Economic substance is a phrase often used but why is it so important and what does it mean for companies based in the Isle of Man?
The origin of economic substance as a concept dates back to 2016 and stems from the European Union (EU) examination of non EU jurisdictions and their tax transparency and compliance with anti base erosion and profit shifting. Concern was raised that certain jurisdictions allowed corporate structures to be formed to collect revenue and profits from a businesses located elsewhere. The result was a mismatch between where taxes were applied and where the economic activity was being performed.
Since January 2019 companies in the Isle of Man must comply with economic substance requirements in order to demonstrate that they have real substance and activity in their taxable jurisdiction and are not simply a “brass plaque” enterprise. The penalties for not complying with these include fines, removal from the companies register and even imprisonment.
However, not all types of businesses are required to demonstrate this; only certain industry sectors traditionally considered to be globally mobile are covered by the requirements. The relevant sectors include: banking, insurance, shipping, fund management, finance and leasing, operation of a holding company and holding intangible property (intellectual property).
For an Isle of Man corporate vehicle to demonstrate adequate economic substance, it should be able to show:
- it is directed and managed in the Isle of Man;
- there is an adequate number of (qualified) employees proportionate to the level of activity carried on. The term “employees” is not limited to individuals legally employed by the company itself and is similar to the definition of employees used by the EU in relation to small to medium-sized enterprises (“SMEs”);
- it has adequate expenditure proportionate to the level of activity carried on in the Isle of Man;
- there is an adequate physical presence; and
- it conducts core income-generating activity (‘CIGA’) in the Isle of Man. CIGA is the essential and valuable activities that generate the income of the business. It is not necessary for the business to perform all of the CIGA listed in the legislation for the particular sector, but it must perform the CIGA that generates the income it has. Where a CIGA is outsourced the resources of the corporate service provider in the Isle of Man will be taken into consideration when determining whether the employee and premises test is met.
If you would like to know more about the Isle of Man’s Economic Substance requirements, or would like to discuss your business corporate vehicle (located in the Isle of Man or elsewhere), please contact Phil Hardisty at phil@icmwealth.com.
