Update on the proposed introduction of substance requirements for certain Isle of Man tax resident companies
The Isle of Man, Jersey and Guernsey have been working together to address the concerns of the EU Code of Conduct Group (Business Taxation) (“the COCG”) regarding economic substance.
As part of a review of over 90 jurisdictions, the EU Code Group concluded that the Isle of Man and the other Crown Dependencies were compliant with most of the EU principles of tax good governance, including the general principles of “fair taxation”. However, it did raise concerns regarding the lack of legal substance requirement for doing business in and through the respective jurisdictions.
The Isle of Man, along with the other Crown Dependencies, made a commitment to address these concerns by the end of December 2018 and the Islands have subsequently worked together with the COCG to develop proposals to meet their commitments.
The Governments of both Jersey and Guernsey have launched public consultations on the proposed introduction of legislation which will require companies tax resident in their jurisdictions and undertaking specific income generating activities, to demonstrate that they have sufficient substance in their respective jurisdictions. Whilst the Isle of Man is not, we understand, intending to undertake a public consultation at this stage, it published an update on progress yesterday.
The key features of the Jersey proposals, which consist of three distinct stages, and are anticipated to be very similar to the IOM proposals, are summarised below.
The term “relevant activities” has been derived from categories of geographically mobile income identified by the OECD Forum on Harmful Tax Practices and include the following:
This is a two part process.
Part 1: “directed and managed” in Jersey
Part 2: Core Income Generating Activities (“CIGA”)
Companies tax resident in Jersey need to demonstrate that the core income generation activities are undertaken in Jersey (either by the company or a third party), which may include the following:
Banking - raising funds, managing risk, taking hedging positions, providing loans, credit or other financial services for customers, managing regulatory capital, preparing regulatory reports and/or returns
Insurance - predicting and calculating risk, insuring or re-insuring against risk, providing client services
Fund Management - taking decisions on the holding and selling of investments, calculating risks and reserves, taking decisions on currency, interest fluctuations and/or hedging positions, preparing relevant regulatory and/or other reports for government authorities and investors
Financing and leasing - agreeing funding terms, identifying or acquiring assets to be leased (in the case of leasing), setting the terms and duration of acquiring assets to be leased (in the case of leasing), monitoring and revising agreements, managing any risk
Headquarters - taking relevant management decisions, incurring expenses on behalf of group entities, co-ordinating group activities
Shipping - managing the crew (including hiring, paying and overseeing crew members), hauling and maintaining ships, overseeing and tracking deliveries, determining what goods to order and when to deliver them, organising and overseeing voyages
Holding company activities - Companies which purely hold equities will need to confirm they meet all applicable corporate law and tax filing requirements, where holding companies also conduct other “relevant activities” they will additionally be subject to the requirements associated with that activity
IP holding companies - IP holding companies will have more rigorous requirements and will need, inter alia, to demonstrate the existence in Jersey of research and development, marketing, branding, distribution, strategic decisions and managing principal risks and carrying on underlying trading activities within Jersey.
All companies carrying on a relevant activity must demonstrate:
Collective Investment Vehicles (CIVs)It is recognised that reduced substantial activity requirements should apply to CIVs as they differ from other companies with geographically mobile activities. The reduced substance requirements will be aligned with the regulatory framework in Jersey.
In order to demonstrate meaningful enforcement of any proposed substance requirements, it is proposed that a formal hierarchy of sanctions for non-compliant companies is introduced with increasing severity of sanctions imposed for persistent non-compliance.
It is important to note that this process applies to other jurisdictions including Bermuda, Cayman Islands, BVI and UAE. Whilst the measures remain significant, it is expected that much of what is required in the proposal currently occurs in practice. That said, the detail on what constitutes “adequate levels of staffing and expenditure” is yet to emerge. It is expected that some of that detail will be available in the next couple of months and, with that in mind, KPMG will be organising a seminar in the Autumn to explore them.
Should you wish to discuss how these proposals impact your business, please do not hesitate to get in touch.