Category: Corporate Services

Background

The current digital age brings with it new challenges and opportunities for the finance sector. As far back as 20th July 2015 the States of Guernsey released their report ‘A strategic vision for FinTech’ drafted by PwC and contributed to by more than 70 representatives of local industry and the FinTech sector including Dixcart Trust Corporation Limited.

FinTech, as defined by the European Commission, is the combination of innovative financial services and the availability of capital through the use of new (digital) technologies, such as crowdfunding.

Broadly speaking FinTech can be currently divided into four sectors;

• payments and currencies (crypto-currencies, currency exchanges, mobile money and payment apps),
• software (any new process or programme designed to improve back and middle office processes),
• platforms (crowdfunding and peer to peer fund raising),
• data/analytics (tech which gathers and analyses data to produce information to improve business or target customers more efficiently, often referred to as “big data”).

FinTech is making a significant impact on the financial services market. Whilst some of this is a natural evolution of the industry, the current rate of change and the level of new opportunities is substantial.

The global growth in FinTech has been rapid and the sector is predicted to continue this strong pattern of growth.

GUERNSEY AS A FINTECH CENTRE OF EXCELLENCE

Guernsey has considerable strengths which make it attractive to the FinTech sector including:

1. Established Trust and Credibility as an Existing International Finance Sector

Guernsey’s finance industry has successfully grown over five decades. Professionals have extensive experience, infrastructure is in place and there is accumulated intellectual capital and this has contributed to the Island becoming a leading international financial service centre, with a high reputation.

International business can be undertaken with confidence in Guernsey as the Island has been scrutinised and endorsed by the International Monetary Fund and the Financial Action Task Force.

2. Ability to be Flexible and Agile with Laws and Regulations Providing Ideal ‘Test Bed’ Conditions

Legislative and fiscal independence allows the Island to respond quickly to the needs of business. The Guernsey Financial Services Commission promotes robust yet pragmatic regulation and is renowned for being approachable, accessible and open to new ideas.

Guernsey is politically and economically stable – with a high grade AA+ credit rating from Standard & Poor’s – and it has strong links to the UK and wider Europe.

The Island is therefore an ideal test bed for FinTech.

3. No Capital Gains Tax

The absence of Capital Gains Tax in Guernsey is a substantial benefit as most entrepreneurs look to exit their start-up in three to five years.

This means that the investors and entrepreneurs can reinvest all of their gains in new projects. As most FinTech businesses do not make a great deal of profit in the early years, low taxes on earnings (another benefit for companies registered in Guernsey) are not, in this instance, such an incentive.

4. No VAT on Capital Expenditure

There is no VAT in Guernsey and therefore VAT savings can be achieved on capital and certain operating expenditure, such as marketing costs.

The absence of VAT on capital expenditure equates to savings on initial setup costs, such as the purchase of servers located on Island. Equipment and software costs for a FinTech business are likely to be significant, increasing the savings that may be enjoyed.

5. Access to Capital Including Public Listed Vehicles

Guernsey offers a wide breadth of financial structuring expertise to help maximise  revenue potential through a project’s lifecycle. Guernsey is, in particular, a leader in private equity investment funds and listings.

Listings are available through the Channel Islands Securities Exchange, as well as other exchanges.

Guernsey has established a prominent position for itself in providing access to international stock exchanges, particularly the London Stock Exchange. More Guernsey companies have had successful initial public offerings of non-UK entities, than from any other jurisdiction in the world.

6. Data Sovereignty

Guernsey is a self-governing democracy, with legislative and fiscal independence from the UK and EU. It legislates for all of its internal affairs, including data protection.

The Island is recognised by the EU as having adequate data protection regulations. This enables businesses to freely move personal data between the EU and Guernsey.

Guernsey’s ‘interception of communications’ legislation is based on a judicial approval process which is favourable compared to other jurisdictions and has received widespread approval.

7. Island Wide Cyber Protection

Guernsey has a resilient and secure data connectivity within the global network of subsea fibre cables. Six fibre cables connect Guernsey to the UK, France and onwards to the rest of the world.

As an Island, there is the potential ability to ‘ring-fence’ systems thereby reducing certain cyber threats, such as distributed denials of service (DDoS) attacks.

Guernsey’s telecoms providers supply data filtering services which recognise when a DDoS attack is happening, and identifies and blocks the flow of malicious traffic, while allowing through legitimate data.

8. Progressive Company and Intellectual Property Legislation

The Island has developed leading intellectual property legislation which covers a number of areas that are particularly relevant to FinTech, these include;

• Brand protection through trademarks and image rights,
• Copyright, including Digital Rights Management,
• Database rights, protecting the value created when analysing data,
• Patent Re-registration, including ‘business method’ style patents.

9. Lifestyle and Community

Guernsey is a vibrant yet relaxed place to live and work with high standards of health and education and a strong sense of community.

Guernsey has a broad-based financial services industry (including support services) and all of the Island’s businesses and key institutions are in close proximity to each other which means an opportunity for increased face-to-face interaction, in less time.

The Island’s location between Europe and the UK places it in a time zone between the US and the Far East. This makes Guernsey a convenient place to carry out business with many different countries.

Summary

Guernsey’s existing laws, regulations and expertise mean that the Island is already an attractive location for FinTech.

In the absence of Capital Gains Tax and VAT in Guernsey provide additional incentives to FinTech companies to locate there.

Established activity across the range of FinTech sectors includes; insurance, financial markets, financial modelling, payment service providers, wealth management, platform investors, peer to peer, private equity and insurance.

For further information regarding support for FinTech business in and from Guernsey please contact Bruce Watterson at the Dixcart office in Guernsey: advice.guernsey@dixcart.com or alternatively please speak to your usual Dixcart contact.

Dixcart Trust Corporation Limited, Guernsey: Full Fiduciary Licence granted by the Guernsey Financial Services Commission.

 

Guernsey registered company number: 6512.

1 Introduction

Like other offshore jurisdictions, Guernsey will be implementing new legislation introducing economic substance requirements for companies in Guernsey. This briefing note sets out key aspects of the Guernsey Government proposed legislation,  noting that further, more comprehensive guidance notes, will follow in due course.

The proposed legislation is relevant to all companies resident for tax purposes in Guernsey and will be effective for accounting periods commencing on or after 1 January 2019.  It is proposed that the Guernsey company tax return will be redesigned  as all tax resident companies will be required to provide additional information concerning their activities and income.

Please note that this briefing note should be read in conjunction with the proposed legislation and guidance notes, which can be found at: www.gov.gg/economicsubstance

2 Background

In 2016 the EU Council committed to coordinated policy efforts in the fight against tax fraud, evasion and the Code of Conduct Group (“COCG”) were instructed to undertake a screening process whereby jurisdictions, including the Crown Dependencies of Guernsey, Jersey and the Isle of Man, were assessed against three standards in respect of:

i)     tax transparency

ii)    fair taxation; and

iii)   compliance with anti– Base Erosion and Profit Shifting (“BEPS”) measures.

No issues were raised in respect of the Crown Dependencies’ standards of tax transparency and anti-BEPs compliance. The COCG, however, expressed concern that the Crown Dependencies did not have a “legal substance requirement for entities doing business in or through the jurisdiction”.

The COCG were concerned that this “increases the risk that profits registered in a jurisdiction are not commensurate with economic activities and substantial economic presence”.  These concerns were articulated in a letter to each of the Crown Dependencies in November 2017.

In response Guernsey, along with the other Crown Dependencies, made a commitment to address these concerns by the end of December 2018.   Accordingly, the Crown Dependency Governments have “worked in close collaboration together” in preparing the respective legislation and guidance notes with the intention of them being as closely aligned as possible.  Representatives from the relevant industry sectors have been involved in the preparation of these legislations to ensure that they can work in practice, as well as fully meeting the requirements of the EU.

On 5 November 2018, the draft Income Tax (Substance Requirements) (Guernsey)(Amendment) Ordinance, 2018 (the “Substance Requirements Law” or ”SRL”) was published by the Guernsey Government with a view to ensure that Guernsey addresses its commitment in relation to the lack of economic substance requirement for doing business in and through Guernsey.

This briefing note has been prepared to summarise the key features of what is proposed under the SRL.

3 High Level Principles

The proposed SRL has been designed to address concerns that companies could be used to artificially attract profits that are not commensurate with economic activities and substantial economic presence in Guernsey.  With this in mind the proposed legislation requires certain companies to demonstrate they have substance in the Island by:

• being directed and managed in the Island;
• conducting Core Income Generating Activities (CIGA) in the Island; and
• having adequate people, premises and expenditure in the Island.

These substance requirements apply to a company resident for tax purposes in Guernsey for the following categories of geographically mobile financial and other service activities referred to as “relevant activities”, as identified by the OECD’s Forum on Harmful Tax Practices:

• 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 Company; and
• Intellectual Property (for which there are specific requirements in high risk scenarios)

Each relevant activity category is defined in the SRL for which further details on specific scope are given in Appendix 1.

It is understood that all tax resident companies will be required to provide more information in their tax returns to ensure the above activities can be identified. Tax returns will also be tailored to collect the information needed to monitor compliance with the substance requirements as detailed in “5 Reporting” below.

Exemption to the Substance Test

Please note the following circumstances, where a resident company carries out a relevant activity, would be considered out of scope:

a)    If in any accounting period it has no income generated from a relevant activity; or

b)    Where a company is not resident for tax purposes in Guernsey, even if incorporated in Guernsey. Under the current law, it will be dependent on whether that Guernsey company is claiming residency in another jurisdiction that Guernsey has a double tax agreement (DTA) with, and then depending on the facts of that company and the applicable DTA to confirm the actual residency status. Guernsey has announced that it is reviewing its corporate tax residence rules in light of the new SRL and further guidance is expected during 2019.

4 The Three Substance Tests

Once a Guernsey resident company has been identified as undertaking relevant activities, the SRL requires the company to satisfy the “economic substance test”.  This test is split into three parts as detailed below (remembering if no gross income is received in relation to the relevant activity, there is no requirement to meet these tests):

(i)    Test 1 – Directed & Managed

The requirement to be directed and managed in the Island (“the directed and managed test”) is a separate test to the case law “management and control” test used in determining the tax residence of a company.  The following areas must be considered in applying the directed and managed test:

• Frequency of Board meetings – that an adequate number of board meetings are held having regard to the amount of decision-making required at that level. What constitutes an adequate number of meetings will be dependent on the relevant activities of the company.  However, it is generally expected that even for companies with a minimal level of activity, there will be at least one meeting per annum of its board of directors.

• Meetings held in Guernsey – that there is a quorum of directors physically present in Guernsey. It is not necessary for all of those meetings to be held in the Island but it would be expected that the majority are.  Also, though the SRL refers to the “quorum” of directors being present in the Island, the Guernsey Tax Office have confirmed they would expect to see the majority of the board physically attending in the Island.

• Minutes and records – that the associated minutes and records are kept and provide evidence that the board is a decision-taking body making the strategic decisions.
• Knowledge and expertise of Board – that the board has the necessary knowledge and expertise to discharge their duties. In the case where there are corporate directors, the requirements will apply to the individual(s) (officers of the corporate director) actually performing the duties.
• Records kept in Guernsey – all minutes and records are kept in Guernsey.

(ii)   Test 2 – Core Income Generating Activities (“CIGA”)

For each sector the proposed SRL provides a list of the core income generating activities (which are listed in Appendix 2), applicable to each relevant activity that a company operates in, would carry out.  The company will therefore need to demonstrate that these core activities are undertaken in Guernsey.

However, it is not necessary for the company to perform all of the CIGA listed, in order to demonstrate substance.  For example, a company that holds a patent does not have to carry on the CIGA of marketing, branding and distribution as well as the research and development.

The proposed legislation also does not prohibit a company from outsourcing some or all of its activity. Outsourcing, in this context, includes outsourcing, contracting or delegating to third parties (such as a Corporate Service Provider (CSP)) or group companies.  What the Guernsey company has to be able to demonstrate is that it has adequate supervision and control of the outsourced activities and, to meet the substance requirements, that those activities are undertaken in the Island.  Where a CIGA is outsourced the resources of the CSP in the Island will be taken into consideration when determining whether the people and premises test is met.  However, there must be no double counting if the services are provided to more than one company.  The company remains responsible for ensuring accurate information is reported on its return and this will include precise details of the resources employed by its CSP, for example based on the use of timesheets.

Note, where outsourced activity is not part of the CIGA this will not affect the company’s ability to meet the substance requirement (for example, back office functions such as IT support). In addition, the substance requirement does not preclude companies seeking expert professional advice or engaging the services of specialists in other jurisdictions.

The key point to note is that the income subject to tax in the Island must be commensurate to the CIGA undertaken in the Island.

(iii)  Test 3 – Adequate Resources

The company has to demonstrate that in relation to the level of relevant activity carried on in Guernsey that there is adequate:

(a) Employees – The Company has an adequate level of (qualified) employees in the jurisdiction proportionate to the activities of the company.

(b) Expenditure – An adequate level of annual expenditure is incurred in the jurisdiction proportionate to the activities of the company.

(c) Premises – Adequate physical offices and/or premises in the jurisdiction from which it can carry out the activities of the company.

The proposed legislation refers to the term “adequate”.  However, this term is not defined and therefore has its ordinary meaning.  The dictionary definition of “adequate” is: “Enough or satisfactory for a particular purpose”.

What is adequate for each company will be dependent on the particular facts of the company and its business activity.  A company will have to ensure it maintains and retains appropriate records to demonstrate the adequacy of the resources utilised and expenditures incurred.

5 Reporting

The SRL requires a Guernsey company to provide to the Guernsey Income Tax Office any information that is reasonably required to assist the Director of Income Tax in determining whether or not a resident company has met the economic substance test.  Although the legislation is currently silent on what type of information is required, industry advisors have indicated that this information will be collected through the company’s annual tax return and that the following are details that are likely to be requested:

• Business activities;
• Amount and type of gross income;
• Amount and type of expenses and assets;
• Premises;
• Number of employees specifying the number of fulltime equivalent employees with the necessary qualifications.

6 Sanctions and International Reporting

The proposed legislation includes robust and dissuasive sanctions for failure to meet the substance requirements. The sanctions are progressive and include financial penalties (as detailed below), the possible request for an audit where continued non-compliance is identified, with the ultimate sanction leading to the striking off of the company from the Companies Register.

The competent authority will also spontaneously exchange relevant information with the EU Member State competent authority where the immediate parent company, ultimate parent company and/or ultimate beneficial owner is resident, if the substance requirement is failed.  In all high risk IP cases exchange of relevant information will automatically occur (see Appendix 1 “Intellectual Property” for further details).

The financial penalties in Guernsey for failing the economic substance test are:

i)    For first accounting period failure, a penalty not exceeding £10,000;

ii)   For its third accounting period failure, a penalty not exceeding £50,000; and

iii)  For its fourth accounting period failure, a penalty not exceeding £100,000.

7 Further Guidance 

The tax administrations from the Crown Dependencies will continue to work together to produce comprehensive guidance notes which will be published in the near future.  However, these will not possibly be able to cover every scenario and will not replace the need to take independent professional advice.

A useful substance requirements flowchart as produced in the Crown Dependencies guidance notes has been attached at Appendix 3.

8 Conclusion

Companies operating in relevant sector industries are now under pressure to ensure that they comply with the new legislation which will commence at the start of 2019.

This will have a significant affect upon many Guernsey businesses who have only a short amount of time to demonstrate to the authorities that they are compliant. The potential penalties of non-compliance may cause detrimental reputational risk, fines of up to £100,000 and could even cause a company to eventually be struck off.

• Where does this leave us?

All companies must consider whether they fall within the relevant sectors, and where they do, will need to consider and asses their position.  If a company does not fall within a relevant sector, then there are no obligations falling upon them by the proposed SRL.

Many companies will easily be able to identify whether or not they fall within a relevant sector and companies managed by CSPs may need to assess whether they have the necessary substance.

• What might change?

We are on the brink of Brexit and, to date, much of the discussions have taken place with the EU commission and the draft legislation has been reviewed by them; however, the COCG will only meet to discuss such matters in February 2019.

It therefore remains to be seen whether the COCG agree that the proposals go far enough. What is clear, is that this legislation is here to stay in some shape or form and therefore companies need to consider their position as soon as possible.

• How can we help?

If you think that your business may be affected by the new legislation, it is important that you begin assessing and taking appropriate action now. Please contact the Dixcart office in Guernsey to discuss substance requirements in more detail: advice.guernsey@dixcart.com.

Dixcart Trust Corporation Limited, Guernsey: Full Fiduciary Licence granted by the Guernsey Financial Services Commission. Guernsey registered company number: 6512.

Appendix 1

Relevant Activity Definitions

Each relevant activity category is defined as follows in the SRL for a company resident for tax purposes in Guernsey:

Banking

Means the carrying on of banking business as regulated by the Banking Supervision (Bailiwick of Guernsey) Law, 1994.

Insurance

Means the undertaking of insurance business within the meaning and under the licence of the Insurance Business (Bailiwick of Guernsey) Law, 2002.

Shipping

Is defined in the SRL as any vessel larger than 24 meters operating in international waters (i.e. not in the Bailiwick of Guernsey waters) for income, for the transport of passengers or cargo including the following activities:

• The rental on a charter basis of the ship;
• The sale of tickets or equivalent and the provision of services connected with such sales;
• The use, maintenance or rental of containers (including trailers and other vehicles or equipment used for the transport of containers) used for the transport of goods or merchandise; and
• The management of the crew of a ship.

Fund Management

Means the “management” within the meaning of the Protection of Investors (Bailiwick of Guernsey) Law, 1987 both for those companies that are licenced or registered under this law.

Finance and Leasing

Is defined as a company providing credit facilities of any kind for consideration to any person (a “customer”).  It includes the provision of credit by way of instalments for which a separate charge is made and disclosed to the customer in connection with:

• The supply of goods by hire purchase;
• Financial leasing (excluding land and interests in land); and
• Conditional sale or credit sale.

Any activity falling within the definitions of banking, insurance or fund management do not constitute financing and leasing.

Headquarters’ Business

Means the provision by a Guernsey resident company to non-Guernsey resident intra group persons of the of any of the following services:

• The provision of senior management;
• The assumption or control of material risk for activities carried out by, or assets owned by, any of those group persons; and
• The provision of substantive advice in relation to the assumption or control of risk for such activities or assets mentioned above.

Any activity of the Guernsey resident company falling within the definitions of banking, insurance or fund management do not constitute activity of headquarters’ business.

Distribution and Service Centres

Means a business of which the sole or main activity is:

• The purchase or raw materials and finished products from other members of the same group which are non-resident in Guernsey and to re-sell them for a small percentage of profits; or
• The provision of services to other members of the same group which are not Guernsey resident.

Any activity of the Guernsey resident company falling within the definitions of banking, insurance or fund management do not constitute activity of distribution and service centres.

Holding Company

Where it is a Guernsey resident company which broadly holds the majority shares in another entity; has as its primary function the acquisition and holding of shares or equitable interests in other companies; and which does not carry on any commercial activity.

Intellectual Property (IP)

Where a company receives income from IP, it will also have to consider if it is a “high risk IP company”, which is defined in the legislation.

There is a rebuttable presumption that a high risk IP company has failed the substance requirement as the risks of artificial profit shifting are considered to be greater.  As a result, the competent authority will exchange all of the information, provided by the company, with the relevant EU Member State competent authority where the immediate parent company, ultimate parent company and/or ultimate beneficial owner is resident.  Such exchange of information will be in accordance with the existing international tax exchange agreements.

To rebut the presumption and not incur further sanctions (see below), a high risk IP company will have to produce materials which will explain how the DEMPE (Development, enhancement, maintenance, protection and exploitation) functions have been under its control, and that this has involved people who are highly skilled and perform their core activities in the Island.  The high evidential threshold requires:

• Detailed business plans which clearly lay out the commercial rationale for holding the Intellectual Property asset(s) in the Island;
• Concrete evidence that the decision making is taking place in the Island, and not elsewhere; and
• Information on the employees in Guernsey, their experience, contractual terms, their qualifications, and their length of service. Periodic decisions by non-resident directors or board members, or local staff passively holding intangible assets, cannot rebut the presumption.

Appendix 2

Core Income-Generating Activity (CIGA) Definitions

For the purposes of the Regulations “core income-generating activity” in relation to each relevant activity that is being undertaken in Guernsey has been defined as follows:

Banking

In relation to banking, includes:

• raising funds;
• managing risk including credit, currency and interest risk;
• taking hedging positions;
• providing loans, credit or other financial services to customers;
• managing regulatory capital; and
• preparing regulatory reports and returns.

Insurance

In relation to insurance, includes:

• predicting and calculating risk;
• insuring or re-insuring against risk; and
• providing client services,

Fund Management

In relation to fund management, includes:

• taking decisions on the holding and selling of investments;
• calculating risks and reserves;
• taking decisions on currency or interest fluctuations and hedging positions; and
• preparing relevant regulatory or other reports for governmental or regulatory authorities; and
• investors;

Finance and Leasing

In relation to financing and leasing, includes:

• agreeing funding terms;
• identifying and acquiring assets to be leased (in the case of leasing);
• setting the terms and duration of any financing or leasing;
• monitoring and revising any agreements; and
• managing any risks.

Headquartering

In relation to headquartering, includes:

• taking relevant management decisions;
• incurring expenditures on behalf of group entities; and
• co-ordinating group activities.

Shipping

In relation to shipping, includes:

• managing crew (including hiring, paying and overseeing crew members);
• hauling and maintaining ships;
• overseeing and tracking deliveries;
• determining what goods to order and when to deliver them; and
• organising and overseeing voyages.

Distribution and Service Centres

In relation to distribution and service centres, includes:

• transporting and storing goods, components and materials;
• managing stocks;
• taking orders; and
• providing consulting or other administrative services.

Holding Company

All activities related to that business.

Intellectual Property Assets

In relation to intellectual property assets, includes:

• research and development (rather than acquiring or outsourcing);
• marketing, branding and distribution;
• taking the strategic decisions and managing (as well as bearing) the principal risks relating to the development and subsequent exploitation of the intellectual property asset;
• taking the strategic decisions and managing (as well as bearing) the principal risks relating to the third-party acquisition and subsequent exploitation of the intellectual property asset; and
• carrying on the underlying trading activities through which the intellectual property asset is exploited and which lead to the generation of revenue from third parties.

Appendix 3

Substance Requirements Flow Chart

 

 

 

Dixcart Trust Corporation Limited, Guernsey: Full Fiduciary Licence granted by the Guernsey Financial Services Commission. Guernsey registered company number: 6512.

Background

The Crown Dependencies (Guernsey, Isle of Man and Jersey) have introduced economic substance requirements, for companies incorporated, or resident for tax purposes, in each of these jurisdictions, effective for accounting periods starting on or after 1st January 2019.

This legislation has been designed to meet the high level of commitment made by the Crown Dependencies, in November 2017, to address the EU Code of Conduct Group’s concerns, that some companies tax resident in these Islands do not have sufficient ‘substance’ and benefit from preferential tax regimes.

• Once implemented, these changes are designed to place the Crown Dependencies on the EU white list of cooperative jurisdictions and will avoid any possibility of future sanctions.

It is worth noting that the EU have identified 47 jurisdictions, in total, all of which are having to address substance requirements urgently.

Crown Dependencies – Working Together

The Crown Dependency Governments have “worked in close collaboration together” in preparing the respective legislation and guidance notes, with the intention that these are as closely aligned as possible. Representatives from the relevant industry sectors have been involved in the preparation of the legislation for each Island, to ensure that it will work in practice, as well as it fully meeting EU requirements.

Summary: Crown Dependency – Economic Substance Requirements

In brief, Economic Substance Requirements, are effective for accounting periods commencing on or after the 1^st January 2019.  Any Crown Dependency company that is considered resident in the jurisdiction for tax purposes and is generating income from undertaking relevant activities, will need to prove substance.

Specific ‘relevant activities’ are defined as:

• Banking;
• Insurance;
• Fund Management;
• Headquarters;
• Shipping [1];
• Pure equity holding companies [2];
• Distribution and service centre;
• Finance and leasing;
• ‘High risk’ intellectual property.

[1] Not including pleasure yachts

[2] This is a very narrowly defined activity and does not include most holding companies.

A company tax resident in one of the Crown Dependencies which undertakes one or more of these ‘relevant activities’ will have to prove the following:

1. Directed and Managed

The company is directed and managed in the jurisdiction in relation to that activity:

• There must be meetings of the Board of Directors in the jurisdiction, at adequate frequency, given the level of decision making required;
• At these meetings, a majority of directors must be present in the jurisdiction;
• Strategic decisions of the company must be made at these Board Meetings and the minutes should reflect these decisions;
• All company records and minutes should be retained in the jurisdiction;
• Members of the Board should have the necessary knowledge and expertise to discharge the duties of the Board.

2. Qualified Skilled Employees

The company has an adequate level of (qualified) employees in the jurisdiction, proportionate to the activities of the company.

3. Adequate Expenditure

An adequate level of annual expenditure is incurred in the jurisdiction, proportionate to the activities of the company.

4. Premises

The company has adequate physical offices and/or premises in the jurisdiction, from which to carry out the activities of the company.

5. Core Income Generating Activities

It conducts its core income generating activity in the jurisdiction; these are defined in the legislation for each specific ‘relevant activity’.

The additional information required from a company, to demonstrate that it meets the substance requirements, will form part of the company’s annual tax return in the appropriate Island. Failure to file returns will generate a fine.

Enforcement

Enforcement of the economic substance requirements will consist of a formal hierarchy of sanctions for non-compliant companies, with increasing severity, up to a maximum fine of £100,000.  Ultimately, for persistent non-compliance, an application would be made to strike off the company from the relevant Company Registry.

What Type of Companies Must Pay Particular Attention to Substance?

Companies that only have their registered office in or are incorporated outside (and controlled in), one of the Crown Dependencies must pay particular attention to these new rules.

How Can Dixcart Help?

Dixcart have been proactively encouraging clients to demonstrate real economic substance for several years. We have established extensive serviced office facilities (in excess of 20,000 square feet) in six locations around the world, including the Isle of Man and Guernsey.

Dixcart employ senior, professionally qualified staff, to support and direct  international functions for its clients. These professionals are competent to take responsibility for different roles, as appropriate; finance director, non-executive director, industry specialist, etc.

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.

Additional Information

Two flow charts, one for Guernsey and one for the Isle of Man, are appended.

They detail the respective steps to consider and define when substance requirements must be met. Links to the relevant Government websites containing comprehensive details regarding the appropriate legislation for each jurisdiction are also featured.

If you require additional information on this topic, please speak to Steven de Jersey: advice.guernsey@dixcart.com or to Paul Harvey: advice.iom@dixcart.com.

 

Dixcart Trust Corporation Limited, Guernsey: Full Fiduciary Licence granted by the Guernsey Financial Services Commission. Guernsey registered company number: 6512.

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

Guernsey Substance Requirements

8th November 2018

https://www.gov.gg/economicsubstance

Isle Of Man Substance Requirements

Release Date: 6 November 2018

Flowchart

https://www.gov.im/categories/tax-vat-and-your-money/income-tax-and-national-insurance/international-agreements/european-union/code-of-conduct-for-business-taxation-and-eu-listing-process-from-2016/

Dixcart Trust Corporation Limited, Guernsey: Full Fiduciary Licence granted by the Guernsey Financial Services Commission.

Guernsey registered company number: 6512.

 

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

Background

Recent interest from the international financial and investment community in Portuguese real estate has motivated the Portuguese Government to introduce a new investment vehicle, exclusively dedicated to real estate investment.

Introduced in February 2019, the ‘Sociedades de Investmento e Gestao Imobiliaria’, (‘SIGI’) introduces a number of features generally associated with Real Estate Investment Trusts.

The SIGI is a new type of real estate company designed to acquire and/or manage, commercial or residential, properties within the rental market.

The tax framework mirrors that of another investment vehicle, the ‘OIC – Organismos de Investimento Colectivo’, and the tax benefits relevant to the latter are also applicable to SIGI’s, and regulated by the Portuguese Company Code.

The Advantageous Tax Regime

A key advantage of an SIGI is its tax framework.

The goal is to attract small investors and to provide them with re-assurance that, as long as there are profits to be distributed, they will benefit from them. The Law therefore states, that 9 months following the end of the tax year, the SIGI should pay, as dividends:

• 90% of the profit arising from; dividends, income generated by its own shares, or income generated by other shares or units (when the SIGI holds the shares of other SIGI’s, or units in an investment fund);
• 75% of the profits generated by the direct real estate activity;
• In addition, at least, 75% of the net profit resulting from the sale of assets under the management of the SIGI, must be reinvested. This reinvestment should be made in other assets, within a 3 year period.

Failure to comply with any of the above requirements will result in SIGI status being withdrawn, for a minimum of 3 years.

Corporate tax, applicable to the profits of the SIGI, is at a rate of 21%.

However, in calculating the net profit, the following sources of income are NOT included:

• Capital gains;
• Income arising from real estate (including rental income);
• Income arising from capital.

These exemptions are not available, if the source of the income is a country considered to be a tax haven by Portugal.

In relation to withholding tax:

• If the investor is an individual tax resident in Portugal, withholding tax at a rate of 28% is applicable, when dividends are paid;
• If the investor is an individual who is not tax resident in Portugal, the withholding tax rate is 10%;
• If the dividends are paid to a Portuguese company, withholding tax is 25%;
• Where dividends are paid to a company, the participation exemption may be applicable, and, in that case, there will be no withholding tax.

Criteria

An SIGI must comply with the following rules:

1. Registered as a stock company (“Sociedades Anónimas”);
2. Appoint an external auditor and an internal tax committee;
3. Use a specified Objects Clause;
4. Have a minimum share capital of €5,000,000, represented in ordinary shares (it is not possible to have different classes of shares);
5. Comply with certain limits relating to debt and the composition of assets;
6. Include reference to “SIGI” or “Sociedades de Investment e Gestao Imobiliaria” in their name;
7. The shares must be available to trade on a stock market or on a Multilateral System in Portugal or another EU Member State (Euronext Access or Alternext, Portugal).
8. To provide additional opportunities to small investors, at least 20% of the shares must be held by investors, each holding less than 2% of the voting rights.

All assets acquired by the SIGI must be retained for at least 3 years and the debt ratio (debt includes: shareholder debt excluding equity, and bank debt) cannot be greater than 60% of the total value of the company assets, at any time.

Land that is acquired for the purpose of construction needs to be designated as urban property or as independent units, within 3 years of the acquisition date.

OIC’s (Organismos de Investimento Colectivo) and stock companies can be converted into SIGI’s.

Additional Information

If you would like additional information regarding Portuguese SIGI’s and their potential benefits, please contact Antonio Pereira at the Dixcart office in Portugal: advice.portugal@dixcart.com. Alternatively please speak to your usual Dixcart contact. 

WHY USE MALTA?

The Republic of Malta is an archipelago consisting of the three inhabited islands of Malta, Gozo and Comino. The Maltese islands are situated in the middle of the Mediterranean Sea, about 100 km south of Italy.

Factors contributing to and enhancing the status of the jurisdiction include:

• Malta is a member of the EU and therefore has access to European Union Conventions.
• It is a Sovereign Independent State, enjoying political, economic and social stability.
• Malta has friendly relations with the majority of countries across the world through its policy of non-alignment.
• Companies operating in Malta are subject to a corporate tax rate of 35%. However, non-resident shareholders enjoy low effective rates of Maltese tax as Malta’s full imputation system of taxation allows generous unilateral relief and tax refunds:

• • Active income – in most instances non-resident shareholders can apply for a tax refund of 6/7ths of the tax paid by the company on the active profits used to pay a dividend. This results in an effective Maltese tax rate of 5% on active income.
  • Passive income – in the case of passive interest and royalties, non-resident shareholders can apply for a tax refund of 5/7ths of the tax paid by the company on the passive income used to pay a dividend. This results in an effective Maltese tax rate of 10% on passive income.

• Holding companies – the dividends and capital gains derived from participating holdings are not subject to corporate tax in Malta.
• There is no withholding tax payable on dividends.
• Malta has an extensive network of Double Taxation Treaties (approximately 70 treaties).
• Advance tax rulings can be obtained. These relate to legislation currently in force in Malta. Advance tax rulings guarantee that if the basic legislation upon which the ruling was based changes adversely for the taxpayer, the terms of the ruling will survive for a further two years after the change in legislation. Advance tax rulings are given for a period of five years, renewable for a further five years.
• Malta offers an aircraft register and a combined ship and yacht register. Substantial tax saving opportunities are available.

FORMATION OF A MALTA PRIVATE LIMITED COMPANY

General information is detailed below, outlining the formation and regulation of Malta companies as embodied in the Companies Act 1995.

1. Incorporation

Incorporation normally takes between twenty four and forty eight hours from the time that the necessary documentation is presented to the Maltese Business Registry. Shelf companies are not available.

2. Authorised Share Capital

The minimum authorised share capital is €1,200.  A minimum of 20% of the authorised share capital must be paid up.  The share capital can be denominated in any currency.

3. Shares and Shareholders

Shares must be registered.  The minimum number of shareholders for public and private companies in Malta is two, but a private limited liability company in Malta may also be formed as a single-member company. The sole shareholder and sole director of the Maltese Company cannot be corporate entities, and the objects clause is restricted to one main activity.

4. Fiduciary Shareholders (previously known as Nominee Shareholders)

These are permitted but must be authorised. Dixcart can provide fiduciary shareholders.

5. Registered Office

A registered office is required in Malta.

6. Directors

The minimum number of directors is one. Directors may be of any nationality and do not have to be resident in Malta. Companies wishing to take advantage of Malta’s Double Taxation Treaties need to ensure that the company is managed and controlled from Malta.

7. Company Secretary

Every company must have a company secretary. The company secretary has to be an individual and cannot be a corporate entity.

8. Accounts and Year End

All companies have a year end of 31st December unless they elect for another date.  Audited accounts must be presented to the members within ten months of the year end and filed with the Registrar forty two days after presentation to the members.

9. Taxation

Maltese companies pay tax at a rate of 35%.  However, when a dividend is paid the non-resident shareholder is able to claim a refund.  This refund equals 6/7ths of the Maltese tax paid on active profits from which the dividend distribution was made.  Where profits emanate from passive income, this refund is reduced to 5/7ths.  It is reduced further to 2/3rds where the dividend is distributed out of foreign source income and where the Maltese company paying the dividend has claimed double taxation relief.

The tax refund is increased to 100% where the profits from which the relevant dividend is distributed are derived by the Maltese company from a participating holding.

This means that the effective rate of tax in respect of dividends received from a participating holding is 0%, for dividends received from active income it is 5%, and for dividends emanating from passive income it is 10%.

10. Continuation of Companies

Maltese law allows companies to change their domicile in and out of Malta. Companies moving their domicile to Malta must come from a jurisdiction which allows this. This option enables companies to freely move from one jurisdiction to another without the need to go through a liquidation process. Companies wanting to move their domicile to Malta must submit certain documentation to the Registry of Companies. The Maltese Registrar then issues a provisional certificate and the certificate is converted into a ‘Certificate of Continuation’ on the presentation of evidence that the company has ceased to exist in the previous jurisdiction.

If you would like additional information regarding the formation of companies in Malta and the fees that Dixcart charge, please contact advice.malta@dixcart.com

 

Updated: January 2020

As a member of the EU, Malta has implemented the EU Anti-Tax Avoidance Directive (ATAD) and has incorporated it into domestic legislation.

Malta incorporated the ATAD measures into its domestic legislation at the beginning of December 2018 through implementation of Legal Notice 411, which includes the following:

• an interest limitation rule;
• general anti-abuse rules (GAAR);
• controlled foreign company rules (CFC);
• an exit tax.

These measures came into force as from 1^st of January 2019, with the exception of the exit tax, which will be introduced as from 1^st of January 2020.

Interest Limitation Rule

This regulation limits the deductibility of borrowing costs for a taxpayer. If borrowing costs exceed interest receivable, the maximum allowable tax deduction from the excess costs (referred to as “exceeding borrowing costs”), during a specific tax year, will be 30% of EBIDTA (the taxpayer’s earnings before interest, depreciation, tax and amortisation).

The unutilised exceeding borrowing costs can be carried forward, subject to further limitations and criteria. In addition, no capping applies for borrowing costs less than €3 million.

The “interest capacity” that a taxpayer has in a tax year can also be carried forward for up to 5 years.

These rules do not apply to financial institutions such as banks, funds, insurance companies, etc. and also to companies which do not form part of a group or have no permanent establishments or associated companies.

There is also an exception to the general rule, whereby it is possible to enjoy full deductibility of the exceeding borrowing costs. This is subject to the taxpayer proving that the ratio of equity over total assets is equal to, or higher than, the equivalent ratio of the group.

GAAR

General anti-abuse rules have been included, for a considerable length of time, in the Malta Income Tax Act and the EU directive re-iterates the importance of these rules.

CFC Rules

An entity or permanent establishment, whose profits are not subject to tax or are exempt from tax, will be treated as a controlled foreign company in the following circumstances:

• an entity (the ‘taxpayer’ and/or associated enterprises), holds a direct or indirect participation of more than 50% of the voting rights, or owns directly or indirectly more than 50% of the capital, or is entitled to receive more than 50% of the profit of that entity; and
• the corporate tax paid by the entity or permanent establishment is lower than the difference between the tax that would have been liable under the Malta Income Tax Act plus any foreign corporate tax paid.

The CFC rule does not apply to an entity or permanent establishment:

• with accounting profits not exceeding €750,000 and non-trading income of not more than €75,000; or
• where the accounting profit is less than 10% of operating costs in the relevant tax year.

Exit Tax

A taxpayer will be subject to tax on unrealised capital gains where assets owned by the taxpayer are moved or transferred outside of Malta.

The capital gain is calculated as the market value of the transferred assets, at the time of exit, less their value for tax purposes, and is applicable in any one of the following circumstances: 

• a taxpayer transfers assets from its head office in Malta to its permanent establishment in another EU Member State or other country;
• a taxpayer transfers assets from its permanent establishment in Malta to its head office or another permanent establishment in another EU Member State or other country;
• a taxpayer transfers tax residence from Malta to another EU Member State or other country (excluding assets which remain effectively connected with a permanent establishment in Malta);
• a taxpayer transfers the business conducted by its permanent establishment in Malta to another EU Member State or other country.

Additional Information

The Dixcart office in Malta has extensive experience in establishing and managing tax-efficient companies in Malta, can assist with all relevant compliance matters, and related corporate and residence issues. For further assistance please contact us on advice.malta@dixcart.com or speak to your usual Dixcart contact.

The Isle of Man Treasury has published a draft of the proposed Income Tax (Substance Requirements) Order 2018. This draft Order will, once final, and if approved by Tynwald (in December 2018), have effect in respect of accounting periods commencing on or after 1 January 2019.

This means that from January 2019, companies engaging in “relevant activities” will have to demonstrate that they meet specific substance requirements, to avoid sanctions.

This Order is in response to a comprehensive review that was carried out by the EU Code of Conduct Group on Business Taxation (COCG) in order to assess over 90 jurisdictions, including the Isle of Man (IOM) against standards of:

– Tax transparency;

– Fair taxation;

– Compliance with anti-BEPS (base-erosion profit shifting)

The review process took place in 2017 and although the COCG were satisfied that the IOM met the standards for tax transparency and compliance with anti-BEPS measures, the COGC raised concerns that the IOM, and other Crown Dependencies did not have:

“A legal substance requirement for entities doing business in or through the jurisdiction.”

High Level Principles

The purpose of the proposed legislation is to address the concerns that companies in the IOM (and other Crown Dependencies) could be used to attract profits that are not commensurate with economic activities and substantial economic presence in the IOM.

The proposed legislation therefore requires relevant sector companies to demonstrate they have substance in the Island by:

• Being directed and managed in the Island; and
• Conducting Core Income Generating Activities (CIGA) in the Island; and
• Having adequate people, premises and expenditure in the

Each of these requirements is discussed in further detail below.

The IOM’s Response

In late 2017, along with many other jurisdictions facing potential blacklisting, the IOM committed to address these concerns by the end of December 2018.

Due to identical concerns being raised in Guernsey and Jersey, the governments of the IOM, Guernsey and Jersey have been working closely together to develop proposals to meet their commitments.

As a result of the work published in Guernsey and Jersey, the IOM has published its legislation and limited guidance, in draft. Please note further guidance will be forthcoming in due course.

The legislation is similar across the three jurisdictions.

The remainder of this article focuses specifically on the IOM draft legislation.

The Income Tax (Substance Requirements) Order 2018

This Order will be made by the Treasury and is an amendment to the Income Tax Act 1970.

This new legislation sets out to address EU Commission and COCG concerns by way of a three-stage process:

1. To identify companies carrying out “relevant activities”; and
2. To impose substance requirements on companies undertaking relevant activities; and
3. To enforce the substance

Each of these stages and their ramifications are discussed below.

Stage 1: To identify companies carrying out “relevant activities”

The Order will apply to IOM tax resident companies engaged in relevant sectors. The relevant sectors are as follows:

a. banking

b. insurance

c. shipping

d. fund management (this does not include companies that are Collective Investment Vehicles)

e. financing and leasing

f. headquartering

g. operation of a holding company

h. holding intellectual property (IP)

i. distribution and service centres

These are the sectors identified as a result of the work, by the Organisation for Economic Cooperation and Development’s (OECD) Forum on Harmful Tax Practices (FHTP), on preferential regimes. This list represents the categories of geographically mobile income i.e. these are the sectors which are at risk of operating and deriving their income from jurisdictions other than those in which they are registered.

There is no de minimus in terms of income, the legislation will apply to all companies carrying on relevant activities where any level of income is received.

A key determinant is tax residence and the Assessor has indicated that existing practice will prevail, i.e. the rules set out in PN 144/07. Therefore where non-IOM incorporated companies are engaged in relevant sectors they will only be brought within the scope of the Order if they are IOM tax resident. This is clearly an important consideration: if resident elsewhere the rules relevant to that country of residence are likely to be the binding rules.

Stage 2: To impose substance requirements on companies undertaking relevant activities

The specific substance requirements vary by relevant sector. Broadly speaking, for a relevant sector company (other than a pure equity holding company) to have adequate substance it must ensure that:

a. It is directed and managedin the island.

The Order specifies that the company is directed and managed* in the Island. Regular board meetings should take place on the Island, there must be a quorum of directors physically present at the meeting, strategic decisions must be made at the meetings, the minutes of the board meetings must be kept on Island and the directors present at these meetings must have the necessary knowledge and expertise ensure that the board can discharge its’ duties.

* Note that the test for “directed and managed” is a separate test to the “management and control” test which is used to determine the tax residence of a company. The aim of the directed and managed test is to ensure that there are an adequate number of Board meetings held and attended in the Island. Not all Board meetings need to be held on Island, we discuss the meaning of “adequate” later in this article.

b. There is an adequate number of qualified employees in the Island.

This stipulation appears to be rather vague as the legislation specifically states that the employees do not need to be employed by the company, this condition focuses on there being an adequate number of skilled workers present on Island, whether or not they are employed elsewhere does not matter.

In addition, what is meant by ‘adequate’ in terms of numbers is very subjective and for the purpose of this proposed legislation, ‘adequate’ will take its ordinary meaning, as discussed below.

c. It has adequate expenditure, proportionate to the level of activity carried on inthe Island.

Again, another subjective measure. It would, however, be unrealistic to apply a specific formula across all businesses, as each business is unique in its own right and it is the responsibility of the Board of Directors to ensure that such conditions are met.

d. It has adequate physical presence in the Island.

Although not defined, this is likely to include owning or leasing an office, having ‘adequate’ number of staff, both administrative and specialist or qualified staff working in the office, computers, telephone and internet connection etc.

e. It conducts core income-generating activity in the Island

The Order attempts to specify what is meant by ‘core income-generating    activity’ (CIGA) for each of the relevant sectors, the list of activities are intended as a guide, not all companies will carry out all of the activities specified, but they must carry out some in order to comply.

If an activity is not part of the CIGA, for example, back office IT functions, the company may outsource all or part of this activity without there being an effect upon the company’s ability to comply with the substance requirement. Likewise, the company may seek expert professional advice or engage specialists in other jurisdictions without effecting its compliance with the substance requirements.

In essence, CIGA ensures that the main operations of the business, i.e. the operations which produce the bulk of the income are carried out in the Island.

Outsourcing

Further to that mentioned above, a company may outsource, i.e. contract or delegate to a third party or group company, some or all of its activities. Outsourcing is only a potential issue if it relates to CIGA. If some, or all, of the CIGA are outsourced, the company must be able to demonstrate that there is adequate supervision of the outsourced activity and that the outsourcing is to an IOM businesses (which themselves have adequate resources to perform such duties). Precise details of the outsourced activity, including, for example, timesheets must be kept by the contracting company.

The key here is the value that the activities outsourced generate, if CIGA.  In some instances, for example, outsourcing coding activities, very little might be generated in terms of value, but it could be design, marketing and other activities carried out locally that are integral to value creation. Companies will need to look closely at where the value comes from, ie who generates it to assess whether outsourced activities are an issue.

“Adequate”

The term ‘adequate’ is intended to take its dictionary definition:

“Enough or satisfactory for a particular purpose.”

The Assessor has advised that:

“What is adequate for each company will be dependent upon the particular facts of the company and its business activity.”

This will vary for each relevant sector entity and the onus is on the relevant company to ensure that it maintains and retains sufficient records which demonstrate that it has adequate resources in the Island.

Stage 3: To enforce the substance requirements

The Order provides the Assessor with the power to request any information required to satisfy her that a relevant sector company meets the substance requirements. Where the Assessor is not satisfied that the substance requirements have been met for a particular period, sanctions will apply.

Verification of Substance Requirements

The draft legislation provides the Assessor with the power to request further information from a relevant sector company in order to satisfy herself that the substance requirements have been met.

Failure to comply with the request can result in a fine not exceeding £10,000. Where the Assessor is not satisfied that the substance requirements have been met, sanctions will apply.

High-risk IP Companies

Generally speaking, the designation ‘high-risk IP companies’ refers to companies holding IP where (a) the IP has been transferred into the Island post-development and/ or the main utilisation of the IP is off-Island or (b) where IP is held on Island but the CIGA are carried out off-island.

As the risks of profit shifting are considered to be greater, the legislation has taken a rather hard approach to high risk IP companies, it takes the position of ‘guilty unless proven otherwise’.

High-risk IP companies will have to prove for each period that the adequate substance requirements in respect of conducting core income-generating activity have been met in the Island. For each high risk IP company, the tax authorities of the IOM will exchange all of the information provided by the company with the relevant EU Member State authority where the immediate and/or ultimate parent and beneficial owner is/are resident. This will be in accordance with the existing international tax exchange agreements.

“To rebut the presumption and not incur further sanctions, the high risk IP company will have to provide evidence explaining how the DEMPE (development, enhancement, maintenance, protection and exploitation) functions have been under its control and this had involved people who are highly skilled and perform their core activities in the Island”.

The high evidential threshold includes detailed business plans, concrete evidence that decision making occurs in the Island and detailed information regarding their IOM employees.

Sanctions

In line with the tougher approach taken towards IP companies detailed above, sanctions are somewhat harsher for such companies.

Whether or not the substance requirements have been met, in accordance with international arrangement, the Assessor will disclose to a relevant EU tax official any relevant information concerning a high-risk IP company.

If a high-risk IP company is unable to rebut the presumption that it has failed to meet the substance requirements, the sanctions are as follows, (stated by the number of consecutive years of non-compliance):

– 1st year, a civil penalty of £50,000

– 2nd year, a civil penalty of £100,000 and may be struck off the company register

– 3rd year, strike the company off the company register

If the high-risk IP company is unable to provide the Assessor with any additional information requested, the company will be fined a maximum £10,000.

For all other companies engaged in relevant sectors (other than high risk IP), the sanctions are as follows, (stated by the number of consecutive years of non-compliance):

– 1st year, a civil penalty of £10,000

– 2nd year, a civil penalty of £50,000

– 3rd year, a civil penalty of £100,000 and may be struck off the company register

– 4th year, strike the company off the company register

For any year of non-compliance of a company operating in a relevant sector, the Assessor will disclose to an EU tax official any relevant information which relates to the company, this could represent a serious reputational risk to the company.

Anti-avoidance

If the Assessor finds that in any accounting period a company has avoided or attempted to avoid the application of this Order, the Assessor may:

– Disclose information to a foreign tax official

– Issue to the company a civil penalty of £10,000

A person (note that “a person” is not defined within this legislation) who has fraudulently avoided or seeks to avoid the application is liable to:

– On conviction: custody for a maximum of 7 years, a fine or both

– On summary conviction: custody for a maximum of 6 months, a fine not exceeding £10,000,or both

– Disclosure of information to a foreign tax official

Any appeals will be heard by the Commissioners who may confirm, vary or reverse the Assessor’s decision.

Conclusion

Companies operating in relevant sector industries are now under pressure to ensure that they comply with the new legislation which will commence at the start of 2019.

This will have a significant affect upon many IOM businesses who have only a short amount of time to demonstrate to the authorities that they are compliant. The potential penalties of non-compliance may cause detrimental reputational risk, fines of up to £100,000 and could even cause a company to eventually be struck off, after potentially, as little as two years of continuous non-compliance for high risk IP companies and three years of non-compliance for other relevant sector companies.

Where does this leave us?

All companies must consider whether they fall within the relevant sectors, if not then there are no obligations falling upon them by this Order. However, if they are in a relevant sector then they will need to assess their position.

Many companies will be easily able to identify whether or not they fall within a relevant sector and companies managed by CSPs may need to assess whether they have the necessary substance.

What might change?

We are on the brink of Brexit and, to date, much of the discussions have taken place with the EU commission and the draft legislation has been reviewed by them; however, the COCG will only meet to discuss such matters as blacklisting in February 2019.

It therefore remains to be seen whether the COCG agree that the proposals go far enough. What is clear, is that this legislation is here to stay in some shape or form and therefore companies need to consider their position as soon as possible.

Reporting

The earliest reporting date would be accounting period ended 31 December 2019 and therefore reporting by 1 January 2020.

Corporate tax returns will be amended to include sections which will gather the information in relation to the substance requirements for companies operating within relevant sector industries.

How can we help?

If you think that your business may be affected by the new legislation, it is important that you begin assessing and taking appropriate action now. Please contact the Dixcart office in the Isle of Man to discuss substance requirements in more detail: advice.iom@dixcart.com.

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

The level of regulation within the e-gaming industry is constantly being reviewed to increase protection for users. Many of the less well regulated jurisdictions are beginning to find themselves less attractive to the major e-gaming organisations.

Agreement between the Isle of Man and Malta

The Isle of Man Gambling Supervision Commission and the Malta Lotteries and Gaming Authority entered into an agreement in September 2012, which established a formal basis for cooperation and information sharing between the Isle of Man and Malta gambling authorities.

The objective of this agreement was to improve the regulatory standards with the ultimate aim of protecting consumers.

This Article provides an overview of the jurisdictions of the Isle of Man and Malta and why they are favourable locations for e-gaming.

The Isle of Man

The Isle of Man was the first jurisdiction to introduce legislation designed to regulate e-gaming and gambling firms, whilst, at the same time, providing statutory protection to online customers.

The Isle of Man is white-listed by the UK Gambling Commission, allowing Isle of Man licensees to advertise in the UK. The island has a AA+ Standard & Poor’s rating and the legal system and legislative practice are based on UK principles. The island also offers political stability and an experienced workforce.

Why is the Isle of Man a Favourable Location for E-Gaming?

The attractive tax regime available in the Isle of Man makes it an attractive location for e-gaming operations to establish themselves.

There are a number of additional advantages in establishing an online gaming operation in the Isle of Man:

• Simple and quick application process.
• World-class infrastructure.
• A diverse economy.
• A general “pro-business” environment.

Taxation

The Isle of Man has a favourable tax system with the following features:

• Zero rate corporation tax .
• No capital gains tax.
• Taxation of individuals – 10% lower rate, 20% higher rate, which is capped at a maximum of £125,000 per annum.
• No inheritance tax.

E-gaming Fees

E-gaming duty charges in the Isle of Man are competitive. The duty payable on retained gross profits is:

• 1.5% for gross gaming yield not exceeding £20m per annum.
• 0.5% for gross gaming yield between £20m and £40m per annum.
• 0.1% for gross gaming yield exceeding £40m per annum.

The exception to the above is pool betting which carries a flat duty of 15%.

Regulation and Fund Separation

The online gaming sector is regulated by the Gambling Supervision Commission (GSC).

Player funds are maintained separately from the operators’ funds to ensure that the players’ monies are protected.

IT Infrastructure and Support Services

The Isle of Man has an advanced telecommunications infrastructure. The island has a very substantial bandwidth capacity and an extremely stable platform, supported by “self healing” SDH loop technology. The Isle of Man also benefits from five “state of the art” data-hosting centres and has a high calibre of IT and marketing support service providers with experience in the e-gaming industry.

What is Required to Secure an Isle of Man E-gaming Licence?

There are a number of obligations, including:

• The business is required to have a minimum of two company directors resident in the Isle of Man.
• The business must be conducted by an Isle of Man incorporated company.
• The servers, where the bets are placed, must be hosted in the Isle of Man.
• Players must be registered on Isle of Man servers.
• Relevant banking must be carried out in the Isle of Man.

Malta

Malta has become one of the leading jurisdictions for online gaming with over four hundred licences having been issued, representing approximately 10% of the global online gaming market.

The online gaming sector in Malta is regulated by the Lotteries and Gaming Authority (LGA).

Why is the Jurisdiction of Malta a Favourable Location for E-gaming?

Malta offers a number of advantages for online gaming operations establishing themselves in this jurisdiction. Specifically in relation to taxes:

• Low levels of gaming tax payable.
• If structured correctly, corporate tax can be as low as 5%.

In addition Malta offers:

• A wide network of double taxation agreements.
• A sound legal and financial system.
• Solid IT and telecommunication infrastructures.

Gaming Tax

Each licensee is subject to gaming tax, which is currently capped at €466,000 per licence per annum. This is calculated depending on the class of licence held:

• Class 1: €4,660 per month for the first six months and €7,000 per month thereafter.
• Class 2: 0.5% of the gross amount of bets accepted.
• Class 3: 5% of “real income” (revenue from rake, less bonus, commissions and payment processing fees).
• Class 4: No tax for the first six months, €2,330 per month for the next six months and €4,660 per month thereafter.

(See below for further details regarding the classes of e-gaming licence in Malta).

Corporate Taxation

Companies operating in Malta are subject to a corporate tax rate of 35%. However, shareholders enjoy low effective rates of Maltese tax as Malta’s full imputation system of taxation allows generous unilateral relief and tax refunds.

In certain circumstances it may be beneficial to interpose a Maltese holding company between the shareholders and the company. The dividends and capital gains derived from participating holdings are not subject to corporate tax in Malta.

Additional Potential Tax Advantages for Online Gaming Companies in Malta

An e-gaming company may be able to take advantage of Malta’s extensive double tax treaty network, as well as other forms of double taxation relief.

In addition Malta companies are exempt from transfer duties, exchange control restrictions and capital gains on the transfer of shares, in most cases.

Classes of E-gaming Licence in Malta

Every remote gaming operation must hold a licence issued by the Lotteries and Gaming Authority.

There are four classes of licence, with each class being subject to different rules. The four classes are as follows:

• Class 1: Risk taking on repetitive games generated by random events – this includes casino style games, lotteries and machines.
• Class 2: Risk taking by creating a market and backing that market – this includes sports betting.
• Class 3: Promoting and/or abetting games from Malta – this includes P2P, betting exchanges, skins, tournaments and bingo operations.
• Class 4: Provision of remote gaming systems to other licensees – this includes software vendors who take commissions on bets.

Licensing Requirements

To qualify for a licence in Malta, the applicant must:

• Be a limited liability company registered in Malta.
• Be fit and proper.
• Demonstrate adequate business and technical ability to conduct such activities.
• Demonstrate that the operation is covered by sufficient reserves or securities and be able to ensure payment of player winnings and deposit returns.

How Can Dixcart Help?

Dixcart has offices in both the Isle of Man and in Malta and can assist with:

• Licence applications.
• Advice regarding compliance.
• Advice regarding the tax issues to consider.
• Administrative and accounting support.
• Management and regulatory reporting assistance.

Dixcart can also provide initial office accommodation, if required, via its managed office facilities in the Isle of Man and Malta.

Additional Information

If you would like additional information regarding e-gaming, please speak to Paul Harvey at the Dixcart office in the Isle of Man: advice.iom@dixcart.com or Sean Dowden at the Dixcart office in Malta. Alternatively please speak to your usual Dixcart contact.

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

Updated 28/5/15

Malta introduced the Notional Interest Deduction Regime (NID) on 1 January 2018. On 8 August 2018, the Guidelines in relation to NID were updated, in particular the treatment of NID between related companies.

What is NID?

NID is an innovative way in which companies can, in the correct circumstances, reduce their tax liabilities. This option is of greatest interest to companies with large equity balances.

NID allows companies to deduct a notional interest amount based on the ‘risk’ capital of a company. Such companies will be able to claim a deduction against chargeable income for NID deemed to be incurred on their equity capital. Previously in Malta debt interest had been tax deductible, whilst dividends were not.

‘Risk’ capital is defined as: share capital, share premiums, retained earnings, interest free debt and any other equity.

Ability to Choose Between NID and the Maltese Tax Refund System

From the start of the 2018 tax year, Maltese companies, including permanent establishments of foreign companies in Malta and partnerships, can elect to use either the Notional Interest Deduction Regime OR the tax refund system (6/7^ths or 5/7^ths).

Tax Refund System – the Alternative to NID

Malta operates a full imputation system of taxation which allows for generous tax refunds. In most instances, shareholders not resident in Malta can apply for a tax refund of 6/7ths of the tax paid on active income used to pay a dividend. With a corporate tax rate of 35%, this results in an effective tax rate of 5%. In the case of passive income such as interest and royalties, non-resident shareholders can apply for a tax refund of 5/7ths of the tax paid on passive income used to pay a dividend. With a corporate tax rate of 35%, this results in an effective tax rate of 10%.

NID in More Detail

Notional Interest Deduction is calculated by multiplying the notional interest rate* by the company’s total equity at its financial year end.

*Notional interest rate is defined as the ‘risk free rate’; the current yield to maturity of Malta Government stocks, with a remaining term of approximately 20 years (this was 3.940% in Quarter 1 of 2024), plus a 5% premium.

Additional Features of NID

• NID claimed in any one year cannot exceed 90% of the company’s taxable income. Any excess can be carried forward indefinitely, to be deducted against taxable income in future years. Remaining income is taxed at the standard rate of 35%.
• No tax refund is paid to shareholders under the Notional Interest Deduction Regime and this therefore removes the relevance and need to put a double tier company structure in place.

Notional Interest Income in Relation to Shareholders

• For Maltese tax purposes, when NID is claimed, the shareholder (or partner) will be considered to have received that amount of notional interest as income.

• However, if the shareholder is not resident in Malta, the deemed interest income will be exempt from tax in Malta, providing that certain criteria have been met.

Timing Implications

Taxpayers are able to claim NID, for the first time, on profits relating to the 2017 tax year, as these profits are assessable for income tax in 2018.

Additional Information

If you have any questions or require any further information please contact the Dixcart office in Malta: advice.malta@dixcart.com  or speak to your usual Dixcart contact.

Características ventajosas para la ubicación de una empresa “holding” internacional

La ubicación de una empresa “holding” es una consideración importante en cualquier estructura internacional, donde uno de los objetivos es minimizar el impuesto aplicado sobre el flujo de ingresos.

Lo ideal sería que la empresa “holding” sea residente en una jurisdicción que:

• Tienga una buena red de tratados de doble tributación, lo que minimiza la retención de impuestos sobre los dividendos recibidos
• Exima los ingresos de dividendos de impuestos
• Exima a las ganancias de capital por la venta de subsidiarias de impuestos
• No imponga retenciones sobre las distribuciones de la sociedad “holding” a su matriz o a sus accionistas
• No imponga impuestos sobre las ganancias de capital derivadas de la venta de acciones en la sociedad “holding” por parte de accionistas no residentes
• Exima la transferencia de acciones de impuestos
• Asegure estabilidad en la aplicacion de leyes y reglamentos tributarios

Las empresas “holding” de Malta pueden beneficiarse de todo lo anterior.

Ventajas disponibles a las empresas “holding” de Malta

Red de Tratados Tributarios

Malta beneficia de una red de más de 70 tratados de doble imposición.

En la mayoría de las situaciones en que una empresa de Malta posee más del 10% del capital social emitido de una subsidiaria extranjera, la tasa de retención de impuestos sobre los dividendos que reciba de un socio ubicado en un pais con lo cual Malta tenga un tratado se reduce al 5%.

Como Malta es parte de la UE, también se beneficia de la Directiva de la UE sobre matrices y filiales, lo que reduce la retención fiscal a cero en los dividendos de muchos países de la UE.

Ventajas tributarias disponibles a las empresas “holding” de Malta

• Exención de participación y exención del impuesto sobre ganancias de capital

Los dividendos elegibles y las ganancias de capital derivadas de una “tenencia participante” están (a elección del contribuyente) exentas del impuesto de Malta.

Diríjase a nuestra oficina de Dixcart en Malta: advice.malta@dixcart.com para obtener definiciones sobre lo que constituye una “tenencia participante”.

• Venta de acciones en empresas “holding”

Malta no aplica impuestos a las ganancias de capital sobre la venta de acciones en empresas de Malta.

• Retención de impuestos

Malta no impone retenciones en la distribución de dividendos a los accionistas o empresas “holding”.

La retención a cuenta cero es aplicable independientemente de en qué parte del mundo resida el accionista.

• Impuesto sobre capital

En Malta no existe un impuesto sobre las aportaciones al capital social y no existe un impuesto de timbre en las transferencias posteriores.

• Otros ingresos

Los ingresos que no sean dividendos o ganancias de capital están sujetos a impuestos a la tasa normal de Malta del 35%. Sin embargo, al pagar un dividendo de este “otro ingreso”, se paga al accionista un reembolso de impuestos entre 6/7 y 5/7 del impuesto pagado por la sociedad de Malta, lo que resulta en una tasa impositiva neta en Malta de entre 5% y 10%.

Cuando dichos ingresos se hayan beneficiado de la desgravación fiscal doble o del crédito fiscal de tasa fija de Malta, se aplica un reembolso de 2/3.

Estabilidad en la aplicacion de leyes y reglamentos tributarios

Es posible obtener decisiones tributarias formales en Malta. Las decisiones proporcionan certeza sobre la aplicación de la ley a una transacción específica, y vinculan la Fiscalia de Malta durante cinco años.

También hay un sistema de orientación informal de la Fiscalia. Esto toma la forma de una carta de orientación a las autoridades fiscales. Dichas cartas no están expresamente reguladas en la ley, pero crean una expectativa legítima en la que un contribuyente puede confiar. La Fiscalia de Malta considera tales cartas como vinculantes para si misma.

Conclusión

Una empresa “holding” de Malta es una opción atractiva para los grupos comerciales internacionales.

Las ventajas potenciales incluyen:

• La amplia red de tratados de doble tributación de Malta
• Exención de impuestos de los dividendos
• Exención del impuesto de las ganancias de capital sobre la disposición de “tenencias participantes”
• Exención de impuesto de las ganancias de capital sobre la venta de acciones en una empresa “holding” por parte de accionistas extranjeros
• La ausencia de retención de impuestos

¿Cómo puede ayudar Dixcart?

Dixcart tiene una oficina en Malta y puede ayudar con:

• Incorporación de empresas “holding”
• Servicios de oficinas registradas
• Provisión de despachos gestionados
• Servicios de “compliance” tributario
• Servicios de contabilidad
• Servicios de directoria
• Consultoria en todos los aspectos de adquisiciones y disposiciones de acciones

Información Adicional

El Apéndice 1 proporciona un ejemplo de cómo se puede utilizar una sociedad “holding” de Malta como parte de una estructura fiscalmente eficiente.

Contacto

Si desea obtener más información sobre este tema, contáctese con Jonathan Vassallo en la oficina de Dixcart en Malta – advice.malta@dixcart.com.