It gives them the same rights as married couples regarding inheritance, pensions and tax allowances.
The law comes into effect on 6 April. Civil partnerships gained legal recognition in the UK in 2006.
Allan Bell, MHK, Minister for Economic Development, who tabled the bill says gay rights have been brought in line with the UK after a 20-year battle.
"It has been an extremely difficult time for gay people wishing to have open, loving caring relationships," he said.
"But gay rights have changed beyond recognition over the last 20 years on the island. It is a very different place now, it is more tolerant, understanding and inclusive."
The Isle of Man has its own parliament and own laws, some of which are very different to those in the UK.
Abortion laws are much stricter, the death penalty was only abolished in 1993 and homosexuality was illegal until 1992.
Same-sex couples on the island have welcomed the bill claiming they have been discriminated against for years.
One man told the BBC that he and his partner were forced to take HIV tests in order to get a mortgage and life insurance on the island.
"I told our broker in no uncertain terms that I didn't want to take out a policy with someone who discriminated against gay people but most on them on the island weren't prepared to give a policy unless the HIV test was taken," he said.
Mr Bell said the island used to have "a very negative image with the UK and Europe".
"The island was subject to a boycott of the UK trade unions who used to use the island for a lot of their conferences," he said.
"We are trying to compete internationally for business and there is still the suspicion that we tend to be a backward society."
"That is no longer the case. This legislation is a major statement to the outside world that we have changed. "
The bill has now passed through both houses of parliament but not without resistance. It has sparked fierce debate among some groups on the island.
Peter Murcott, Methodist preacher, said: "It will have a fundamental change in due course on how the next generation is brought up to conceive family life and ultimately it is going to introduce an anti-Christian attitude and it will be contrary to the beliefs of many other religions as well."
Allan Bell said: "Not everyone will feel comfortable with this legislation but it's been a much easier debate than the fierce resistance we had 20 years ago when we first started this process.
"The gay community on the Isle of Man has been a repressed community on the island for many years.
"Today is a red letter day for the island and for those groups."

Wiltshire Police said there had been an increase in the number of the patterns appearing in fields in the county.
A spokesman said creating a crop circle was criminal damage and an offence. Damage caused means a loss in revenue to the farmer and landowner.
Wiltshire remains one of the hotspots for the formations, which appear every summer in the English countryside.
Wheat farmer Tim Carson said his land at Alton Barnes near Marlborough was first used for a crop circle 27 years ago.
For a time he would charge visitors to see them.
He said: "At the time it was the first one that had ever occurred anywhere in the world. Little did we know we would get hundreds more after that.
"It was a one-off but the press seemed to go for it, and people just started turning up. Thousands of people came into that formation."
However, he is now trying to discourage crop circle enthusiasts using his land as it creates harvesting problems.
The farmer, who currently has a crop circle in one of his fields, estimates a loss of about Â£120,000 in lost or damaged crops.
Mr Carson said: "This is quite a small formation compared to some of the ones that we've had in the past.
"The wheat is completely flat on the floor now, it's unlikely we'll be able to get the combine low enough to harvest it."
Gay couples on the Isle of Man will get the right to a civil partnership after a new law was signed in Tynwald.
[NEXT_CONCEPT]
Farmers have been urged to report crop circles made on their land to police after a recent spate of them.