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IoM Proposes Replacement Of Distributable Profits Charge

by Jason Gorringe, Tax-News.com, London

26 October 2007


The Manx Income Tax Division is proposing to replace the Distributable Profits Charge in the Isle of Man, which has been criticised by many for its complexity, and has also fallen foul of EU tax rules.

The proposal document explains why the Distributable Profits Charge is to be replaced, and provides details of the proposed new regime, the Attribution Regime for Individuals.

In his March 2007 Budget, Treasury Minister Alan Bell announced that he had asked the Assessor to review the operation of the Distributable Profits Charge (DPC), which was introduced as part of a package of taxation changes in April 2006.

According to Bell: “Although I am content that the Distributable Profits Charge system is appropriate and fair, I am aware of concerns expressed about it. As such, it is only right that we take a careful look again at the Distributable Profits Charge and deal with any resulting issues.”

Concerned at the prospect of a broader loss of revenue following the introduction of the 0% standard corporate tax in 2006, the Isle of Man introduced the DPC to limit the ability of Manx resident individuals and the trustees of certain trusts (all referred to for convenience as individuals) to own companies taxed at the standard rate, but choose to leave profits in the company rather than paying them out as distributions which would be taxable as part of their personal income.

However, concerns had been raised locally about the complexity of the DPC regime, and the Manx Treasury became aware that, notwithstanding the expert opinions sought by Treasury prior to its introduction, the DPC would be subject to critical scrutiny by the EU Code of Conduct for Business Taxation review group in the latter part of 2007. The Isle of Man has given a commitment to the EU that its business taxation system will conform to the principles of the Code of Conduct.

The EU Code Group met on 16 October 2007, and considered the DPC. It examined the DPC only and not the Isle of Man’s ’0/10’ taxation system for companies, which conforms to the principles of the Code of Conduct. The DPC, however, was found by the EU Code Group not to conform to the principles of the Code of Conduct. The Treasury has therefore proposed its replacement.

The Treasury is also taking into account the concerns raised about the complexity of the DPC, and intends that its replacement will be a simpler but equally effective method of minimising tax deferral by Manx resident individuals and trusts.

"We have worked with the authorities in the UK and with the EU Commission, and based on those discussions we are confident that the new system proposed does not relate to business taxation and is therefore outside the mandate of the EU Code Group," the Treasury stated in the introduction to its discussion paper.

It is intended that the new system will come into operation in April 2008. The earliest date that the related legislation could go to Tynwald is December 2007.

A comprehensive report in our Intelligence Report series giving background tax and residence information on many of the key offshore jurisdictions is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report4.asp

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