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COVID-19 and the Isle of Man’s Economic Substance rules COVID-19 and the Isle of Man’s Economic Substance rules

On top of the well-documented impact of the COVID-19 pandemic on public health, the world economy and society at large, issues which are of course everyone’s primary concerns at this time, there are various less obvious consequences for businesses trying to deal as best they can with the “new normal”.

For those companies within the scope of the Isle of Man’s Economic Substance rules, the widespread existence of lockdown measures and travel restrictions might well make complying with the rules that bit more challenging. By way of example, board meetings which were scheduled to take place on the Island and attended in person by non-Isle of Man resident directors are now instead most likely to be held virtually, with the off-Island participants dialling in from home. This has the potential to result in a failure to satisfy the “directed and managed” leg of the substance requirement which would clearly be a major concern.

Equally, a foreign-based employee of an Isle of Man company critical to that company’s business and who had intended to spend a significant amount of time on-Island, but is now prevented from doing so, might jeopardise the company’s satisfaction of the “core income generating activity” requirement.

Whilst the tax authorities in some of the other jurisdictions with equivalent Economic Substance rules (for example Jersey and the Cayman Islands) have issued guidance acknowledging these sorts of concerns and offering a degree of reassurance, the Isle of Man authorities, to date, have not.

Nevertheless, we would fully expect the Income Tax Division to take a pragmatic approach to assessing the position of companies whose position under the Economic Substance rules is impacted by COVID-19; however, this is only likely to be the case where it is clear that business practices have been temporarily adversely affected by the pandemic. To be clear, we would expect the Division to distinguish between cases in which a company has a clear track record of complying with the rules prior to the onset of the pandemic and those situations in which no such history exists. In the former case we would expect the Division to take a lenient view, whereas in the latter there would seem far less scope for such discretion to be exercised. However, each case will be different and will need to be assessed in its own right, whether by the company itself, by external advisers or, ultimately, by the Income Tax Division.

Given the above and the additional pressures of remote working, those businesses who manage the affairs of a number of Isle of Man companies need to be sure that they are monitoring the Economic Substance position in an accurate and consistent way.

If you require any assistance as to how COVID-19 might be affecting you or your clients’ substance position, please contact me or a member of the team. KPMG have also developed a tool to assist in this process, more information in respect of which can be found here.

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