US Edition The self-governing British crown dependency in the Irish sea, with a population of 80,000, wants to introduce a compulsory blanket licence for music downloads.
Broadband ISP subscribers would pay a "nominal" compulsory tax, but be able to share music legally.
The proposal was unveiled during the Midem international music market and conference in Cannes.
Ron Berry, inward investment manager for the Isle of Man government, said: "At the end of the day, we are not going to stop piracy, so let's embrace it."
"This gives us the unique opportunity to lead the way in music licensing. The proposal is a culmination of a year's negotiations with key partners in the industry which began at Midem in 2008."
Mr Berry added that it was still inviting input from rights holders to ensure that it is a long-term solution. He also suggested the system could affect the business models of commercial digital download services on the island.
"A blanket license for ISPs to allow their subscribers to download music for non commercial use as an intrinsic part of their monthly ISP or MSP [mobile service provider] charge is the way forward.
"However, to enable this to happen, it needs to be a collaborative effort between rights holders, telecommunication providers and internet service providers, and a supportive government."
The Isle of Man has no capital gains tax, corporation tax and income tax is 10 per cent.
The proposal has won approval from the British Phongraphic Industry, the industry's trade association.
Geoff Taylor, the chief executive of the BPI said: "If ISPs take the position advocated in the Isle of Man, we'd be in an enormously better position."