16 June 2021, the Isle of Man parliament approved the Income Tax (Substance Requirements) Order 2021 to amend the Income Tax Act 1970 to extend the scope of the economic substance rules to cover partnerships, limited partnerships and limited liability companies (LLCs). The extended rules will apply to accounting periods commencing on or after 1 July 2021.
Partnerships (whether registered in or outside of the Isle of Man) will be caught if they are resident in the Isle of Man and derive revenue from any ‘relevant activity’. The residence of a partnership or LLC will be determined by its ‘place of effective management’ (POEM).
An LLC will be treated as Isle of Man-resident unless its POEM is in a jurisdiction that imposes the same economic substance test or where the highest rate that may be charged to tax on any part of its profits is at least 15%.
‘Relevant activities’ for economic substance purposes include banking, insurance, fund management, financing and leasing, headquartering, shipping and distribution and service centre. The exploitation of intellectual property and pure equity holding, although not ‘relevant activities’, will also cause partnerships to come into scope.
Collective investment schemes (other than ‘self-managed schemes’), partnerships where the partners are individuals and subject to personal income tax, and partnerships that are not part of a multinational group and carry out all activities on the Isle of Man, fall outside of the scope of the economic substance rules.
The Order also introduces civil penalties for late filings of partnership tax returns and a registration requirement for certain foreign or general partnerships that carry out business activities in the Isle of Man. A partnership caught by the economic substance rules that fails to meet the test in a single financial period can be fined up to £10,000, increasing in stages of up to £150,000 for each additional period.
Guernsey’s economic substance regime was similarly extended to partnerships under the Income Tax (Substance Requirements) (Implementation) Regulations 2021, which came into force on 30 June. The Regulations apply to certain newly formed Guernsey partnerships as from 1 July 2021 and to many other Guernsey partnerships existing on 30 June 2021 as from 1 January 2022.
All Guernsey law partnerships, including limited partnerships (LPs) both with and without legal personality and limited liability partnerships (LLPs) will be brought in scope. Foreign partnerships, including LPs and LLPs formed under non-Guernsey law but which have their POEM in Guernsey and carry on business in Guernsey will also be brought into scope.