers can easily be located outside
high tax jurisdictions. For this reason, it is
comparatively easy to avoid having a taxable
Permanent Establishment in a high tax
jurisdiction — even if customers are there.
3.4
Who’s in charge?
3.5
An additional point to consider, which is key
from a tax perspective is the location of the
‘Management and Control’ — (sometimes
called ‘Mind and Management’) of a
business as this also is used as a key factor
by HMRC for determining liability to
corporate taxation. This is called the
‘Management and Control’ test.
3.6
The Management and Control test is aimed
at companies which don’t have operations in
the UK but do have key staff. It says that if a
company, any company — regardless of its
place of incorporation, is managed and
controlled in the UK then that company will
be liable to UK corporation tax, as if it was
incorporated in the UK. To benefit from
setting up a business in a low tax centre, it is
important that the Management and Control
test can be passed.
3.7
The key to avoiding UK tax on a
management and control basis is to ensure
that the management and control of the
business is exercised from outside the UK.
The simplest way to achieve this is for the
founders / directors of the business to
relocate themselves to a tax friendly
jurisdiction like the Isle of Man. In the long
run this is a good solution but it may not be
practical in the short term; even in this case
it is generally possible to structure matters
tax efficiently by taking appropriate advice.
Secondly, Technology businesses generally
rely on much fewer permanent staff than
traditional ones — again this makes it easier
for the business to avoid having a place of
business in a high tax country like the UK.
Any business functions such as warehousing,
customer services and technical support that
are best delivered onshore are frequently
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outsourced to 3 parties under arm's length
commercial contacts. This leaves the main
profit centre offshore, where it can enjoy its
preferential zero tax rate.
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4.0 Let's Look at the Real
Financial Benefit of
Moving Offshore
4.1
Having considered some of the UK tax issues
— let's look at some of the tangible benefits
of making the move for your business – or
indeed yourself, to another country like the
Isle of Man. The numbers are convincing...
4.2
Typically corporate tax rates onshore are
between 25% and 35% depending on where
your business is incorporated. For a
profitable business making (say) GBP1m per
year, this translates to an annual bill of
between GBP250,000 to GBP350,000 per
year — concentrates the mind doesn’t it!
4.3
4.4
4.5
4.6
4.7
Entrepreneurs looking to set up their
businesses offshore typically think of savings
in these terms — i.e. annual corporate tax
savings; but there is another, even more
compelling way of viewing this.
Typically, businesses are valued by third
parties by applying a multiple to earnings —
currently FTSE250 companies are trading on
an earnings multiple of about 18x.
Technology businesses tend to be even more.
Based on this 18x P/E — let’s look at the value
of our business making GBP1m per year.
In the high tax-onshore case, the annual
gross profit is GBP 1m, tax is at (say) 30% so
the profit after tax would be GBP 700,000;
Applying a P/E of 18x this values the
business at GBP12.6m
Now let’s look at the value of the same
business, based in the Isle of Man, where the
corporate tax rate is 0%. Annual Gross Profit
is GBP 1m, tax is levied at 0%, so the net
profit is also GBP 1m. Using the same P/E –
18x the business would be valued at GBP18m.
In other words, locating the business in the
Isle of Man is worth an extra GBP 6.4m in
shareholder value! Choosing your corporate
domicile is not just about reducing tax– it’s
about increasing shareholder value.
5.0 The Isle of Man and
Intellectual Property
5.1
Technology companies frequently rely on
their intangible Intellectual Property assets
which include Patents, Trademarks,
Copyrighted works, Database rights and
Design Rights; as such it is vital that the legal
framework for protecting Intellectual
Property in any offshore jurisdiction being
considered by the business is fit for purpose.
There are some very good reasons apart
from tax why the Isle of Man fits the bill —
your lawyers or savvier investors may ask
about these too so we have included a few
of them below for reference purposes:
5.2
The Isle of Man is a member of the Berne
Convention and the World Trade
Organization’s Agreement on Trade Related
Aspects of Intellectual Property ("TRIPS")
5.3
The UK Patents Act 1977 extends to the Isle
of Man; therefore Manx Patents are
recorded at the UK Patents registry.
5.4
The Patent Cooperation Treaty (‘PCT’) has
extended to the Isle of Man since 29
October 1983 thus simplifying international
registrations.
5.6
The European Patent Convention applies to
the Isle of Man which allows protection in up
to 38 countries under a uniform application
procedure.
5.7
UK Legislation relating to Trademarks has
been extended to the Isle of Man thus there
are no formalities required to extend UK
trademarks and applications to the Isle of
Man.
5.8
European Community Trademarks and
applications relating thereto extend to the
Isle of Man.
5.9
The Madrid Protocol extends to the Isle of
Man. This offers the possibility to protect a
trademark in 81 countries by making a single
application to the World Intellectual
Property Organization.
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6.0 The Isle of Man — A Nation
of Entrepreneurs
6.1
As well as the obvious tax reasons, there are
a host of other good reasons why
entrepreneurs love the Isle of Man.
6.2
Business Friendly — The Isle of Man is one of
the most business friendly regions in Europe
and was recently ranked 4th “Most Business
Friendly” area in European Regions of the
Future.
6.3
Access to Government — The Isle of Man
shows that small is beautiful – business
leaders can gain access to Ministers and
senior officials rapidly. The Government is
agile and responsive so change can be
delivered far faster than in large
jurisdictions.
6.4
Excellent Telecoms Infrastructure — The
Island enjoys resilient, world-class telecoms
connectivity and redundancy.
6.5
Outstanding Support from Government —
The Business Innovation Centre and
Financial Assistance Scheme offer a
generous package of support to businesses
relocating to the Island which far exceed
those permitted within the EU — including.
6.6
Geographic Location — with excellent
accessibility to the UK and beyond. By air
London is 60 minutes, Manchester is 45
minutes, Liverpool is 30 minutes, Dublin is
30 minutes, Birmingham is 55 minutes, &
Belfast is 30 minutes.
6.7
Superb Education — The Island has a high
performing education system. Students’
results consistently outperform those of the
UK between the ages of 5 and 18. Each of
the Island’s five comprehensive secondary
schools has a reputation for academic
success.
6.8
BEST OF ALL !! — Unrivalled Quality of Life
— The Isle of Man offers an unrivalled
quality of life and scored the highest ever
rating polled by MORI as a place to live. 93%
of residents were either happy or very happy
with the Isle of Man as a place to live.
(Although the rumours about the weather
are not entirely unfounded!)
 Use of Free office space, Address, WiFi
 Up to 40% equipment grants, to include
all hardware and software
 Up to 40% building grants either for new
build or for rents payable
 Up to 40% revenue grants encompassing
expenditure from research and
development, relocation, consultancy,
marketing and quality and environmental
standards
 Up to 50% training grants
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7.0 How It Works In Practice …
7.1
7.2
7.3
7.4
The easiest route to organising your
business offshore in the Isle of Man is to
engage the assistance of a professional
company manager — sometimes called a
Corporate Service Provider (CSP) to arrange
your local presence in the Isle of Man. A
good CSP will save you time and money by
providing invaluable advice based on
experience of helping others as we as a
broad range of professional services.
Your CSP will provide directors and act as
administrators of the Manx part of your
business. This is a key relationship, as these
are the people who will incorporate and
administer your new Isle of Man based
business.
You should then look carefully at your
business — with the help of a specialist tax
adviser and consider which parts of it can be
relocated to the Isle of Man. The aim is to
leave as little as possible in the UK. This
varies from business to business but IP
assets, Head Office, Web Hosting and
Financial Management are three obvious
ones.
Any residual UK parts of the operation will
need to be outsourced by the Isle of Man
business under an arm's length contracts —
either to 3rd parties (preferable) or to a UK
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based subsidiary .
7.5
An Isle of Man holding company should be
established to hold intangible assets such as
trademarks, domain names, program code,
know-how and patents. This company
should not undertake any trading activity —
this company may not even need a bank
account.
7.6
It is at this holding company level that you
generally, see third party investors making
investments and owning shares.
1
Note: If outsourced to a related company then transfer
pricing could be an issue in which case arm's length
consideration is even more important.
7.7
If Investment monies from third parties are
required, it could be beneficial, if possible, to
raise these funds offshore. Organisations
such as the Isle of Man Angel Network may
be able to assist with this.
7.7
Typically, the holding company establishes a
subsidiary to act as the trading company, the
holding company would then grant an
exclusive licence to this subsidiary, to utilise
and commercialise its assets — often this
licence is renewable annually and involves a
nominal royalty payment of (say) GBP1.00
per year.
7.8
The trading company is the key profit centre
that will conduct the business and receive
revenue from the 3rd party customers.
REMEMBER this company enjoys a 0% tax
rate if it is an Isle of Man company.
7.9
The principal reason for separating the
trading and holding activity is asset
protection. Trading companies are much
more likely to incur a catastrophic liability
than a holding company. If this happens,
valuable holding company assets can be
insulated from creditors.
7.10
Next, attention should be put to addressing
the UK corporation tax issues.
7.11
The first one is the Permanent Establishment
test referred to in 3.3 above. It is imperative
that neither the holding company nor the
trading company maintain a places of
business in the UK. A place of business
includes an office / shop or other permanent
facility. For technology businesses this is
usually easily arranged — as offices are
generally not required but for the avoidance
of doubt, this means no business cards or
email footers with UK addresses or
telephone numbers.
7.12
The next issue is the management and
control test referred to in 3.5 above. To gain
any corporate tax advantage, it is imperative
that management and control of both
holding and trading companies is located
outside the UK. The best way to do this is to
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clearly place that control in the Isle of Man
and ensure that you can evidence that this
has been done so that any challenge from
HMRC can be correctly rebuffed.
7.13
Generally directors control companies — so
the first step is to appoint Isle of Man
resident people from your corporate service
provider as the company directors. These
appointees should really be prepared to
understand and act for the business as they
may well need to meet / correspond and
take telephone calls from your customers /
suppliers. You need to be comfortable that
they are capable of this.
7.14
Don’t expect to continue to directly control
all aspects of the business if you continue to
live in the UK — you will inevitably need to
hand over some of this to Isle of Man
resident directors. This is because of the
management and control test. If possible,
relocation personally to the Isle of Man is
the best option.
7.15
The Entrepreneur will, of course, continue to
be involved in developing and driving the
business strategy, but (assuming they
remain UK resident) their role will now be to
formulate and recommend strategies to the
Isle of Man board — for their consideration
and implementation. This requires
something of a change of mind-set on the
part of the Entrepreneur. Key negotiations
with third parties will need to be referred to
the Isle of Man Board for their consideration
and approval - rather than being sealed
immediately.
7.16
The key to passing the management and
control test is to demonstrate that the
Directors are REALLY considering those
decisions and not just ‘rubber stamping’
them; this must not be a sham. In practice,
the best way to achieve that is to appoint
Isle of Man directors whose abilities you
genuinely value. The devil is in the detail - it
is vital that decisions of the board are
accurately and regularly documented since
these records will be considered if there is
ever any challenge to the tax status.
8.0 Typical Structure
8.1
Of course the reality is that every business is
different and in truth there is no such thing
as a ‘typical structure’ however, for
illustrative purposes the diagram following
outlines the typical features and provides a
helpful starting point.
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8.2 Tech Business – A typical corporate structure
rd
3 Party
Ebusiness (IOM) Ltd
Founder 1
Purpose: Holding Company
Incorporated: IOM, Companies Act 2006
Registered Office: Isle of Man
Corporate Tax Rate: 0%
Founder 2
Intellectual Property
including Domain
Names, Trade Marks,
Content, Source Code
Managed
and
controlled in
IOM
Owns 100%
Licensed Rights
Dividends
Ebusiness UK Ltd
Ebusiness Trading Ltd (IOM)
Purpose: Services Company
Incorporated: UK
Registered Office: UK
Arranges sales
Purpose: Profit Centre
VAT Registered
Corporate Tax Rate: 0%
Incorporated: IOM
Registered Office: Isle of Man
Contract for
Services – arms
length basis
R
Training
Revenue
E
V
Owns 100%
Managed
and
controlled in
IOM
E
N
Retail Revenue
In EU and
elsewhere
U
E
Custom Coding
Revenue
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9.0 Next Steps
10.0 Further Reading
9.1
I hope that this short guide has enthused
you about the benefits of escaping from the
high regulation, high tax environment of the
UK and similar jurisdictions to the Isle of
Man. Of course the most obvious benefit is
the beneficial corporate tax regime which
can directly result in dramatically increased
shareholder value — remember the
GBP6.4m increase seen in 4.7 above.
10.1
Why oh why isn’t the income accruing to my
offshore company tax free
10.2
Tax efficient IP Royalty Routing Strategies
Explained
10.3
Isle of Man for UK VAT Registrations
10.4
Isle of Man Government — eBusiness
Division
However, the non-tax reasons for relocating
to the Isle of Man set out in Section 6 —
which includes grants, reduced red tape and
quality of life should not be underestimated.
10.5
Isle of Man eIsland guide 2010
10.6
Isle of Man Government eBusiness Strategy
(2005)
10.7
Isle of Man eBusiness Video news archive
10.8
Isle of Man Grants
9.2
9.3
9.4
Do anticipate the tax and administrative
issues of locating the business overseas by
planning in advance. Don’t re-invent the
wheel - this has all been done before a
meeting with the right advisors early on who has done this before will save you time
and money.
Moving a business offshore is not for
everyone but if, having read this guide, this
remains of interest to you then the next step
is simple — continue the discussion by
picking up the telephone and talking to us.
We can refer you to offshore tax advisers
who help you assess and evaluate your
options.
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Contact Info
Martin Katz
T: +44 1624 648548
E: [email protected]
S: katz-martin
MK Ventures Ltd is affiliated with the 'Middleton Katz' Professional
Services Group.
This guide does not constitute tax advice and no reliance can be
placed on its contents which are only intended to be illustrative in
nature.
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