Tag: Corporate Services

The HMRC Open Consultation on the Taxation of Employee Ownership Trusts and Employee Benefit Trusts has just closed as at 25 September 2023 and includes a portion dedicated to the examination of Trustee Tax Residency – particularly the use of Non-Resident Trustees for Employee Ownership Trusts (EOTs).

Whilst there does not appear to be evidence of widespread abuse of offshore EOTs, HMRC feel there is still scope for offshore EOT planning to go beyond the intentions of Parliament and the purpose of the incentives available to EOTs. Therefore, some refinement of the rules may be in order to obviate the potential for escaping UK Tax liabilities that would be otherwise due on subsequent sales to third parties.

Whilst we eagerly await the outcome of the Open Consultation, we thought it would be a good opportunity to revisit the basics of EOTs, their advantages and underline the value that a properly licensed and regulated Isle of Man Trustee can add to bona fide EOT planning.

In this article we cover the following topics:

1. What is an Employee Ownership Trust?
2. What are the Advantages of an Employee Ownership Trust?
3. Why use an Isle of Man Trustee for your Employee Ownership Trust?
4. How Can Dixcart Help with Employee Ownership Trust Planning?

1. What is an Employee Ownership Trust?

Building upon the Nuttall Review’s recommendations, the Finance Act 2014, enacted by the UK’s Clegg-Cameron Coalition, was designed to incentivise the employee ownership model. Its chief objective was to foster a more responsible, diversified, and consequently, robust economy. A sentiment that has been supported by the current Prime Minister and Chancellor, Rishi Sunak and Jeremey Hunt, who are currently considering reforms to encourage employee ownership in the UK to boost the economy.

This concept is not unique to the UK and broadly similar company models exist all over the world, albeit there may not be comparable tax incentives. For example, the United States’ Employee Stock Ownership Plan (ESOP), France’s Société coopérative de production (SCOP), Australia’s Employee Share Schemes (ESS) and any number of other workers cooperative or share purchase models.

An EOT is one method of facilitating the employee ownership model. EOTs are a restricted form of EBT that is settled by a Company’s Founders or current owners and involves transferring ownership of a business into a Trust for the long-term benefit of all Eligible Employees.

The UK Government has incentivised transferring a business to its employees with notable tax exemptions. Under an EOT, majority shareholders can sell greater than 50% of the share capital to the Trust, receiving tax-exempt proceeds. The agreed sale amount is based on a business valuation carried out by an independent expert. Without a third-party buyer, this amount should reflect what the business can feasibly pay over an acceptable period.

Many owners choose a full 100% sale, while some keep a minority stake in the company for various reasons— ensuring legacy, ongoing income, to pass on the capital to loved ones as part of their personal Estate or even to make the sale more affordable for the business. It is important to understand that any subsequent disposal of retained shares to the EOT will not avail of the tax exemptions. If a minority stake is retained, provision should be made to protect shareholder interests from events, such as dilution.

In essence, the EOT functions as a Trust, comprising a Settlor, Trustees, and Beneficiaries. You can learn more about the basics of Trusts here.

Party to the Trust	Description
Settlor	Person(s) disposing of their Controlling Interest in the Company (i.e. more than 50% of the voting and equity rights).
Trustees	Can be sourced internally from Directors and employees of the Company, or externally by engaging independent Professional Trustees. Some EOTs may call for a mix.
Beneficiaries	All Eligible Employees of the company. This is a term defined within the Act as an employee or office holder of a Trading Company or principal company of a Trading Group. There are strict equality requirements.

The EOT facilitates indirect ownership of the Company’s shares. While Trustees legally own the shares, eligible employees hold the equitable title, enabling them to benefit from dividends, profits, and voting rights without direct share control. This provides benefits like administrative simplicity and increased stability.

EOT planning is undertaken for many reasons and circumstances and objectives will typically determine whether an EOT is an appropriate solution. Common drivers include where private owners, whether entrepreneurs or a family business, are considering succession planning, to support growth plans or upon initiating a new venture. However, EOTs should not be viewed merely as tax-planning tools. Their establishment should genuinely benefit the ongoing success of the business and its employees. The holistic benefits are explored in the next section.

2. What are the Advantages of an Employee Ownership Trust?

Driven by the UK Government and promoted by organisations like the Employee Ownership Association, employee ownership is now the UK’s leading SME ownership model. In 2022, there was a 37% increase, with half of all such businesses transitioning since 2021. From just 17 in 2014, the number of EOTs is now well over 1,000 and includes prominent firms like ARUP Group Limited, Adventure Forest Group Limited (Go Ape), and famously, the John Lewis Partnership PLC.

There are many benefits of employee ownership facilitated by EOTs, but simplicity I have divided the most prominent them into three main categories.

i) Benefits for the Business

The UK Government’s promotion of employee ownership stems from a core belief in its power to foster a resilient economy. This is grounded in the Nuttall Review’s assertion that incentivizing employees leads to enhanced trading performance. Key outcomes include:

• Lower Absenteeism
• A Happier Workforce & Increased Staff Wellbeing
• Lower Staff Turnover
• Faster Employment Growth
• Increased Productivity

The EOT model speeds up employee engagement, typically translating into increased profitability and reduced expenses in areas like recruitment. It also improves the Company’s resilience, better equipped to handle challenging market conditions because the workforce now has a direct stake in the outcome, or an ‘owner’s mindset’.

Selling to employees via an EOT means the business’s existing culture, values, and way of operating can be preserved. In contrast, an external third-party might seek to integrate or change the business to fit their own strategies or corporate culture – possibly even placing the existing employees at risk of an exercise in rationalisation or contract renegotiations. This continuity is especially valuable for SMEs where the founding owners have played pivotal roles in the company’s governance, strategy, and overall trajectory from inception. Further, many SMEs do not have a comprehensive succession plan; EOT planning can often serve as a timely catalyst for undertaking succession planning, preparing the next generation of leadership for their roles.

The bespoke nature of an EOT sale offers a great deal of flexibility, from financing options to handover periods. Often, the sale price is spread over several years and is paid out of the business’s profits. Depending on the circumstances, this may also allow the Company to gear in a way that better aligns with the long-term interests of the business and its employees e.g. speeding up the route to profit-share by limiting the levels of debt financing required.

In essence, an EOT, under apt circumstances, is a robust strategy to ensure a business’s enduring success and stability.

ii) Benefits for Owners

Exiting owners have compelling incentives to sell to an EOT, chiefly the potential for a Capital Gains Tax exemption on the disposal of their shares.

This saving of up to 20% is particularly compelling in the face of a reduced Business Asset Disposal Relief (previously named Entrepreneurs’ Relief). The cumulative limit on the lifetime allowance has fallen from £10m to £1 million for qualifying gains flowing from disposals on or after 11 March 2020.

An internal sale process through an EOT offers numerous practical advantages:

• No need to find an external buyer.
• The sale price aligns with an independent market valuation, avoiding lengthy third-party negotiations.
• Pre-determined Sale and Purchase Agreement offer opportunity to tailor terms.
• Involving employees in the transition process, especially incoming Board Members, ensures a seamless handover.
• Transitioning to an EOT acknowledges the workforce’s contributions and preserves the owner’s legacy.

This approach provides the exiting owner clarity and certainty on aspects that there is typically less control over in traditional trade sales, such as the transaction terms, sale price, and exit date etc.

The arrangement of funding for the EOT sale can also be highly customised. Options include seller financing, external debt financing, engaging investors, or using the company’s retained earnings; a hybrid approach is common to optimise the outcome for all. However, the method of financing requires careful consideration and should ideally be advised.

In the right circumstances, an EOT sale offers owners an efficient exit strategy, granting more control over the sale, whilst also ensuring a lasting legacy.

iii) Benefits for Employees

All Eligible Employees benefit from the company shares held in their name through the EOT. As such, EOT-owned businesses offer both financial and non-financial advantages to their employees.

First and foremost,under the Finance Act 2014, employees can access a tax-free bonus up to £3,600 annually. The conditions for this bonus, as defined in s312B of the Income Tax (Earnings and Pensions) Act 2003, include:

• Participation Requirement: All employees, including those overseas, and in any company within a group structure, must be eligible for any qualifying bonus award at the point the award is determined.
• Equality Requirement: Employees must participate on the same terms. Variables like remuneration, service length, and hours worked can determine the qualifying bonus. The equality requirement is infringed if the scheme wholly or mainly benefits directors or top earners.
• Office Holder Requirement: Within an individual company payments will not be qualifying if directors or office holders and other employees connected with them exceed 2/5 of total employees.

HMRC’s Open Consultation considers key issues regarding the Income Tax-free bonus. Notably, the Employee Ownership Association points out that due to inflation, the real value of this tax-free bonus has decreased since 2014. They suggest a current appropriate limit should be £4,600+.

Beyond the bonus, Eligible Employees have a voice in the business and can benefit from future profit-sharing once the EOT’s funding commitments are met. This longer-term financial incentive means employees can benefit from the business’s growth, driven by improvements in their increased engagement and commitment, in turn leading to greater trading performance.

While the EOT benefits all Eligible Employees, the strict requirements do not prevent the business running other initiatives. For example, provision can be made for key staff to directly buy company shares outside of the Trust. This offers more individualised approach to recognition, aiding talent retention.

It is vital that employees are well-informed about the EOT and the incentive structure. The business should take a proactive approach to education, which can include regular communication from the Trustees and management regarding timelines and mutual benefits.

The business can choose to establish an Employee Council to facilitate optimal communication between the workforce and Trustees. The Employee Council represents the interests of the Eligible Employees, giving them a voice and a means to be informed about and influence the EOT’s activities. Specific rights and powers can be reserved for the Council within the EOT’s constitutional documents. For example, the power to veto certain actions, approve certain decisions or have the right to be consulted on certain matters. Alternatively, the Council’s role might simply be advisory in nature.

Finally, trade sales to external parties can be fraught with uncertainties. Conversely, the transition to an EOT is more straightforward as the employees are the purchasers, and they already possess a deep understanding of the company’s operations, culture, and vision, ensuring business continuity and hopefully stable growth.

In the appropriate context, transitioning to an EOT offers advantages not just to the business and the exiting owner, but also to all Eligible Employees. This structure can address talent retention and inflation-related wage concerns, promoting a resilient economy and a more equitable society.

3. Why use an Isle of Man Trustee for your Employee Ownership Trust?

The Trustees appointed to administer the EOT will hold Legal Title to the EOT Shares and owe the Beneficiaries a blend of Trustee Duties and Fiduciary Duties. These legal duties can be onerous and carry a level of liability. Particularly pertinent duties that must be considered, include:

• To maintain and act in the interest of the Beneficiaries
• The requirement to avoid conflicts of interest
• To exercise reasonable care and skill
• To understand and carry out their obligations in line with the terms of the Trust
• To act fairly and with impartiality in their capacity as Trustee

While it’s common for EOT Trustees to be individuals or an external Professional Trustee, some businesses opt for a SPV to serve as a Private Trust Company (PTC). When this route is chosen, Trustees become the Directors of the PTC. While the PTC structure offers Limited Liability, safeguarding the Trustee Directors’ personal assets from legal action targeting the PTC, it does not provide an absolute shield. For example, in cases of criminal liability, failure of Fiduciary Duties or Gross Negligence etc. the Trustees can face personal, or even joint and several, liability.

Acting as a Trustee is a serious undertaking that can be complex and must be fully understood prior to appointment. Selecting the right Trustees for an EOT is crucial due to the potentially long-term nature of the appointment. Typically, candidates can be categorised into Lay Trustees and Professional Trustees. You can read more on the general differences between Lay and Professional Trustees here.

Lay Trustee Options for Employee Ownership Trusts:

Employee Trustees may be considered for as they are well placed to direct insight into the day-to-day operations and challenges of the business, bridging communication between the workforce and the Trust. Further, this appointment can provide an opportunity to develop talent to form part of the wider succession plan. Therefore, an Employee Trustee may add value in strategic decision-making and potentially promote an EOT-aligned culture, whilst preparing them for future responsibilities.

Businesses often also consider appointing Board-level Trustees. In particular, Non-Executive Directors can offer a balanced perspective on the strategic mind of the company, providing Board representation for the Trust and acting with increased independence.

Exiting owners may also be inclined to take up Trustee roles or appoint close associates, anticipating a retention of influence over the business. While this can initially seem logical, especially for Founders who deeply care about their company’s trajectory, it carries pitfalls. Ongoing control and influence for the exiting owner can hinder the business’s evolution and negate the genuine benefits of transitioning to an employee-owned model.

The HMRC Open Consultation considered exiting owner appointments and recommends limiting the participation of former owners and their close associates to a minority role. Any breach of this after disposal would be a disqualifying event, leading to an immediate CGT Tax charge to the trustees, or the former owner if within the first year following disposal.

However, the appointment of any Lay Trustee isn’t without challenges:

• Trust Expertise: Lay Trustees might not have prior experience in Trust governance, fiduciary duties, or corporate oversight which require training and ongoing CPD commitments. This could mean a steeper learning curve, which can lead to errors or inefficiencies.
• Conflicts of Interest: Employee or exiting owner trustees may find themselves in situations where the best interests of the Trust conflict with the immediate interests or sentiments of their colleagues or the Board. For instance, the exiting owner may have personal financial interests or other agendas that could conflict with the best interests of the Eligible Employees or the business’s long-term success. Further, whilst a NED is more independent, they are still employed by the company and far closer than an external party may ever be.
• Administrative Burden: Serving as both an employee or NED and a Trustee can be demanding, especially when balancing professional and Trustee responsibilities.
• Objectivity and Independence: A deep-rooted connection with the business is a double-edged sword. It can aid in understanding nuances but may also hinder unbiased decision-making. Further, where exiting owners or Board Members act alongside employee Trustees, it is important to acknowledge that these parties may tend to dominate important debates and decision-making, owing to strength of character and experience. Further, EOT Trustees will naturally face pressure from members of the business, which can make it difficult to maintain impartiality or to make unpopular but necessary decisions.
• Legal and Regulatory Compliance: Trust governance often involves complex legal and regulatory responsibilities. Inexperienced Lay Trustees might not be familiar with these areas, potentially leading to non-compliance or legal issues.

Professional Trustee Option for Employee Ownership Trusts:

Selecting a Professional Trustee for your EOT fundamentally addresses various concerns related to trust management and risk mitigation. This choice safeguards the EOT from potential mismanagement and legal non-compliance by employing a third-party specialist whose core focus is trust governance.

A Professional Trustee, being entirely independent, guarantees impartial and unbiased decision-making, which is paramount in safeguarding the interests of the EOT beneficiaries and ensuring robust governance. They play a pivotal role in mediating conflicts, leveraging their extensive experience, and providing a fresh, external perspective to strategic planning.

Equipped with specialised systems and methodologies for efficient EOT management, they devote undivided attention to trust administration, ensuring no conflict with other roles and responsibilities. Importantly, unlike Lay Trustees, a Professional Trustee can deliver a continuous and stable relationship with the EOT in perpetuity, especially when a Trust Services Provider with low staff turnover is chosen, fostering a consistent, long-term business connection.

Isle of Man Professional Trustees for Employee Ownership Trusts

As at time of writing, no IHT charges arise on the transfer of the exiting owner’s shares to an EOT and the EOT is also exempt from the IHT Relevant Property Regime. Therefore, even where the exiting owner, company and employees are UK Tax Resident Domiciliaries, there is currently nothing to prevent the use of Non-Resident Trustees. In fact, there can be very compelling non-Tax reasons for choosing Non-Resident Professional Trustees, such as those located in the Isle of Man. However, it is important to acknowledge that each case needs to be considered on its own merits – as with all things Trust related, one size does not fit all.

Isle of Man Trustees, such as Dixcart, are required to be licensed under the Financial Services Act 2008 and the Regulated Activities Order 2011, ensuring consistent regulatory oversight by the Isle of Man Financial Services Authority. This oversight assures clients that these trustees adhere strictly to best practices in their EOT obligations.

Furthermore, the Isle of Man is globally recognised as an exemplary international financial hub, boasting a stable political, economic, and regulatory landscape. With deep roots in intricate Trust and Corporate planning, the island’s financial services sector is populated by seasoned professionals.

The Isle of Man and UK are separated by the Irish Sea, meaning Isle of Man Professional Trustees are truly independent from the EOT-owned UK business. However, its proximity and transport links mean that Trustees can promptly attend crucial UK meetings, offering an ideal blend of autonomy and accessibility.

4. How Can Dixcart Help with Employee Ownership Trust Planning?

Dixcart Isle of Man have been assisting with owner-managed businesses, complex Trust arrangements and intricate employee share ownership structures for over 30 years – therefore, we are exceptionally well placed to assist with Employee Ownership Trusts.

By leveraging Dixcart’s expertise and quality focused services, we can deliver an effective bulwark between the businesses and its ownership, providing checks and balances on the business, assurance against conflicts of interest and that the rights and interest of the beneficiaries will always be the first priority.

Get in Touch

If you would like to discuss how our Professional Trustee services can augment your Employee Ownership Trust planning, please feel free to get in touch with Paul Harvey at Dixcart: advice.iom@dixcart.com

Dixcart Management (IOM) Limited is licensed by the Isle of Man Financial Services Authority.

Today’s businesses are subject to the constantly shifting sands of tax, regulation and an ever evolving, increasingly globalised economy. Engaging a Trust & Corporate Services Provider to manage and administer your company can offer many benefits, particularly for entrepreneurs, family offices or organisations that operate in multiple jurisdictions.

Trust & Corporate Services Providers, often referred to TCSPs, are specialist firms that offer a range of professional services to businesses, helping them with administrative, legal, financial, and regulatory aspects of running a company, partnerships and more.

In this article we look at 7 of the leading reasons why utilising a properly licensed and regulated Isle of Man TCSP can save entrepreneurs and dynamic businesses precious resources:

1. Administrative Ease and Convenience
2. Expertise and Specialist Knowledge
3. Cost Efficiency
4. Risk Management, Governance and Compliance
5. Business Continuity and Expansion
6. Pre-planning for Future Sale
7. Everything Else

1. Administrative Ease and Convenience

For many entrepreneurs and growing businesses there simply isn’t the resource to devote to day-to-day company administration that does not add to the bottom line – but in today’s world, good governance is more important than ever. Further, there may not be the personnel and/or skills or expertise in-house to fill important appointments such as Directorships or Company Secretary etc.

Even for those more established businesses that operate internationally, or have a presence in multiple countries, having a single base of operation can deliver stability and certainty where taxation and the legal regime are concerned.

Utilising an Isle of Man TCSP can provide the business with such stability and reduce the administrative burden on you and your team, freeing you up to focus on core business activities and strategic planning in a neat “all-in-one” package.  

In addition, the opening and ongoing maintenance of banking relations is integral to the running of any business. An established TCSP will have strong banking relations and be in a position to guide your business through onerous bank account on-boarding processes. Indeed, many high street clearing banks rely on introductions made by licensed and regulated TCSPs to entrepreneurs and small businesses. In most instances, said banks will insist on a local, resident Board of Directors that are provided by a TCSP.

TCSPs, such as Dixcart, are staffed with professionals who possess the experience, expertise and operational capabilities to handle your day-to-day company admin like bookkeeping, banking, secretarial tasks, and regulatory filings effectively and efficiently. Furthermore, best practices will inform all of the company’s underlying activity – giving you peace of mind that all regulatory, tax and legal requirements are being fulfilled.

2. Expertise and Specialist Knowledge?

A good quality TCSP will ordinarily employ qualified professionals from a number of disciplines. This typically includes persons from the accounting, legal, tax and fiduciary sectors such as trust and estate practitioners and chartered secretaries.

Having experts and their skillsets readily available can provide entrepreneurs and fledgling businesses with invaluable support for navigating their industry, avoiding potential liabilities or pitfalls. This is also of particular importance in the bearish post-pandemic skills market where recruiting has become so very difficult in almost every industry – in affect, your business would have a group of retained professionals on-hand.

At Dixcart, our professionals possess a deep understanding of corporate governance, laws, regulations, and maintain a good tax awareness along with any jurisdictional or global requirements.

TCSPs also often have extensive networks of legal, tax, financial, and business professionals that can provide additional support and services as needed. Over Dixcart’s 50+ years of trading, we have amassed a network of trusted experts, so that even where we do not know the answer, we know who will. This knowledge can be invaluable in the company’s decision-making and ensures compliance whilst avoiding potential liabilities.

3. Cost Efficiency

As the saying goes, ‘time is money’. This adage is of paramount importance to entrepreneurs and growing businesses, who are typically light on staff headcount and need to remain agile to have the best chance of succeeding in their given business activities.

The proper administration of a company can be time-consuming and require specialist knowledge. Activities such as completing annual filings, handling legal matters (such as contracts) or seeking counsel, dealing with tax advisers, maintaining proper accounts, holding board meetings and minuting decisions, banking etc. take precious working hours away from achieving the business’s objectives. The question is, would it be more efficient to hire employees rather than outsource?

Let’s take the UK as our working strawman, as they are our closest neighbour. Employing an administrator, who would carry out basic admin e.g. collating documentation, basic filing work, answering the phone etc. and (not items like accounting, dealing with third-party professional advisers, making tax and VAT filings etc.), generally commands an income of between £25,000 to £35,000, on average, within the UK. This does not include employers NI, lost hours due to statutory minimum holiday allowance, pension contributions, sick days, equipment, office space, bonuses, benefits etc. which, based on the lower of £25,000, represents a cost to the employer of circa £45,000+ per annum. This cost also represents a resource that is fairly limited in remit and capabilities, and potentially disproportionately expensive.

On the other hand, a company that undertakes a mid-high level of ongoing activity may incur TCSP fees of circa £25,000+ per annum in total. For this, the business is getting access to qualified accountants, corporate secretaries, professional trustees etc., a network of trusted and professional contacts around the globe, normally hundred(s) of years’ combined experience and, in a good TCSP, a direct line to the senior management team and a transparent fee structure that delivers cost certainty.

Dixcart delivers a full suite of services to its clients, many of whom are entrepreneurs and small to medium sized enterprises wishing to conduct ambitious projects or have growth targets to meet within a certain period of time. Not only does the Isle of Man company benefit from an efficient and effective team of qualified professionals, but the fees are always transparent and tailored to the business in question.

4. Risk Management, Governance and Compliance

Ok, I know that the heady subjects of risk management, governance and compliance (GRC) aren’t the most exciting benefit of utilising a TCSP but hear me out.

GRC management has become essential for the ongoing profitability and sustainability of any modern business, ensuring that the business operates in a lawful, ethical, and profitable manner. GRC is closely related to the core principles of the Environmental, Social, and Governance (ESG) phenomenon that has developed over the decades and accelerated in recent years – now being actively policed by financial regulators with regards to misconduct and adherence to public statements etc.

This is all very well to say, and sounds good, but what does GRC management really mean in practice?

Good corporate governance involves balancing the interests of a company’s many stakeholders, such as shareholders, angel investors, management, employees, customers, suppliers, financial/banking institutions, government agencies and local communities etc. Good governance helps to build trust and confidence among stakeholders, thus promoting sustainability and safeguarding growth.

Risk management is central to the identification, assessment and control of vulnerabilities and threats to the company and its stakeholders. These threats could come in many forms, including financial practices, legal liabilities, strategic decision making, management errors or cybersecurity issues. Good risk management aids a company in proactively eliminating, mitigating or identifying environmental factors that could lead to financial loss, reputational damage, criminal liability and more – therefore it enhances the company’s resilience and aims to futureproof the business.

For example, diversifying business operations across multiple jurisdictions enables an entrepreneur to spread their risk and reduce their exposure to changes in a single country’s economic, legal or tax environment.

Finally, compliance relates to the company’s adherence to applicable laws, regulations, standards, and ethical practices within the jurisdictions of trade. Failure to comply with these requirements can lead to financial penalties, legal liability and reputational damage. Businesses that carry out certain activities, such as investment management, medical services etc. must follow strict regulatory rules.

TCSPs stay updated on legal and regulatory changes, ensuring that the business remains compliant with all relevant laws and avoids potential penalties or legal issues. This is especially important for the business as it develops, whether the goal is a future sale or floating the company on an exchange, GRC is here to stay.

By engaging professionals such as Dixcart to handle critical business functions, such as GRC management, businesses can:

• Enhance decision making via delivering regulatory, legal and tax awareness in a reliable and timely manner, thus improving the quality of strategic and operational decisions.
• Improve efficiency by streamlining processes and procedures, saving time and resources.
• Increase stakeholder trust, which can lead to increased investment, better working partnerships, and improved reputation.
• Ensure sustainability by identifying, assessing and managing potential financial risks, legal liabilities and malicious threats.
• Diversify the business’s operations across multiple jurisdictions, by spreading risk and reducing exposure to changes in a single jurisdiction’s economic, legal or tax environment.

5. Business Continuity and Expansion

As a business grows its needs evolve. A TCSP’s services can adapt to meet those changing needs by providing revised and scalable solutions that align with the business’s development and expansion plans. Privately owned TCSPs, such as Dixcart, can adjust their offerings quickly and evaluate your evolving requirements based on growth or fluctuations in demand, without disruption.

Workforce continuity is of paramount importance for the success of fledgling and growing businesses. In fact, one of the key issues experienced by businesses today is the reliable acquisition and retention of good quality staff. This is not an issue where a good quality TCSP is engaged.

Dixcart provides businesses with access to the skills and knowledge of consummate professionals for as long as needed. When choosing a TCSP you should ensure that there is a low churn rate of staff and/or a large proportion of long-serving senior team members, who you will have direct access to. In such instances, the same contacts can act as your dedicated touchpoints throughout the entire relationship, allowing them to gain significant insight into the business, your issues and objectives, and therefore deliver more effective and efficient services.

Moreover, for entrepreneurs and businesses with global aspirations, TCSPs can also assist with company formation and compliance in foreign jurisdictions – enabling a full global group structure to be created through one point of contact. This support can help navigate complex international regulations and cultural differences, making the expansion process smoother. Having a presence in multiple locations can also reduce risk by diversifying operations and protecting assets.

By collaborating with entrepreneurs, our various Dixcart Group TCSP offices around the world, or TCSPs of similar standing to Dixcart, we can create comprehensive business continuity plans to aid existing or expanding operations. These plans outline strategic procedures to follow during challenging times – emergencies, natural disasters, or other disruptions – ensuring the business is resilient and can continue functioning effectively, no matter what. In addition, an extra layer of ongoing financial stability and flexibility may be introduced by the diversification of banking and professional relationships, taking advantage of Dixcart’s already established list of reputable contacts.

6. Pre-planning For Future Sale

When entrepreneurs and businesses embark on new commercial ventures, such as entering a new market or undertaking a special project, the activity is often undertaken with a view to hitting certain growth or value targets before selling the subsidiary or business as a whole. Where this is the case, especially in instances of cross-border trade or multi-jurisdictional planning or ownership, engaging a good TCSP within a reputable jurisdiction can augment the journey to sale.

By delivering tailored solutions, a TCSP can help maximise the value of the business and ensure a smooth and efficient sales process. Working with advisers and clients to provide the optimal corporate structure can enhance the business’s attractiveness to potential buyers via maximising value and operational efficiency. This may involve creating a holding company or subsidiary structure that is more appealing to investors or simplifies the ownership and shareholding arrangements etc.

Very often we are approached by entrepreneurs and business owners, pre-incorporation, to establish and administer Isle of Man holding structures for the purpose of owning the equity in the various arms of the business. The Isle of Man holding company can also hold any other relevant assets, for example, Real Estate, Investments, or Intellectual Property.  This can provide the Beneficial Owners with additional flexibility when it comes to onward sale of the business and the potential to optimise their sale proceeds and mitigate unnecessary tax liabilities.

A good TCSP can ensure the company’s financial records and reporting requirements are always up-to-date, well-organised, and comply with the relevant requirements, making the preparation for sale a more straightforward and efficient task. Engaging a TCSP, such as Dixcart, to assist with due diligence requirements, valuation, confidentiality measures and negotiations can not only give owners and investors peace of mind, but also instil confidence in potential buyers. In addition, post-sale, an experienced TCSP can ensure smooth transition and transfer of assets to the new owners and help the outgoing owners wind down operations as part of a post-sale planning strategy.

Proper planning and collaboration with experts at Dixcart can significantly enhance the likelihood of a successful and profitable business sale.

7. Everything Else

So, it is clear from the information above, that utilising an offshore TCSP can be advantageous in the running of an entrepreneur’s business, but what else can be offered?

Offshore jurisdictions often offer tax neutrality and efficiency compared to the entrepreneur’s home country. By structuring their businesses offshore, entrepreneurs may legally reduce their tax liabilities, retain more profits, and reinvest them in their businesses or personal portfolio.

Legitimate use of offshore trusts or entities can create a legal separation of ownership between personal and business assets, therefore helping to protect those assets from potential lawsuits, creditors, or other financial risks.

Where the legal separation of assets has occurred, a TCSP can facilitate estate and succession planning, ensuring that an entrepreneur’s wealth and business interests are managed and distributed to future generations according to their wishes, in a tax efficient manner. Further, the TCSP can assist entrepreneurs in designing and implementing various employee benefit plans such as share purchase schemes or Employee Ownership Trusts etc., incentivising their performance and loyalty.

Some entrepreneurs value privacy and may prefer to keep their financial affairs confidential. Offshore jurisdictions often have strict laws that protect the privacy of business owners and shareholders, offering a higher level of confidentiality.

Speak with a member of the Dixcart team to find out more about the various structuring options and services that may be available to you.

Why Choose an Isle of Man Trust & Corporate Service Provider?

There are many reasons to choose the Isle of Man, such as regulators who work in harmony with the private sector, political and economic stability, a comprehensive financial infrastructure, a strong banking sector, favourable taxation that encourages the creation and preservation of wealth and world class communications.

Ultimately, the Isle of Man is a competitively priced, reputable and well-regulated international financial centre, which can enhance the credibility of an entrepreneur’s business in the eyes of clients, partners, and investors alike.

Things to consider…

It is important to note that whilst TCSPs can be beneficial, often crucial, for businesses to thrive, they should be selected carefully. Research and due diligence are required to ensure the TCSP is reputable, compliant and can deliver the necessary support for the company’s specific requirements.

Additionally, it is important to ensure that the chosen offshore jurisdiction aligns with the company’s overall business strategy and goals.

Seeking professional advice from qualified accountants, tax, legal and financial advisors is essential to ensure that the chosen structures and arrangements are legal, ethical, and aligned with the entrepreneur’s specific needs and objectives.

With ten offices covering nine different jurisdictions worldwide, Dixcart are ideally placed to provide any entrepreneur with the support and expertise required to support a flourishing business.

Get in Touch

If you would like to discuss corporate services or estate and succession planning, please feel free to get in touch with the team at Dixcart: advice.iom@dixcart.com

Alternatively, you can connect with Glenn on LinkedIn

Dixcart Management (IOM) Limited is licensed by the Isle of Man Financial Services Authority.

Isle of Man companies provide a flexible vehicle that meet a huge variety of objectives and can be particularly beneficial under the right conditions.

Depending on the circumstances, the Ultimate Beneficial Owner (UBO) and their adviser can utilise Isle of Man companies in everything from corporate structuring and asset protection to wealth and estate planning. The Isle of Man company delivers a tax efficient and globally compliant solution.

In this article we highlight some of the good reasons to consider using Isle of Man companies:

• Isle of Man Jurisdictional Benefits
• The Flexibility of Isle of Man Companies
• Isle of Man Companies and Disclosure of Beneficial Ownership
• Re-Domiciling an Existing Company to the Isle of Man
• Isle of Man Companies and Banking
• Taxation of Isle of Man Companies
• How Are Isle of Man Companies Used?
• How Dixcart Can Help

Isle of Man Jurisdictional Benefits

The Isle of Man is an independent Crown Dependency that holds a Moody’s rating of Aa3 Negative, as at 28 October 2022, in line with the UK’s current rating. Companies registered in the Isle of Man benefit from the business-friendly Government, legislative environment and locally set tax regime. In addition, an Isle of Man company can be incorporated in 48 hours or less.

Headline rates of taxation include:

• 0% Corporate Tax
• 0% Capital Gains Tax
• 0% Inheritance Tax
• 0% Withholding Tax on Dividends
• Isle of Man companies are able to register for VAT, and businesses in the Isle of Man fall under the UK’s VAT regime.

However, the island offers more than just tax efficiency.  It is OECD compliant and therefore not considered a tax haven and the local environment continues to provide world class professional services to those engaging in international wealth, corporate and estate planning.

You can read more about why the Isle of Man is a jurisdiction of choice, here.

The Flexibility of Isle of Man Companies

Isle of Man companies provide a large degree of flexibility in terms of their constitution and operation, particularly companies incorporated under CA 2006 – although, there can be situations where a more traditional CA 1931 company can be more attractive.

Whilst both types of company are required to maintain a Registered Office in the Isle of Man, must have a Nominated Officer etc. there is a large amount of freedom provided:

Companies Act 1931	Companies Act 2006
No restrictions on trading objects
Minimum of one Shareholder. Can be corporate.
Can have a single share, with no max. Share can hold a par value of as little as £0.01p. No thin capitalisation rules. Can be any currency.	Can have a single share, with no max. Share can hold a par value of zero. No thin capitalisation rules. Can be any currency.
Minimum of two Directors. Can be non-resident. Cannot be a corporate.	Minimum of one Director. Can be non-resident and can be a corporate.
Company Secretary required. Can be a non-resident and can be a Director.	Requires a Registered Agent at all times. Registered Agent is a licensed Isle of Man resident.
Minimal restrictions on the management of dividends and share capital
Requirement to produced Annual Financial Statements, in line with Part 1 of the Companies Act 1982. Subject to meeting the conditions set out in the Companies (Audit Exemption) Regulations 2007, the Members can unanimously agree to dispense of the requirement for Annual Accounts to be audited where applicable.	No requirement to produce Annual Financial Statements, but it is standard practice to produce such accounts. No requirement for Annual Accounts to be audited.
Minimal filing and accounting requirements
There is a requirement to hold an Annual General Meeting, but private companies can dispense with this requirement in line with the Companies Act 1931 (Dispensation For Private Companies) (Annual General Meeting) Regulations 2010.	No requirement to hold Annual General Meetings.

Furthermore, it is possible for a CA 1931 company to apply to re-register as a CA 2006 company and vice versa, since the commencement of the Companies (Amendment) Act 2021. This provides UBOs and advisers with ultimate flexibility with regards to the constitution of the company. You can read more about the effect of the Companies (Amendment) Act 2021 here.

You can read more about Isle of Man companies incorporated under the Companies Act 1931 here. Alternatively, you can read more about Isle of Man companies incorporated under the Companies Act 2006 here.

Dixcart have significant experience in assisting clients and their advisers with their corporate planning and can support them to make the most appropriate decisions regarding the choice of vehicle.

Isle of Man Companies and Disclosure of Beneficial Ownership

Central registers of beneficial ownership were introduced as a mandatory requirement for Member States and jurisdictions within the European Economic Area by Article 30 of the Fourth EU Money Laundering Directive (4MLD), coming into force in 2017. The Isle of Man gave affect to this Directive through the introduction of the Beneficial Ownership Act 2017.

Under the Beneficial Ownership Act 2017, where the UBO owns more than 25% of the legal entity the person is a Registrable Beneficial Owner, and the Nominated Officer must submit the Required Details to the Registrar to be held in the Isle of Man Database of Beneficial Ownership. The Register is not publicly available and is limited to competent Authorities and relevant organisations who conduct AML checks e.g. criminal enforcement bureaus such as the Financial Investigations Unit etc.

Further, you may be aware of a recent EU Court of Justice (CJEU) Grand Chamber ruling concerning the balancing the proportionality of achieving AML objectives and privacy rights. The judgement stemmed from a Luxembourg case, whereby a Luxembourg company and its UBO made an application to prevent information concerning beneficial ownership from being made publicly available – this was rejected by the Luxembourg RBO. Following this, the company and UBO began legal action relating to both the decision and legality of the legislative powers allowing this to take place.

The law gave affect to the Fifth EU Money Laundering Directive (5MLD). 5MLD amended Art 30 of 4MLD to make provision for any member of the general public to be entitled to access information concerning beneficial ownership. The Grand Chamber found that the legislation was indeed unlawful, and disproportionate in its derogation from the European Union’s Charter of Fundamental Rights – namely Art 7 the right to respect for private and family life, and Art 8 concerning the protection of personal data.

The Crown Dependencies’ financial regulators have released a joint statement in late December 2022 in response to this landmark CJEU Grand Chamber ruling. They intend to seek specialist legal advice regarding how to proceed in implementing 5MLD compliant legislation, given the outcome of the above case. The Crown Dependencies have stated that they intend to adopt legislation in their respective jurisdictions as soon as possible after receiving the expert legal opinion, which is expected to be completed in early 2023. Whilst the regulators are clearly committed to honouring their commitments to openness and transparency, the statement does not provide any consideration of how the judgement will affect any interpretation of 5MLD or the legality of introducing measures such as a public register. You can find the Joint Statement: Crown Dependencies on access to registers of beneficial ownership of companies here.

Redomiciling an Existing Company to the Isle of Man

If there is an existing legal entity, you may be able to redomicile it to the Isle of Man and reregister it under Companies Act 1931 or Companies Act 2006.

When an incorporated entity is redomiciled to the Isle of Man, the result is a continuation of the same body corporate with all of its assets, liabilities and obligations remaining i.e. it is not a new entity. However, once imported, the laws and regulations of the Isle of Man apply.

It is important to note that this process can only be undertaken if the jurisdiction that the legal entity is exiting has the required legislative framework in place. Of course, the Isle of Man possess such legislation. For example, conversely there is no such Statute in the UK to support redomiciliation, and therefore UK companies cannot be redomiciled to any jurisdiction.

Further, it is necessary for the UBO and/or adviser to be aware of the potential licensing requirements if they wish to continue certain business activities after redomiciliation.

Additionally, it is also necessary to ensure your company’s Registered Name, or a derivative is available – if available, it can be reserved. In such cases, we would advise contacting Dixcart in the first instance. For further information on choosing a company name, you can read the Company and Business Names Etc Act here and you can check the name’s availability here.

There is a myriad of reasons why a UBO or their adviser may seek to move their company to the Isle of Man. For example, where an entity has been incorporated in a jurisdiction that was previously attractive, but has since fallen out of favour, this can make administering the company operationally difficult owing to the implicit risks of that jurisdiction. You can find a risk rated list of jurisdictions here (Jurisdictions in Lists A, B, C and D concerning AML/CFT risks).

The Isle of Man is regarded as a compliant, stable and well-regulated jurisdiction, and is therefore considered a leading international destination for business. For example, due to the Isle of Man being well-regulated and transparent, those companies that wish to structure debt finance can be looked on favourably by banks, owing to facilities such as a public register of mortgages and other charges. You can read more about why the Isle of Man is a Preferred Jurisdiction for Corporate Structuring here.

Dixcart are well placed to assist with the redomiciliation of all incorporated vehicles.

Isle of Man Companies and Banking

From carrying out its activities to meeting its liabilities, reliable banking arrangements are essential. Where a company is not incorporated in a reputable jurisdiction, or worse a blacklisted jurisdiction, this can cause significant operational issues. Further, where the company does not bank with a trusted institution, this can also create operational issues.

The banks take a risk-based approach, considering various factors upon application e.g. jurisdictions, connected parties, source of funds and wealth, nature of activity, volume of transactions etc. all of which will influence the acceptability of the application. The resulting risk rating will also affect the level of fees payable to the bank.

In addition, high street banks will not provide services to Isle of Man companies that do not have a resident Director. Therefore, in the circumstances where the UBO and/or adviser do not wish Dixcart to provide Isle of Man Directors, other options will have to be considered – for example, do you have existing banking relationships within other jurisdictions?

Dixcart has good relationships with all of the banks on the Isle of Man and can facilitate banking services on fully managed entities. In circumstances where Dixcart are not providing Directors, we can make appropriate introductions.

Taxation of Isle of Man Companies

Tax advice is almost always essential for non-Isle of Man residents, when considering incorporating an Isle of Man company. There are so many factors at play – what activity is the company carrying out? Are there Economic Substance requirements to be met? How are foreign companies treated within the UBOs local jurisdiction? How involved can they be with the management and control of the company? Is the company conducting cross-border transactions? Etc.

Furthermore, as a compliant whitelisted jurisdiction, the Isle of Man has signed up to a number of information exchange and double-taxation agreements. There can be reporting requirements that must be taken into account.

As you can see, even considering these basic questions there are a lot of things to clarify, much of which can have complex tax implications and require professional advice. Generally, the place to start will be to take advice in the UBO’s local jurisdiction. Whilst our Isle of Man office does not provide tax advice, we have built up a network of contacts over our 30+ years of trading, and will be able to make an appropriate introduction to an adviser local to the UBO.

How Are Isle of Man Companies Used?

Isle of Man companies have a huge variety of uses, and can be an option in most circumstances where the planning allows for the use of the Isle of Man. Below, I have covered a number of areas where Isle of Man companies are commonly utilised.

Holding Companies

A large range of capital, from participations in other companies to investment portfolios and luxury assets, can benefit from being owned via an Isle of Man company, due to the local legislative environment and tax regime. In such situations it is particularly important to ensure that placing the assets with the Isle of Man company will not attract any unintended taxation or liabilities – this needs to be considered at outset. Often the question can be whether the cost of maintaining and administering an Isle of Man company will outweigh the benefits or vice versa.

Below I have noted some of the most common types of Isle of Man holding companies:

• Equity Holding: Isle of Man companies offer a great vehicle for holding participations in other companies. This can take the form of a personal portfolio of stocks and shares, or even the Isle of Man company acting as TopCo of a group of companies. Regardless, the UBO will need to confirm whether the Isle of Man company’s activity falls within a Relevant Sector for the purposes of Economic Substance legislation – contained in Part 6A Income Tax Act 1970.

Under Economic Substance, if an Isle of Man company’s sole function is to acquire and hold controlling equity positions in other companies i.e. more than 50% of the company’s share capital, then the company is considered a Pure Equity Holding Company. A Pure Equity Holding Company must demonstrate that its Core Income Generating Activities (CIGA) occur on the Isle of Man. The required CIGA is usually met through the provision of Directors and other management services in the Isle of Man, enabling Adequate Substance to be met.

However, if the Isle of Man company meets these requirements but has no income i.e. no dividends are paid up from the equity holdings, then it falls out of Economic Substance.

You can find the latest guidance on Economic Substance here.

• Real Estate Property Holding: Isle of Man companies are often used to purchase, develop and/or generate income from Real Estate. This option is particularly attractive in circumstances where the UBOs are in a number of geographic locations or outside of the jurisdiction being invested into.

• Yacht Holding: Isle of Man companies are often used for the management of luxury assets. We have particular expertise in Superyacht management structures, whereby we work with industry professionals to deliver a ringfenced and efficient corporate ownership structure. You can read more about our superyacht services here.

• Honourable Mentions: as noted above, in the right circumstances it can be beneficial to hold almost any asset via an Isle of Man company. Other typical assets held by Isle of Man companies include; intellectual property, aircraft, and tangible investment property such as works of art, wine etc.

International Structuring

The Isle of Man provides a great non-EU base from which to structure companies that operate internationally. There are several instances where this makes particular sense:

• Geographic diversity – The company may have Shareholders, workforce or activities that are located within multiple jurisdictions or trade areas;
• Restructuring – An Isle of Man company may be established for the purposes of carrying out acquisitions and mergers. Further where a TopCo needs to relocate to a well-regarded jurisdiction, the Isle of Man company offers a great option for redomiciliation.
• Equity Finance – The company and or its subsidiaries may wish to commoditise their assets to attract new investment i.e. converting immovable assets, such as land and real estate, into shares or debt instruments. New investors would purchase positions within the new TopCo, thereby providing the group of companies with a source of capital for growth etc. You can read more about financing international investment via Isle of Man Companies here.
• Access to markets – As a well-regulated and reputable jurisdiction, the Isle of Man provides a platform for certain types of regulated business to attain and manage licenses to provide international activities e.g. eGaming.

Estate Planning

Trusts have been the mainstay of estate planning for generations, delivering a degree of certainty and protection to Settlors and their assets. However, a Trust is not an incorporated entity and therefore has no separate legal personality and limited liability – the Trustees hold legal title of the assets and are responsible for the Trust’s liabilities. Additionally, the Trust cannot engage in commercial activity, and must do so via a company. Further, Trusts are not recognised in all jurisdictions, and therefore predominantly attractive to Settlors from Common Law jurisdictions. You can read more about Isle of Man Trusts in this series of articles, and this accompanying video presentation.

In recent times, many offshore jurisdictions, such as the Isle of Man and Channel Islands, have introduced legislation to support the use of Foundations. Foundations provide an incorporated vehicle that is comparable to a Trust but possesses separate legal personality and limited liability – albeit there is no share capital. The Foundation is traditionally used within Civil Law jurisdictions. Therefore, the tax treatment of a Foundation is less certain within Common Law jurisdictions such as the UK, and seems to be assessed on a case-by-case basis – in part governed by the purpose of establishment i.e. if formed to carry out company activities it may be treated as per a company. As with the Trust, the Foundation cannot engage in commercial activity, and must do so via a company. You can read more about Isle of Man Foundations in this series of articles, and this accompanying video presentation.

Isle of Man companies, incorporated under the CA 2006, can be used as a viable alternative to both Trusts and Foundations. Delivering an entity with separate legal personality, limited liability and share capital. Further, companies, unlike Trusts, are recognised as legal structures throughout the world and can engage in commercial activity directly. Therefore, given the right circumstances, an Isle of Man company can present a more efficient option than a Trust or Foundation.

The UBO, or Founder, transfers their assets to the Isle of Man company. Transferring those assets to the Isle of Man company can have tax implications and as such will require tax advice within the Founder’s jurisdiction of domicile and tax residency.

Through the issuance of different classes of share, various powers and rights can be attributed to different parties. For example, issuing a class of shares to the Founder can provide them with voting rights and therefore increased control during their lifetime. This mechanism can also provide the beneficiaries with access to income and/or capital and the appointed Directors with management rights. The class rights would be detailed within the Articles of Association. It is important to note that where the Founder possesses voting rights, this can have tax implications, even though there is no right to participate in income or capital.

Dixcart can provide for the provision of Trustees, Council Members and Directors as required by the client and their adviser, and are well placed to assist in all international planning.

How Dixcart Can Help

Our Isle of Man office has been providing effective structuring and efficient administration for companies for over 30 years and is well placed to assist with all Isle of Man planning.

We have developed an extensive range of offerings which can be tailored to meet the needs of  clients and their advisers. Our in-house experts and senior employees are professionally qualified, with a wealth of experience – this means that, from pre-incorporation planning and advice to the day-to-day management of the company and troubleshooting issues, we can support your goals at every stage.

Additional Information

If you require further information regarding the use of Offshore Trusts, or Isle of Man structures, please feel free to get in touch with Paul Harvey at Dixcart: advice.iom@dixcart.com

Dixcart Management (IOM) Limited is Licensed by the Isle of Man Financial Services Authority