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Isle of Man Economic Substance Requirements Update

Isle of Man Economic Substance Update

KPMG Isle of Man Update on Economic Substance Requirements


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The Isle of Man Income Tax Division has just released much-awaited updated guidance in relation to the economic substance requirements, which can be found here. As with the guidance it replaces, it applies equally to the equivalent substance requirements in both Jersey and Guernsey.

This guidance should, to all intents and purposes, be considered as “final”, particularly as we understand it has been reviewed by both the EU and the OECD. We do not expect it to be updated in the foreseeable future.

The main updates comprise the inclusion of specific sections dealing with the application of the rules to the shipping, insurance and high risk IP relevant sectors (albeit in respect of the latter this essentially replicates the commentary included within the “Key Aspects” note issued in December 2018). The guidance also contains several other new pieces of commentary including:

  • additional discussion of the general approach to core income generating activities;
  • further clarification as to the position in respect of pure equity holding companies and those companies with income from the distribution and service centre and fund management relevant sectors; and
  • in the context of the “directed and managed” test, updates to the tax authorities’ view of the practicalities of the conduct of board meetings.

As expected, many areas of the legislation remain open to interpretation and it is likely that the directors of a significant number of affected companies will be required to exercise at least some degree of judgment. This being the case, in order for companies to protect their position, it is critical that they, inter alia:

  • fully document the decision-making process when determining whether or not they fall within the scope of the rules
  • fully document their rationale should they consider that, whilst in scope, they comply with the adequate substance test; and
  • determine the extent to which they propose to disclose their position when completing their tax returns, as well as considering the nature of such disclosure.

We at KPMG Isle of Man have worked closely with our colleagues in the Crown Dependencies and British Overseas Territories as the substance requirements have developed and would be delighted to offer you our advice and assistance.

Please contact David Parsons, Robert Rotherham or your usual point of contact at KPMG Isle of Man.

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