Isle of Man: E-gaming
23 January 2006
Innovative legal reforms combined with a sustained marketing salvo have established the Isle of Man as the offshore capital of e-gaming. By Tim Casben
Since 2003, the Isle of Man has been marketing itself aggressively to the e-gaming sector and it has adopted an innovative approach to legislation and regulatory matters in its attempt to lure such business. Combined with the attractions of listing an Isle of Man-incorporated company on AIM, this campaign has resulted in the island increasingly being seen as the offshore centre of choice for the e-gaming industry.
The Isle of Man was one of the first jurisdictions to pass dedicated legislation for the e-gaming sector in May 2001, and by 2002 it had bagged five gaming operators from around the world. However, the regulatory requirements for holding a gaming licence in the Isle of Man did not alter and adapt to keep pace with the rapid growth in the gaming industry, and the island soon became less of a draw as an offshore centre for the industry.
The requirements included the need to deposit a $2m (£1.1m) surety bond, which was obviously restrictive for smaller players in the market. Additionally, operators were not able to accept bets or players from markets in which online gaming was prohibited. As a result, by the end of 2003 no gaming operators held a licence issued by the island.
Since licensing has been taken over by the island’s Department of Trade and Industry, a number of significant changes have been made. The size of the bond has become negotiable to take account of the size of the operator and, perhaps most significantly, in January 2005 the island’s Council of Ministers approved a policy change, enabling operators based in the Isle of Man to accept bets from the US - although the question mark over the legality of an e-gaming company’s operations there raises several concerns when preparing it for flotation.
It should be noted that e-gaming companies incorporated in the Isle of Man will not necessarily be applying for licences. In fact, the more common approach to date has been for companies looking to list on AIM to put in place a holding company, incorporated in the Isle of Man and taking advantage of the exempt company regime without having its operations on the island, and consequently not needing to apply for an Isle of Man e-gaming licence.
Taxation and duty
Perhaps the most significant change in the last year was the announcement in April 2005 of zero-rate income tax for the e-gaming sector. In addition, it is intended that from April 2006 a zero-rate company tax regime will replace the exempt company regime.
As a result, it will be interesting to see whether the Isle of Man will, in the future, attract some of the big players based in Gibraltar. Unless Gibraltar changes its rules to avoid EU restrictions, from 1 July 2007 companies located in Gibraltar will be subject to a 35 per cent tax rate. It seems inconceivable that businesses will not be looking at alternative jurisdictions before then.
In such circumstances the Isle of Man will be competing for business with the likes of Alderney, which has attracted some of the world’s leading companies, and which stole a march on the Isle of Man when the regulatory requirements had not kept up with developments.
The gaming industry and AIM
There are now more than 20 e-gaming and e-betting related companies listed on AIM, the vast majority of which have listed in the last 12 months. Summer’s flotations of Partygaming, followed by 888 Holdings on the full list, has undoubtedly opened the floodgates, and it would now appear that London is the international location of choice for gaming companies.
It is also inevitable that, due to the lighter regulatory regime, the majority of these companies will be attracted to AIM. The Isle of Man is in a prime position to win this business and is getting an increasing share of AIM floats. One of the island’s leading law firms has reported that it had a strong pipeline prior to the dip in the market towards the end of last year and that it is anticipated that a number of these will list on AIM in 2006.
Neteller has been the most significant gaming-related business listed on AIM to be based in the Isle of Man, and the success of its flotation has focused investors’ and advisers’ interests in the tax and communications benefits offered by the Isle of Man.
In the past 18 months, the island has attracted some of the largest players in the online gaming and betting market, together with related services such as payment providers. The biggest movers have been Microgaming, the world’s leading software provider for online casinos, and Pokerstar, a global internet poker company which has moved its headquarters from Costa Rica.
Pokerstar claims to have relocated because the Isle of Man’s “infrastructure and the regulatory regime permits the company to operate to its full potential”. The company is also rumoured to be preparing for an AIM listing and it is certain for the reasons set out above, together with the political and economic stability, that investors would look more favourably on a company incorporated and licensed in the Isle of Man than other ‘third-tier’ tax havens. It is relevant that Pokerstar’s management also expressly recognised the Isle of Man government’s “support and guidance in acquiring their e-gaming licence”.
The challenge for the Isle of Man going forward will be to maintain flexibility to continue to attract companies in a rapidly evolving marketplace. Its e-gaming legislative framework is currently under further review, with the intention that it is refined and amalgamated into one overarching statute to enable the rapid introduction of secondary legislation.
Tim Casben is a partner at Lawrence Graham