Extension of Economic Substance Requirements to Partnerships
The Income Tax (Substance Requirements) Order 2021 was approved by Tynwald on 16 June 2021 and extended the scope of the economic substance rules to cover ‘relevant partnerships’. This includes General Partnership, Limited Partnerships, Limited Liability Companies (‘LLCs’) and foreign partnerships that carry on a business activity in the Isle of Man.
There are some limited exceptions including collective investment schemes within the meaning of the Collective Investment Schemes Act 2008, other than “self-managed schemes” and partnerships where all the partners are individuals who are subject to personal income tax in the Isle of Man.
The expanded rules will apply to relevant partnerships deriving income from a ‘relevant activity’ for accounting periods commencing on or after 1 July 2021. As with the existing legislation, relevant activities include:
- Banking;
- Insurance;
- Shipping;
- Fund management;
- Financing and leasing;
- Headquartering;
- Operation of a holding company;
- Holding of intangible property; and
- Distribution and service centre business.
The nature of the requirements varies between sectors, however the general requirements for a relevant partnership are that;
- its place of effective management is in the Isle of Man;
- it has an adequate number of qualified employees on the Isle of Man (this will include outsourced employees);
- it has adequate expenditure on the Isle of Man, proportionate to its level of activity on the Island;
- it has an adequate physical presence on the Isle of Man; and that
- it conducts core income generating activity on the Isle of Man.
A range of sanctions will be enforced by the Income Tax Division where they consider that a relevant partnership is not meeting the substance requirements. These include fines, exchange of information with appropriate tax authorities and ultimately, being struck off the Isle of Man register.
Our view
Based on our previous practical of looking at this for companies, the first step is to undertake an impact analysis to understand how and to what extent the business will be affected, if at all. The next step is carrying out a readiness assessment to understand if the business is compliant with the tests and if not, to consider areas requiring improvement or amendment.
To discuss the challenges raised, please get in touch. For information about how we can help, please visit our Substance requirements page.
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