The double tax treaty between the UK and the Isle of Man entered into force on 19 December 2018. The treaty replaces the 1955 Arrangement between the UK and the Isle of Man for the avoidance of double taxation which ceases to have effect from the dates on which the new agreement takes effect.

The treaty includes a preamble stating that the parties are intending to conclude an agreement “without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty shopping arrangements aimed at obtaining reliefs provided in this Agreement for the indirect benefit of residents of third States).” This is in line with the recommendations of the OECD following the report on base erosion and profit shifting (BEPS) and the multilateral instrument for inclusion of treaty related BEPS measures into bilateral tax treaties.

The agreement provides for zero withholding tax on dividends, interest and royalties, subject to certain conditions. However where dividends are paid out of income derived directly or indirectly from immovable property by an investment vehicle distributing most of its income annually and whose income from the immovable property is tax exempt, the maximum withholding tax chargeable in the source country is 15%. Where the beneficial owner of the dividends is a pension scheme however the dividends are exempt from tax in the source country.

There are miscellaneous rules applicable to certain offshore activities. Offshore activities are activities carried on offshore in a contracting state in connection with the exploration or exploitation of the seabed and subsoil and their natural resources situated in that territory. An enterprise of a territory carrying on offshore activities in the other territory is deemed to be carrying on business in the other territory through a permanent establishment unless the activities continue for a period not exceeding an aggregate of 30 days in a twelve-month period.

The agreement contains an article on entitlement to benefits under which benefits are not granted under the treaty if obtaining that benefit was one of the principal purposes of any arrangement or transaction resulting in that benefit, unless it can be established that granting the benefit is in accordance with the object and purpose of the relevant provisions of the treaty.

The article on the mutual agreement procedure provides that any issues arising from a case that are not resolved within two years after presentation of the case to the competent authority may be submitted to arbitration at the request of the person who presented the case. Unless a person directly affected by the case does not accept the mutual agreement implementing the arbitration decision that decision shall be binding on the contracting states and implemented regardless of any time limits in domestic law.

The provisions of the agreement take effect for withholding taxes from 1 February 2019. For income tax the agreement tax effect in the Isle of Man from 1 January 2019 and in the UK from 6 April 2019. For corporation tax the agreement takes effect in the UK from 6 April 2019.