What are the Economic Substance Regulations?

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The core requirement of the Substance Regulations is that an Isle of Man or Guernsey (referred to each as “the Island”) tax resident company must, for each accounting period in which it derives any income from a relevant sector, have “adequate substance” in its jurisdiction.

Relevant sectors include

Banking
Insurance
Shipping
Fund Management (this does not include companies that are Collective Investment Vehicles)
Financing & leasing
Headquarters
Distribution and service centres
Pure Equity Holding Companies; and
Intellectual Property (for which there are specific requirements in high risk
At a high level, companies with relevant sector income, other than pure equity holding new zealand mobile database companies, will have adequate substance in the Island, if they are directed and managed in the jurisdiction, conduct core income-generating activities (“CIGA”) in the jurisdiction and have adequate people, premises and expenditure in the jurisdiction.

Directed and Managed

Being ‘directed and managed in the Island’ is distinct from the residency test of ‘management and control’.

Companies must ensure that there are an adequate number of board meetings* held and attended in the relevant Island to show that the company has substance. This requirement does not mean that all meetings need be held in the relevant Island. The key points of consideration to meet this test are:

the frequency of meetings – should be sufficient to meet the business needs of the company;
how directors attend board meetings – a quorum should be physically present in the Island and tax authorities have recommended that the majority of directors should be physically present. Furthermore, directors are expected to physically attend the majority of meetings;
the board should have relevant technical knowledge and experience;
strategic and significant decisions must be made at the board meetings.