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Economic Substance Requirements – An Update From the Isle of Man

Background

The Crown Dependencies (Guernsey, Isle of Man and Jersey) introduced economic substance requirements in January 2019. Together with the Channel Islands, the Isle of Man’s tax legislation requires Isle of Man tax resident companies, deriving income from relevant sector activities, to comply with the economic substance test. These requirements are effective for accounting periods commencing on or after the 1st January 2019. 

Specific ‘relevant activities’ are defined as:

  • Banking
  • Insurance
  • Shipping
  • Fund Management (this does not include companies that are Collective Investment Vehicles)
  • Financing and Leasing
  • Headquarters
  • Distribution and service centres
  • Pure Equity Holding Company; and
  • Intellectual Property (for which there are specific requirements in high risk scenarios).

How has Covid-19 affected Economic Substance?

The outbreak of Covid-19 hs caused issues for companies required to comply with economic substance. Legislation introduced in response to the Coronavirus pandemic, included significant restrictions on the movement of people. This applies not only to international travel with the closure of borders and the suspension of flights and other forms of transport, but also in relation to travel within countries themselves.

These restrictions, compounded with the practice of social distancing, or in some cases isolation, have changed the way corporate meetings have been held all over the world.

The economic substance laws and regulations have remained in place during this time, and it has been important for entities to demonstrate how they are complying with these requirements.

Companies must continue to ensure they are following the regulations as much as possible, and comprehensively record any instances where compliance might not be possible due to travel restrictions and social distancing measures outside their control.

They should maintain relevant records, showing both local regulations and their own internal policies, in respect of restrictions on travel for company officers, and the period of time for which these policies are in place.

This will ensure that companies can demonstrate that COVID-19 restriction measures prevented the company from holding an adequate number of board meetings on the island, or temporarily required meetings to be held virtually, for example; conference calls, video conferencing, Skype or similar. Normal protocols for such meetings should be observed, as far as possible.

Companies should also keep records and document, where possible, all new measures they have made to modify working arrangements, on a case by case basis.

How Can Dixcart Help?

Dixcart proactively encourages clients to demonstrate real economic substance and are ideally positioned to provide advice and assistance in relation to these matters, especially during these unprecedented times.  

We can advise companies on how to document working arrangements, board meetings and virtual meetings, for example conference calls, video conferencing, Skype or similar.

We have established extensive serviced office facilities in the Isle of Man, and we employ senior, professionally qualified staff, to support and direct international functions for our clients. These professionals are competent to take responsibility for different roles, including, as appropriate, finance director, non-executive director, industry specialist, etc. and, if needs be, can act as alternate directors and assist the affected entities with substance issues generally.

Dixcart professionals are also available to provide advice and assistance to businesses on the implications of economic substance and other Isle of Man tax related matters. 

Summary

Dixcart perceive this as an opportunity for clients to demonstrate true tax transparency and legitimacy. These measures also encourage real economic activity and job creation, in the Crown Dependency jurisdictions, moving forward.

Additional Information

Please contact us if you need advice to help you to meet economic substance requirements during this challenging time.

If you require additional information on this topic, please speak to Steve Doyle, who is based at our Dixcart office in the Isle of Man: advice.iom@dixcart.com.

Dixcart Management (IOM) Limited is licensed by the Isle of Man Financial Services Authority.

Isle of Man Government – Economic Substance

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