• Home
  • >
  • Blogs
  • >
  • Double Taxation Agreement – UK and Isle of Man

Double Taxation Agreement – UK and Isle of Man

Published by Susan Basnet
Posted Date: June 15, 2024 , Modified Date: June 18, 2024

The Double Taxation Agreement (DTA) between the United Kingdom and the Isle of Man, signed on 2nd July 2018 and effective from 19th December of the same year, establishes a framework to alleviate double taxation concerns for individuals and enterprises operating across both territories.

Covering various tax aspects from residency determination to specific taxation of income streams such as dividends, interest, royalties, and capital gains, the Agreement ensures fairness, transparency, and non-discrimination in tax matters. It provides mechanisms for tax relief, dispute resolution, and cooperation in tax collection while promoting clarity and predictability in tax obligations for residents and businesses in both jurisdictions.

Scope and Application

The initial two articles of the Agreement explore its scope and applicability, specifying the individuals and types of taxes it encompasses. They clarify who is subject to the Agreement and cover the various taxes governed by its provisions.

Article 1: Persons Covered

The first paragraph of Article 1 states that the Agreement applies to persons who are residents of one or both of the Territories. The second paragraph specifies that income earned through an entity or arrangement deemed fiscally transparent under the tax laws of either Territory will be considered income of a resident of that Territory, provided the income is treated as the income of a resident for tax purposes in that Territory.

Article 2: Taxes Covered

Article 2 of the Agreement lists the various taxes covered by its provisions. Specifically, the Agreement applies to taxes on income and capital gains imposed by a Territory. The third paragraph of the article identifies the existing taxes to which the Agreement applies: the income tax (Manx tax) in the Isle of Man and the income tax, corporation tax, and capital gains tax in the United Kingdom.

General Definitions

The third article of the Agreement focuses on defining the relevant terms used within the document. These definitions are provided to ensure accurate interpretation of the Agreement.

Double Taxation Agreement Definition
  • The term ‘Isle of Man’ means the island of the Isle of Man, including its territorial sea.
  • The term ‘United Kingdom’ means Great Britain and Northern Ireland.
  • The terms ‘a Territory’ and ‘the other Territory’ mean the Isle of Man or the United Kingdom, as the context requires.
  • The term ‘person’ includes an individual, a company and any other body of persons.
  • The term ‘competent authority’ means the Assessor of Income Tax or his or her delegate in the Isle of Man and the Commissioners for Her Majesty’s Revenue and Customs or their authorised representative in the United Kingdom.
  • The term ‘pension scheme’ means any scheme or other arrangement which is generally exempt from income taxation and operates to administer or provide pension or retirement benefits or to earn income for the benefit of one or more such arrangements.
  • The term ‘offshore activities’ means activities which are carried on offshore in a Territory in connection with the exploration or exploitation of the seabed and subsoil and their natural resources situated in that Territory.

Residency Status

Article 4: Resident

Article 4 of the tax agreement defines the residency status of a person, whether an individual or a company. According to the article, a person is considered a resident in the UK for tax purposes if they are liable to tax in the UK due to their domicile, residence, place of management, place of incorporation, or any other similar criterion. However, the term 'resident' does not apply to those who are liable to tax in the UK only on income or capital gains from sources within the UK.

The same definition is used to determine the residency status for individuals from Isle of Man. If an individual qualifies as a resident of both Isle of Man and the UK under this definition, their residency status will be determined based on additional factors, including:

Permanent Home: An individual is considered a resident of the Territory where they have a permanent home. If the person has a permanent home in both territories, their residency is determined by the proximity of their personal and economic relations to each territory.

Habitual Abode: If the permanent home test fails, either because there is no permanent home or the proximity of relations cannot be established, a person is considered a resident of the Territory where they have a habitual abode, i.e., where they spend a significant amount of time.

If both of these tests fail, the question of residency will be settled by mutual agreement between the competent authorities of the two territories. In the absence of such an agreement, the person shall not be considered a resident of either Territory and therefore cannot claim any benefits under the Agreement, except for the elimination of double taxation, non-discrimination, and the mutual agreement procedure.

Specific Tax Provisions

Article 5: Permanent Establishment

Article 5 of the Agreement defines the term ‘Permanent Establishment’. According to this provision, a ‘permanent establishment’ denotes a fixed business location where activities are wholly or partially conducted, such as a management office, branch, office, or factory. Additionally, a construction project qualifies as a permanent establishment if its duration exceeds twelve months.

The fourth paragraph specify certain activities excluded from this definition. These include using facilities solely for storage or merchandise delivery or maintaining a business location solely for purchasing goods or gathering information for the enterprise. However, these exemptions cease to apply if the enterprise or a closely affiliated entity engages in business activities at the same location or elsewhere within the same territory.

Likewise, if an individual represents an enterprise and routinely finalises contracts within a territory, the enterprise will be deemed to possess a permanent establishment there for any actions conducted by said individual, provided they do not fall within the previous paragraph's exclusion.

The concluding two paragraphs of Article 5 clarify that an enterprise does not automatically establish a permanent establishment in a territory solely because it conducts business there through an independent broker or agent, or due to control relationships between companies from different territories.

Article 6: Income from Immovable Property

Immovable property is a common source of income for residents in both territories, and the taxation of such income is covered in Article 6 of the Agreement. Typically, such income earned in the other territory may be taxed in the territory of income’s origin. The second paragraph of the article clarifies that the definition of ‘immovable property’ is defined in the same way as it is under the law of the territory in which the property is situated. However, the term clearly excludes ships, boats and aircraft.

For the purposes of Agreement, the income could origin via the direct use, letting or use in any form of immovable property, whether by individuals or enterprises.

Article 7: Business Profits

Enterprise profits are typically taxed where they are earned, but if the enterprise operates in another territory via a permanent establishment, the profits attributable to the permanent establishment may face taxation there. The attributable profits are the profits it might be expected to make if it were a separate and independent enterprise engaged in the same or similar activities.

Business profits Double taxation agreement

If one Territory adjusts the profits attributable to permanent establishment of an enterprise from another Territory and taxes the profits already taxed in the other Territory, the other Territory shall make an appropriate adjustment to the amount of tax charged on those profits to eliminate the double taxation. The competent authorities of both territories will consult each other as necessary to determine such adjustments.

Article 8: International Shipping and Air Transport Businesses

In the case of enterprises operating in the ships or aircraft in international traffic, such profits are taxable only in the territory where the profits are made.

For the purposes of this article, such profits must be from activities incidental to the operation of ships or aircraft in international traffic, including:

  • Profits from the rental on a bareboat basis of ships or aircraft,
  • Profits from the use, maintenance or rental of containers used for the transport of goods.
  • Profits from the participation in a pool, a joint business or an international operating agency.

Article 9: Associated Enterprises

As per Article 9 of the Agreement, an appropriate adjustment must be made by the Territories in regard to the tax on profits from associated enterprises. The article applies in two scenarios:

  • When an enterprise from one Territory is directly or indirectly involved in the management, control, or capital of an enterprise in the other Territory, or
  • When the same persons are directly or indirectly involved in the management, control, or capital of enterprises in both Territories.

If either of these conditions is met and the terms between the two enterprises differ from those between independent enterprises, resulting in unreported profits, those profits may be added to the taxable profits of the enterprise.

Additionally, if a Territory taxes profits of its enterprise that have already been taxed by the other Territory—and those profits would have accrued to the first enterprise under independent conditions—the other Territory will adjust the tax amount appropriately. This adjustment will consider the other provisions of the Agreement, and the competent authorities of both Territories will consult each other if needed.

Article 10: Dividends

Article 10 of the Agreement establishes that dividends paid by a company in one Territory to a resident of the other Territory can be taxed in that other Territory; such dividends can also be taxed in the company’s resident Territory according to its laws.

However, if the beneficial owner of the dividends is a resident of the other Territory, the dividends will generally be exempt from tax in the company's resident Territory. An exception is if the dividends are from income derived from immovable property by an investment vehicle that distributes most of its income annually; in this case, the tax charged will not exceed 15% of the gross amount of the dividends, unless the beneficial owner is a pension scheme, in which case the exemption applies. The company paying the dividends will still be taxed on the profits out of which the dividends are paid.

The term ‘dividends’ includes income from shares or similar rights that participate in profits or other income treated as dividends under the tax laws of company’s resident Territory. Furthermore, a company resident in one Territory cannot be taxed on dividends by the other Territory unless the dividends are paid to a resident of that other Territory or are connected to a permanent establishment there.

Article 11: Interest

The provisions on the Interest are similar to the ones governing the dividends. Typically, interest arising in a Territory and beneficially owned by a resident of the other Territory may be taxed in the other Territory, but could be taxed in that Territory as well, according to the laws of that Territory. However, if the beneficial owner is a resident of the other Territory and at least one of the following conditions is met, the interest is only taxable in that other Territory.

Interest Double taxation agreement
  • The interest is beneficially owned by that other Territory itself, an individual, a pension, a bank or building society, etc.
  • The interest is paid by a Territory, one of its political subdivisions or local authorities.

The term ‘interest’ refers to income from debt-claims of any kind, regardless of whether they are secured by a mortgage or include the right to participate in the debtor's profits. This includes income from government securities, bonds, or debentures. However, it does not include any items treated as dividends under Article 10. Furthermore, any item treated as dividends under the earlier provision should be excluded from the definition.

Article 12: Royalties

Taxation on the royalties arising in territories is dealt with in Article 12 of the Double Taxation Agreement. For the purposes of DTA, the term “royalties" refers to payments for the use of copyrights, patents, trademarks, designs, plans, secret formulas, or industrial, commercial, or scientific information.

Primarily, royalties arising in one Territory and beneficially owned by a resident of the other Territory may be taxed in the resident's Territory and in the Territory of origin. However, if the beneficial owner is a resident of the other Territory and meets specific conditions, they are taxable only in the resident's Territory. Conditions include ownership by government entities, individuals, publicly traded companies, companies with less than 25% foreign ownership, or approved persons, etc.

It's worth noting that if the beneficial owner has a permanent establishment in the Territory of origin, and the royalties are connected to it, Article 7 provisions apply instead.

Article 13: Capital Gains

Gains made by a resident of one Territory from selling immovable property located in the other Territory, as mentioned in Article 6, can be taxed in the other Territory. However, gains made by a resident of one Territory from selling shares or similar interests (excluding shares that are substantially and regularly traded on a recognized stock exchange) that derive more than 50% of their value from immovable property in the other Territory can also be taxed in that other Territory.

Gains from selling movable property that is part of a business's assets, including gains from selling the entire business or its permanent establishment in the other Territory, can be taxed in that other Territory.

Gains from selling ships or aircraft, or movable property related to the operation of such ships or aircraft by a business of one Territory operating in international traffic, are only taxable in that Territory.

Importantly, Gains from the disposal of assets not described above will only be taxed in the Territory where the seller is a resident.

Article 14: Income from Employment

Salaries, wages, and other similar payments received by a resident of one Territory for employment are generally only taxable in that Territory, unless the work is performed in the other Territory. If the employment is carried out in the other Territory, the income earned from it can be taxed there.

However, even if the work is done in the other Territory, the income will only be taxed in the resident's home Territory if all of the following conditions are met:

  • The employee is present in the other Territory for no more than 183 days in any twelve-month period starting or ending in the relevant fiscal year.
  • The payment is made by, or on behalf of, an employer who is not a resident of the other Territory. and
  • The payment is not charged to a permanent establishment that the employer has in the other Territory.

Additionally, income earned by a resident of one Territory for employment on a ship or aircraft operating in international traffic (except those operating solely within the other Territory) will be taxable only in the resident's home Territory.

Article 15: Directors' Fees

Directors’ fees and other similar payments derived by a resident of a Territory in his capacity as a member of the board of directors of a company which is a resident of the other Territory may be taxed in that other Territory.

Other Provisions

Article 16: Income as Artists and Sportsmen

The income earned by a resident of a Territory as an entertainer, such as a theatre, television artist, or as a sportsman, from his personal activities in the other Territory, may be taxed in that other Territory.

Article 17: Pensions

Pensions paid to an individual shall only be taxable in the Territory where he is resident.

Pensions Double taxation agreement

Article 18: Government Service

Remuneration, including pensions, paid by the Government of one of the territories for services rendered to that Government shall be exempt from tax in the other Territory if the individual is not ordinarily resident in that other Territory.

Article 19: Students

Payments received by a student or business apprentice for the purpose of education and training are exempt from taxes in the Territory where they are studying if they were a resident of the other Territory and the payments come from outside the Territory where they are studying.

Article 20: Other Income

Article 20 of the Agreement document specifies that income not dealt with in the previous articles, regardless of its source, are taxable only in the Territory of residence.

However, there are exceptions, notably when income is paid to a resident of one Territory from sources controlled by trustees or personal representatives who are residents of the other Territory. In such cases, the income is treated as arising from the same sources and in the same proportions as the income received by the trustees or personal representatives, with any tax paid by them on behalf of the beneficiary being treated as paid by the beneficiary.

Article 21: Miscellaneous Rules Applicable to Offshore Activities

An enterprise conducting offshore activities in a different Territory is treated as having a permanent establishment there, unless the activities last less than 30 days in a fiscal year.

Profits from specific offshore services, like transportation or ship operations, are taxed solely in the resident Territory of the income recipient. Income from exploration rights or related property sales may be taxed where the activities occur.

Salaries from offshore-related employment are typically taxed where the work is done, except for those earned aboard ships or aircraft engaged in offshore operations, which are taxed only in the resident Territory.

The definition of offshore activities is given in the Article 3 of this document.

Article 22: Elimination of Double Taxation

For the Isle of Man, double taxation will be avoided as follows. According to Isle of Man laws regarding the credit for taxes paid outside the Isle of Man (without affecting the general principle):

Elimination of Double Taxation
  • If a resident of the Isle of Man earns income that can be taxed in the United Kingdom under the Agreement, the Isle of Man will allow a deduction from its own tax equal to the income tax paid in the United Kingdom.
  • This deduction will not exceed the portion of the Isle of Man tax, calculated before the deduction, that is attributable to the income taxed in the United Kingdom.
  • If a resident of the Isle of Man earns income that, according to the Agreement, is only taxable in the United Kingdom, the Isle of Man may include this income in its tax base but will allow a deduction from its income tax for the portion of the tax related to the income earned from the United Kingdom.

On the other hand, credit is given in the UK as follows:

  • Manx tax paid on profits, income, or chargeable gains from Isle of Man sources (excluding dividend taxes on profits from which the dividend is paid) will be credited against the equivalent UK tax.
  • Dividends from an Isle of Man company to a UK company are exempt from UK tax if UK conditions are met.
  • Profits of a UK company's Isle of Man permanent establishment are exempt from UK tax if conditions are met.
  • Non-exempt dividends from an Isle of Man company to a UK company controlling at least 10% of voting power will also consider Manx tax on the profits from which the dividend is paid.

Article 23: Entitlement to Benefits

Article 23 of the Agreement states that a benefit will not be granted for income or capital gains if it is concluded that one of the main purposes of any arrangement or transaction was to obtain that benefit, unless it aligns with the Agreement's objectives and purposes.

If a benefit is denied under this condition, the competent authority of the denying Territory may still grant the benefit, or a different benefit, after considering a request and all relevant facts. Before rejecting such a request from a resident of the other Territory, the competent authority will consult with its counterpart in that other Territory.

Article 24: Non-Discrimination

Article 24 of the Agreement primarily focuses on three areas, which can be summarised as follows:

  • Entities governed by the laws of one territory should not be subjected in another territory to taxation or obligations more burdensome than those faced by similar entities in the latter territory, especially concerning residency status.
  • Taxation on a business's permanent establishment in a different territory should not be less favorable than the taxation applied to local businesses engaging in comparable activities.
  • Payments such as interest and royalties made by a business from one territory to a resident of another territory should be deductible under the same conditions as if they were made to a resident of the former territory.

However, this principle doesn't mandate either territory to extend to non-resident individuals the same tax benefits provided to residents, unless they are nationals of the United Kingdom.

Article 25: Mutual Agreement Procedure

Article 25 of the agreement outlines the Mutual Agreement Procedure (MAP) for resolving taxation disputes between the involved territories. Unresolved cases are decided via arbitration between the competent authorities, provided that the cases are presented in time.

If a person believes they are facing taxation contrary to the agreement's provisions, they can present their case to either Territory's competent authority within three years of the taxation issue's notification. The competent authorities will endeavour to resolve the case mutually, and if unsuccessful, will seek resolution with the other Territory's authority. Any agreement reached supersedes domestic law time limits.

Arbitration Process for Unresolved Cases:

If a taxation dispute remains unresolved after two years of the initial presentation, the case can be arbitrated upon the person's request. The arbitration decision becomes binding unless a directly affected person rejects the implementing mutual agreement.

The application of the arbitration process is determined through mutual agreement between the competent authorities.

Article 26: Exchange of Information

The importance of exchanging the information by the competent authorities of two territories (defined in Article 3) is addressed in Article 26 of the Double Taxation Agreement. The relevant information will be exchanged for enforcing the provisions of the agreement. The article also stresses that the information received by a Territory must be treated as secret, similar to domestic tax information.

Double Taxation Agreement Exchange of Information

If a Territory requests information, the other Territory cannot refuse to supply it, and must use its measures to obtain it, even if it doesn't need it for its own tax purposes.

However, the territories are not obligated to do the following:

  • Carry out administrative measures that violate the laws or administrative practices of either Territory.
  • Supply information that is not obtainable under the laws or normal administrative practices of either Territory.
  • Provide information that would reveal trade secrets or contravene public policy.

Article 27: Assistance in the Collection of Taxes

Under Article 27 of the Agreement, the territories agree to help each other collect revenue claims, including taxes, interest, penalties, and collection costs, as long as this cooperation aligns with their laws and the Agreement. If a revenue claim is enforceable in one territory and the debtor cannot prevent its collection, the other territory will collect it as if it were their own tax.

Similar to Article 26, Article 27 highlights that the territories are not obligated to certain practices, such as:

  • Perform actions against its laws or administrative practices
  • Undertake actions contrary to public policy
  • Assist if the requesting territory has not used all reasonable collection measures
  • Assist if the administrative burden outweighs the benefit
  • Assist if the taxes in question are considered contrary to generally accepted taxation principles

Article 28: Entry into Force

It was agreed on the Agreement that each of the Territories should notify the other in writing of the completion of procedures required by its law for bringing the Agreement into force. The same is emphasised in Article 28 and 29. The Agreement was given effect via the exchange of letters signed on 2 July 2018 and entered into force on 19 December of the same year. Various taxes were affected in different dates:

  • For taxes withheld at source - 1 February 2019, In the Isle of Man and the UK.
  • For income tax - 6 April 2019
  • For corporation tax -1 April 2019, In the UK

Article 28: Termination

This Agreement remains valid until terminated by either Territory. Termination requires written notice at least six months before the end of any calendar year, beginning after five years from the Agreement's entry into force. Upon termination:

  • Taxes withheld at source cease six months after the notice date.
  • Income tax ceases for any year of assessment starting after the next 6th April following the notice.

In the Isle of Man, and

  • Taxes withheld at source cease six months after the notice date.
  • Income tax and capital gains tax cease for any year of assessment starting after the next 6th April following the notice.
  • Corporation tax ceases for any financial year starting after the next 1st April following the notice.

In the United Kingdom.

Conclusion

In conclusion, the Double Taxation Agreement between the United Kingdom and the Isle of Man serves as a comprehensive framework, governing tax matters ranging from residency determination to specific taxation of income streams like dividends, interest, royalties, and capital gains.

The Agreement ensures that individuals and enterprises operating in both territories are not subject to double taxation, providing mechanisms for tax relief and dispute resolution through Mutual Agreement Procedures and arbitration. Additionally, it promotes non-discrimination, fairness, and transparency in tax matters, while facilitating the exchange of information and cooperation in tax collection between the competent authorities of both territories.

Need expert advice on Double Taxation Agreement?

Contact us today for efficient and hassle-free assistance.

Susan Basnet
Our Complete Guides
Related Posts

Confused where to start?

Schedule a free 15-minute discovery call by providing your contact details, mentioning your requirements, and selecting a convenient date for the call.

How our discovery call works:

Please wait while the page is loading
Current Progress
Current Progress

Complete Our Contact Form

Discovery Calls Scheduled

Receive a Tailored Proposal

Success message!
Warning message!
Error message!