A lot has changed in the world since December 2018, when the Isle of Man first introduced substance requirements for companies operating within certain sectors.  Substance legislation was introduced in many offshore jurisdictions in response to EU concerns about the lack of real economic activity in low tax jurisdictions.  With all that has happened since, it is perhaps unsurprising that this ‘Substance Legislation’ has not always been a top priority for everyone. However, many companies will now be part way through their third accounting period within scope of the legislation, with the potential for quite severe sanctions for non-compliance, including £100,000 civil penalties and the threat of strike-off.

It is worth remembering that similar legislation has been introduced in most, if not all, of the Isle of Man’s traditional ‘competitor’ jurisdictions.

The legislation itself is quite short and relatively easy to understand. It also closely mirrors legislation in Guernsey and Jersey, which should be no surprise given how closely the three jurisdictions worked together on this. It does, however, contain some grey areas and the long-awaited jointly issued guidance failed to really clear these up.

At its most basic, an Isle of Man company must first consider two questions:

Is the company tax resident in the Isle of Man?

The substance requirements only apply to companies that are tax resident in the Isle of Man. Companies who are tax resident in another jurisdiction may be able to make an application under Section 2N of the Income Tax Act to be considered as not resident in the Isle of Man, subject to certain criteria.

Does the company generate income?

The substance requirements only apply to companies receiving income in the relevant accounting period. Many holding companies do not receive income and so will not fall within the scope of the requirements. However, the directors will still need to consider whether this be the case in the future.

If the answer to both of questions is ‘Yes’, then the directors must consider whether the income generated is from a ‘Relevant sector’ and this is where things can get slightly more complicated.

The relevant sectors are:

  • Banking
  • Insurance
  • Fund management
  • Finance and leasing
  • Pure equity holding company
  • Shipping
  • Headquartering
  • Intellectual property holding
  • Distribution and service centre business

Whilst some of the above are self-explanatory, determining whether a company falls within others may require a little more consideration.

Once it has been established that the company is tax resident in the Isle of Man, it has received income, and that the income was generated from a relevant sector, then it must demonstrate that it has “adequate substance” and that the “Core Income Generating Activities” are taking place on the Isle of Man.

The full legislation and published guidance can be found by clicking on link below:

https://www.gov.im/categories/tax-vat-and-your-money/income-tax-and-national-insurance/economic-substance/

Many companies will not be within scope of the legislation but for those who are impacted, demonstrating strong, proactive management of the company and its activities will often be sufficient. However, the sanctions for non-compliance are severe so for those companies who may not have considered it a priority so far, now really is the time to act.

If you are interested in finding out more, or if you are concerned that your company may not meet the substance requirements please get in touch with us by email enquiries@bostonmfo.com or by phone +44 1624 692930