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UPDATED: March 6, 2015 Web Exclusive
An Alternative Gateway to Europe
Why the Isle of Man could present an attractive prospect for Chinese businesses looking to set up shop westwards
By Eric Daly

Lying between Ireland and the UK, the Isle of Man occupies a curious category in the classification of places. Home to almost 90,000 people, it is neither a member of the UK nor the EU, but a Crown dependency. Although Queen Elizabeth II acts as the island's sovereign, its government, which is said to date back over 1,000 years, is wholly independent of the UK, save for the matters of foreign affairs and defense.

Apart from the world-famous Manx TT motorbike racing competition and a unique breed of tailless cats, the island is famous in the West primarily as a center for financial services and for its low-tax regime. Income tax is capped at 20 percent, there exists no capital gains tax, stamp duty, wealth tax or inheritance tax, and the island boasts an enviable zero-percent tax on corporate profits. Its financial industry initially dealt primarily with British expatriates but now increasingly trades with foreign nationals. Although it is not a member of the trading bloc, it also possesses special rights and privileges pertaining to trade and export in the EU market. Customs and excise arrangements allow Manx-based overseas businessesto ship exports directly to European markets from their country of origin, thus physically bypassing the island altogether.

 Like China, the island has weathered the recession well and is one of the few places that come close to that country's GDP, with an average annual growth rate of 6 percent over the past five years. Despite this, the island remains largely unknown in China, a situation Simon Pickering, the Manx government's head of Retail Financial Services, and colleague Steven Beevers, head of Special Projects for the island's Department of Economic Development, hope to change. Over the past two years, they have ventured to China 10 times and Beevers said that they are "increasingly excited and confident to work with Chinese businesses and entrepreneurs."  

A tempting proposition 

The two men are seeking to attract wealth and talent to invest in and possibly live on the island, pointing to attractive features such as its low crime rate, beautiful scenery and idyllic lifestyle. They see their efforts as facilitating a two-way process, as Isle of Man entrepreneurs and investors are also, naturally, casting their eye toward the emerging Chinese market at present. Some of the island's homegrown manufacturers possess hundreds of employees in China as it stands.

At present, a number of Chinese entrepreneurs have set up trading enterprises on the island, with a view toward establishing sales operations into Europe. Some Chinese shipbuilders have listed their vessels with the island's ship register. Other companies from China have employed Isle of Man corporate vehicles to list on foreign stock exchanges.Yet more Chinese investors have used vehicles to purchase commercial property in the UK. "We would dearly like to attract a Chinese bank to the Isle of Man, as we don't have one at present," said Pickering. "We think the first Chinese bank to come would do very well because of our international trade and our links to the UK."

Pickering pointed out the Manx immigration system is identical to that of the UK.Moving to the island might also mean that one may be eligible for a British passport. Through the UK Home Office, a Tier-1 investor can enter the island with minimum amount of £2 million earmarked for investment. A Tier-1 entrepreneur, meanwhile, can do the same with as little as £200,000. As a gateway for buying UK property, the island offers recuperation on the 20-percent VAT charged on the development costs for land purchased there, in addition to a favorable domestic lending environment.

According to Pickering, the island possesses a "welcoming atmosphere" for foreign businesses and reasons that as the island makes its ownlaws, it makes the Manx government more flexible and adaptable as a place to move for business entities or individuals. He added that Chinese regulatory agencies in banking and securities have traveled to the island and that the two parties signed memorandums of understanding ensuring that authorities in China have a full regulatory understanding of what the Manx government is trying to do and their regime, so as to facilitate business in the future.

Offshore breakdown      

So what can the island offer that other offshore centers cannot? Beevers opined that each of the international financial centers offer distinct advantages. The Cayman Islands, for instance, is tied to the U.S. capital market and time zone and specializes in mutual funds and investment funds. Singapore is renowned as a center for logistics. The Isle of Man's own specialties are life insurance and commercial property holdings, with its trump card being its versatility, although Beevers suggested that this is a double-edged sword. As it offers a greater range of services, he explained, the island has also had to furnish customers with more guarantees and risk management measures, and is consequently seen as more stringent. This means the island is more heavily regulated than its offshore counterparts although for Beevers' money, its credentials are higher.

Given its proximity to London, for instance, there has been over time a steady influx of ex-City lawyers to the island, offering their expertise and experience at comparatively favorable prices. What allows them to do this, according to Beevers, are cost advantages relative to the Square Mile in areas such as the leasing of office space and labor. Thus, one can avail oneself of an extremely high quality of service at a fraction of the normal price.

The island also allows investors and entrepreneurs to access the London Stock Exchangeand the Alternative Investment Market (AIM)affiliated to it. While Beevers held that the AIM market has somewhat "lost its luster" since the economic crash in 2009 and that deal flow out of China has been in general sluggish since that time, he maintained it is still "good for some" and cited the example of the Indian film production company Eros International Plc., which used the AIM as a stepping stone to list on the New York Stock Exchange. The fact that companies from the island gained recognition on the Hong Kong Stock Exchange in 2010 has opened up even more vistas for foreign companies and individuals.

Moreover, Beevers continued, the island's size, comparable to that of Singapore, also allows for real business such as manufacturing.He feels that is an aspect of the island that has been underemphasized and wishes to "rebrand" his home place, eschewing the label of "tax haven" often accorded to the island in favor of "international business center." Although the island offers low taxes and a risk-based regulatory system, Beevers pointed out that it is also home to a broad economy encompassing many industries other than wealth management, including aerospace, film production, space commerce, and alternative and renewable energies. 

An endangered species?      

One concern for individuals or businesses moving to the island is the longevity and sustainability of the country's tax regime, given the attention so-called "offshore tax havens" have been receiving from the competition authorities of international bodies such as the EU and the Organization for Economic Cooperation and Development (OECD). This attention has even been extended to onshore low-tax regimes such as that of Ireland. Since the 1960s, Beevers explained that although the Isle of Man has had low taxes, the island has, like its close neighbor, been obliged to reform and refine its tax policies to ensure that they are in line with OECD and European Code of Conduct regulations, in order to guarantee that they apply equally to all entities and persons and do not positively discriminate against foreign enterprises.

Ireland moved from a system of varying rates of corporate tax for domestic businesses and a zero-percent tax for their foreign counterparts to a 12.5-percent flat rate for the trading profits of all businesses. In a manner reminiscent, the Isle of Man changed from 20 percent on domestic enterprises and zero percent on non-native businesses to zero percent for all. This process appears to have paid dividends: In November 2013, the island was awarded the top "Compliant" rating by the OECD on its tax transparency index, joining a select club of only 18 countries and states.

Concerns have also been raised concerning the artificial movement of companies' headquarters to offshore centers for tax avoidance purposes.Beevers maintained that it can be demonstrated that companies on the island have "real decision makers," are engaged in "real business" and possess "real substance," though he does think that other centers such as Luxembourg may be affected in the future. He concluded by proposing that there are a multitude of factors other than taxes for companies and persons to move to the island, pointing to the presence of businesses clusters, the easy availability of certain skills sets and expertise, cost provisions, access to the European market, telecommunications support and a welcoming and supportive government. Indeed, given all of the aforementioned, he termed the corporate tax rate "mere icing on the cake." In Beevers' words, "Everything else about the country adds up."

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