Economic Substance Guidance | Tax Talk

Kevin Cowley Partner, Tax Leader, PwC Isle of Man May 03, 2019

The Isle of Man recently introduced economic substance legislation, which applies for certain Isle of Man resident companies from 1 January 2019. This legislation was necessary to ensure the removal of the Isle of Man from an EU "Grey List" of non-cooperative tax jurisdictions. Essentially identical legislation was simultaneously introduced in the Channel Islands and in other offshore territories. 

Given the haste with which this legislation was drafted and implemented and with strictly limited guidance available, many entities operating in relevant sectors were left in an uncertain position, with more questions than answers about their operations and how they would sit against the new substance rules. The release last week of further guidance was therefore a welcome development. A link to the draft Guidance Notes can be found here.

The new guidance is intended to be a 'work in progress' as discussions with both the Organisation for Economic Co-operation and Development and the European Union continue on this matter. The contents are generic in nature and will be consistently applied in the Isle of Man, Jersey and Guernsey.

Although the new guidance includes some welcome comments and examples to demonstrate certain points, it is 'principle based' and therefore deliberately not detailed. Indeed, the guidance does not include any specific comment at all on what can be viewed as the most directly affected industries and sectors. For these industries, we must continue to wait for the desired clarity.

Significant points

A summary of the main points raised within the new guidance is below:

  • confirmation that whilst it is not necessary for a company to carry out all possible Core Income Generating Activities (CIGAs) in the Isle of Man in order to satisfy the substance rules, it must carry out those which generate its relevant income in the Isle of Man. This makes sense, given the backdrop to the rules as an anti-avoidance measure to prevent profit shifting to low tax jurisdictions;
  • the new guidance contains no specific information with regard to the key sectors of insurance (including captive insurance), shipping and intellectual property;
  • it is possible that a company may receive relevant income from a number of relevant sectors. In that case, the criteria for each of those sectors should be considered;
  • there are examples of what constitutes CIGA for banking, holding companies, finance and leasing, fund management, distribution and service centres and headquartering;
  • with regard to financing and leasing activities, it is confirmed that intra-group activities are captured by the new legislation;
  • one of the examples included confirms that entering into a 'one-off' transaction will not necessarily mean that an entity is carrying on relevant activities in a particular sector. Whether or not this is the case will be a question of fact, with all relevant matters considered;
  • a definition of "employees" is included, with acknowledgement that appropriately qualified staff will carry more weight when considering the adequacy of employees test; and
  • 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. If more than one meeting is held, then it is expected that the majority of meetings should be in the Isle of Man.

 

 

Contact us

Kevin Cowley

Kevin Cowley

Partner, Tax Leader, PwC Isle of Man

Tel: +44 (0) 1624 689714

Andrew Cardwell

Andrew Cardwell

Director, PwC Isle of Man

Tel: +44 (0) 1624 689465

Phil Morris

Phil Morris

Director, PwC Isle of Man

Tel: +44 (0) 1624 689713

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