Effective from 1 January 2019, the Income Tax (Substance Requirements) Order 2018 is applicable to companies resident in the Isle of Man, which provides for the implementation of minimum substance requirements as part of their annual tax return. The law requires companies engaged in the following sectors to demonstrate that they meet minimum substance requirements:
- Fund management ;
- Financing and leasing;
- Operation of a holding company;
- Holding intangible property; and
- Distribution and service centre businesses.
The substance requirements are extended to the following forms of business:
- Self-managed funds (schemes), which include corporate fund vehicles that have not appointed an external fund manager. The self-managed funds are required to comply with the substance requirements for accounting years beginning on or after 16 December 2020; and
- Resident partnerships (including general partnerships, limited partnerships, limited liability companies, and foreign partnerships whose place of effective management is in the Isle of Man). All relevant partnerships carrying on relevant activities are required to comply with the substance requirements for accounting periods beginning on or after 1 July 2021.Under the measures of the law, resident partnerships must satisfy the economic substance test in relation to any relevant activity carried on by or through it for which it has gross income. However, a resident partnership is not required to satisfy the economic substance test in relation to a relevant activity carried on by or through it if:
- all of the partners in the partnership are individuals who are subject to income tax in the Isle of Man; and
- during the relevant financial period:
- the resident partnership is not part of a multinational group; and
- the resident partnership does not undertake business activities outside of the Isle of Man.
Sector specific substance requirements may vary; however, a company is generally considered to have adequate substance if:
- The company is directed and managed in the Isle of Man;
- There is an adequate number of qualified employees in the Isle of Man (whether employed by it or another person and whether on temporary or long-term contracts);
- It has adequate operating expenditure proportionate to the level of activity carried on in the Isle of Man;
- It has an adequate physical presence in the Isle of Man; and
- It conducts core income-generating activity in the Isle of Man.
In this regard, the government issued in April 2019 a joint guidance with Guernsey and Jersey on the new substance requirements. The guidance provides an overview of the economic substance requirements, information on the relevant sectors, directed and managed requirements, and other matters. An updated guidance was issued in November 2019 to cover additional sectors (such as insurance, intellectual property, high-risk intellectual property and shipping), update existing guidance on other sections and provide further clarifications on funds, CIGA and other aspects. Additionally, in January 2021, another joint guidance was issued providing additional guidance on the scope and application of the economic substance legislation regarding partnerships.
Failure to comply with substance requirements attracts penalties of up to GBP 10,000, which may be increased to GBP 50,000 for high-risk IP companies.
Tax Information Exchange Agreements (TIEAs) provide for the exchange of information on tax matters and the Isle of Man has concluded TIEAs with 38 countries, including Anguilla, Argentina, Australia, Bermuda, Botswana, British Virgin Islands, Cayman Islands, Canada, China, Czech Republic, Denmark, Faroe Islands, Finland, France, Germany, Gibraltar, Greenland, Iceland, India, Indonesia, Ireland, Italy, Japan, Lesotho, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Slovenia, Sweden, Switzerland, Turkey, Turks and Caicos Islands, United Kingdom, United States.
The Isle of Man has agreed to exchange tax rulings with eligible jurisdictions from 1 April 2017 in the implementation of BEPS Action 5. A specific ruling can be exchanged with a relevant jurisdiction if it is international in nature and affects the relevant jurisdiction. The exchange is possible if there is an agreement between the Isle of Man and the relevant jurisdiction providing for the spontaneous exchange of tax information. The agreement can be a tax information exchange agreement (TIEA), a tax treaty or the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters. Exchange is also required for "past" rulings granted between 1 January 2012 and 1 April 2017.
The Isle of Man has adopted measures to implement the automatic exchange of financial account information with the global standard for the exchange of information developed by the OECD under the Common Reporting Standard (CRS). The first exchange of financial account information was completed in September 2017.
Further, the Isle of Man concluded the Intergovernmental Agreement (IGA) with the United States on 13 December 2013 to improve international tax compliance and to implement the US Foreign Account Tax Compliance Act (FATCA). The first exchange of financial account information with the US was completed in September 2015.
On 1 July 2017, the Isle of Man introduced the ultimate beneficial ownership disclosure requirement under the Beneficial Ownership Act 2017, replacing the Companies (Beneficial Ownership) Act 2012. Under the new rules, the obligation to identify and report their ultimate beneficial ownership applies to all legal and corporate entities in the Isle of Man.
A "beneficial owner" means the person who ultimately owns or controls a legal entity to which the Act applies, in whole or in part, through direct or indirect ownership or control of shares or voting rights or other ownership interest in that entity, or who exercises control via other means.
A beneficial owner who owns or controls more than 25% of the beneficial ownership of a legal entity is considered as a “registrable beneficial owner”. The legal entity is required to electronically file the details of the registrable beneficial owner to the Isle of Man Database of Beneficial Ownership through a nominated officer/a corporate service provider (CSP).
A statement of compliance of the information on the registrable beneficial ownership is required to be filed as a part of the annual income tax return.
Any change to the information must be submitted to the database within one calendar month of the nominated officer being made aware of the said changes. If there are no changes, the nominated officer is still required to visit the database at least once a year to confirm that the existing information is current and correct.