Substance requirements
How will the substance requirements affect your Isle of Man tax resident company?
Substance requirements will affect Isle of Man tax resident companies deriving any income from activity in a variety of geographically mobile business sectors. The Isle of Man Government has approved legislation in relation to the substance requirements which came in to effect for accounting periods starting on or after 1 January 2019.
The nature of the requirements varies between sectors, with general requirements that will apply to all affected companies except for pure equity holding companies which will have to meet more relaxed requirements. The general requirements for a relevant company are that;
- it is managed and directed 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.
Latest commentary
Watch the latest discussions from our tax team about the Economic Substance Regulation requirements.
5:15
Economic Substance Matters | Tax Talk
Watch Phil and Kevin discuss the Economic Substance Regulation requirements.
The requirements affect Isle of Man tax resident companies deriving any income from activity in the following sectors:
- Banking;
- Insurance;
- Shipping;
- Fund management;
- Financing and leasing;
- Headquartering;
- Operation of a holding company;
- Holding of intangible property; and
- Distribution and service centre business.
A range of sanctions will be enforced by the Income Tax Division where they consider that a company is not meeting the substance requirements. These include fines, exchange of information with appropriate tax authorities and ultimately, the company being struck off the Isle of Man register.
A vital feature of these requirements is the idea of ‘adequacy’. Substance adequacy will vary from business to business and there are no set parameters or guidelines to determine what constitutes adequacy. Companies must ensure that they have what they consider to be appropriate arrangements in place and be prepared to defend the adequacy of, for instance, their staffing levels and experience. For regulated industries such as banking, insurance and fund management there will be overlap between the adequacy requirements and their current regulatory requirements.
An area of the legislation that is likely to be of relevance to a number of Isle of Man resident companies relates to ‘high risk IP companies’. These are companies that (broadly) either:
- hold an IP asset that has been acquired from and is licensed to related parties; or
- hold an IP asset and do not carry on core income generating activities from within the Island.
For such companies there is a rebuttable presumption that such a company has failed the substance requirements. This means that the burden of proof is on such companies to demonstrate compliance with the substance requirements is higher.
How we can help
We consider that complying with the substance rules will be via a three step process:
- Undertaking an impact analysis to understand how and to what extent your business will be affected
- Carrying out a readiness assessment to ensure your business is prepared or to advise on areas requiring improvement/amendment
- Obtaining assistance for tax return preparation and Income Tax Division liaison to ensure timely implementation of the requirements
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