The Isle of Man ("IOM") Income Tax Division (“ITD”) has a published concessional practice in respect of the tax treatment of company distributions - this is set out in full in Guidance Note 49 (a copy of which can be found here). Amongst other things, this has the effect that the IOM tax liability arising for an IOM resident shareholder on the receipt of dividends from an IOM company can be fully or partially offset by tax credits where the profits out of which they have been paid have already been subject to tax. To obtain this concessional treatment a company must file a “reserves analysis” with its annual tax return.
Yesterday the ITD released a practice note (PN224/24) - a copy of which can be found here) amending the concessional treatment of the amounts which are currently contained within “Box 2“ of these reserves analyses. These are profits that arose in the 2005/2006 tax year or earlier and which were subject to tax in the IOM at a rate of at least 10%.
Prior to yesterday, these profits (and their concessional treatment) were only accessible if the company had fully distributed its “Box 1” reserves (ie those reserves with no tax credits attaching to them).
The practice note introduces transitional provisions that permit a company to distribute Box 2 reserves in priority to the Box 1 reserves as long as they are distributed between yesterday's date (29 February 2024) and 5 April 2025 (inclusive). However, such treatment is only available to the extent that a company has accounting reserves in excess of its Box 1 reserves.
Importantly, any Box 2 reserves that have not been distributed prior to 6 April 2025 will be transferred into Box 1 and any tax credits attaching to such reserves will be lost.
As such, we would recommend that any companies with Box 2 reserves should consider whether they wish to make a distribution so as to obtain the current concessional treatment – given the recently announced increase in the higher rate of IOM income tax with effect from 6 April 2024, it is particularly worth considering whether any such distributions can be made prior to this date.
If you wish to discuss your options please do not hesitate to contact your usual KPMG contact.
