The Isle of Man's Income Tax Division, along with the other Crown Dependencies, has issued long-awaited draft Guidance Notes in respect of the economic substance requirements introduced by the Income Tax (Substance Requirements) Order 2018. This follows the recent removal of the Island (and other Crown Dependencies) from the EU's "Grey List", which may be seen as an effective endorsement of the Island's policies and a public acknowledgement by the EU that the Isle of Man is not a tax haven. A link to the draft Guidance Notes can be found here.
Overall, the Guidance Notes are not as detailed as many had expected. However, they do establish some useful principles that will assist affected companies to determine their compliance with the new requirements. We would highlight the following aspects:
- This is a work in progress document and therefore there are gaps within it, such as the guidance on relevant activities involving insurance, shipping and intellectual property.
- There are examples of what constitutes core income-generating activities (“CIGA”) for banking, holding companies, finance and leasing, fund management, distribution and service centres and headquartering (Section 4).
- Guidance has been provided on the Directed and Managed Test (Section 5).
- A definition of "employees" and some guidance on outsourcing have been provided at Sections 6 and 7 respectively.
- There is some guidance on what a resident company carrying on ‘relevant activities’ is expected to report in its Income Tax Return (Section 2.4).
Furthermore, there are a number of important matters which we would bring to your attention:
- In order for a relevant activity of a company to be viewed as ‘directed and managed’, the company is expected to hold at least one board meeting per year; where more than one meeting is held, then it is expected that the majority of such meetings will be held in the jurisdiction of residence of the company.
- In order to meet the economic substance requirements, the CIGA that generate the income must be performed in the Island.
- Sanctions for failure of the economic substance requirements will include exchange of information with “Competent Authorities in other jurisdictions”. The current wording of the legislation is that the information will only be exchanged where the parent of the company in question or the beneficial owners are resident in the EU. It is therefore expected that there will be a change in the current Law.
As always, KPMG will be assisting its clients in addressing the requirements of the legislation.
Should you have any queries regarding the above, please contact Gregory Jones, David Parsons, Robert Rotherham or your usual point of contact.