Isle of Man Substance Requirements

On the 13th December 2018 the Income Tax Act 1970 was amended to incorporate substance requirements. These measures require Isle of Man (IOM) resident companies to have adequate substance on the Island to support the activities they are undertaking.

The legislation has been brought in following pressure from the EU Code of Conduct Group who expressed concern that the IOM, amongst other jurisdictions, did not have clear substance requirements. The Conduct Group felt this could lead to an entity in the IOM receiving profits that are not reflected in the economic presence on the Island. The legislation was therefore required to ensure that the Isle of Man remains fully compliant with international tax standards.

The new legislation requires that a “resident company must, for any accounting period in which it derives any income from a relevant sector, have adequate substance on the Island”. “Resident” will include any non-IOM incorporated company which is IOM tax resident.
The Income Tax Division (ITD) have produced a high level flowchart to assist with determining whether the substance requirements apply. The link is available here;

http:// https://www.gov.im/media/1363454/substance-flowchart-iom-6nov18.pdf

What are the relevant sectors?
The legislation applies to relevant sectors as follows;
• Banking
• Insurance
• Shipping
• Fund management
• Financing and leasing
• Headquartering
• Operation of a holding company
• Holding intangible property; and
• Distribution and service centre business

What does this mean in practice?
All IOM resident companies operating in relevant sectors have to apply the substance requirements and must ensure that;
• It is directed and managed in the Island
• There is an adequate number of qualified employees in the Island
• It has adequate expenditure proportionate to the level of activity carried on in the Island
• It has an adequate physical presence in the Island
• It conducts core income-generating activity in the Island
ITD have confirmed that pure equity holding companies are subject to a lower threshold which is demonstrated in the flowchart above. The requirements for these companies will be met if the company complies with it’s statutory obligations and has adequate people and premises for managing the equity interests.

An entity is considered to be ‘directed and managed in the Island’ if;
• The company’s board of Directors meets in the Island at an adequate frequency given the level of decision-making required
• During each meeting in the Island, there must be a quorum of Directors physically present in the Island
• Strategic decisions of the company must be set at meetings of the Board of Directors and minutes of the meetings must reflect those decisions
• The board of Directors as a whole, must have the necessary knowledge and expertise to discharge its duties as a board, and
• The minutes of all board meetings and the company records are kept on Island.

What are the implications of non-compliance?
Failure to comply can result in a civil penalty of £10,000 with deliberate non-compliance risking a custodial sentence.

What happens next?
This legislation is now enacted and applies to accounting periods starting on or after 1st January 2019. The earliest reporting date is therefore 1st January 2020.
We expect revised company tax returns to be issued presently which will include amendments designed to capture information in relation to the substance requirements.
Our staff will be working hard to ensure all client entities comply with the substance requirements. If you have any questions or concerns, please get in touch with your usual point of contact to discuss the specific circumstances of your business in more detail.

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