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ISLE OF MAN

TECHNOLOGY AND INNOVATION OFFSHORE

GUIDE

The Isle of Man is a highly attractive International Finance Centre for technology businesses. Its long established “Freedom to Flourish” philosophy creates a supportive and responsive environment with a reputation for innovation and expertise. Several funding schemes are currently in place to aid the development of businesses, with the Island’s Department for Enterprise committed to assisting new and established businesses in the Island.

In order to accommodate rapid growth of FinTech in the Island, the Isle of Man Government has made regulatory changes to include a broader range of technology businesses within the ambit of anti-money laundering (AML) and countering the financing of terrorism (CFT) regimes. In addition, the Island’s data protection regime allows for stringent protections and control to be afforded to persons whose data is being processed.

ISLE OF MAN OVERVIEW

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ISLE OF MAN

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CAYMAN ISLANDS

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As the pace of technological change accelerates, so too does the legal and regulatory landscape.

Our “At a Glance” matrix provides a snapshot of the current legal and regulatory position in eight of the world’s largest offshore jurisdictions across a number of different technology sectors. The full chapters then expand upon those responses to provide a single, comprehensive resource to help you identify the most suitable offshore jurisdiction for your technology project.

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FINTECH BDA BVI KY GUE IOM JER MAU SEY

Existence of a “sandbox” or other regulatory neutral initiative?

Digital “incubator” or hub?

Examples of FinTech use cases?

Local AML requirements based on those of the FATF?

Electronic signatures valid?

INITIAL COIN OFFERINGS (ICOs) BDA BVI KY GUE IOM JER MAU SEY

ICOs separately regulated?

ICOs subject to the local AML regime?

Can an ICO be conducted without a physical presence in the jurisdiction?

Can a crypto-to-crypto exchange be established?

Can a crypto-to-fiat exchange be established?

Licence or registration required for crypto-to-fiat transfers?

Local banks willing to provide accounts for ICO projects?

Gambling platforms permitted?

As the pace of technological change accelerates, so too does the legal and regulatory landscape.

Our “At a Glance” matrix provides a snapshot of the current legal and regulatory position in eight of the world’s largest offshore jurisdictions across a number of different technology sectors. The full chapters then expand upon those responses to provide a single, comprehensive resource to help you identify the most suitable offshore jurisdiction for your technology project.

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GLANCEAT A

DATA PRIVACY BDA BVI KY GUE IOM JER MAU SEY

Separate data protection framework?

INTELLECTUAL PROPERTY BDA BVI KY GUE IOM JER MAU SEY

Is copyright protection available?

Can trade marks be registered?

Are patents registrable?

Are trade secrets protected?

TAX BDA BVI KY GUE IOM JER MAU SEY

Tax exemptions available for corporate entities?

Individual investors exempt from income taxes?

DOING BUSINESS BDA BVI KY GUE IOM JER MAU SEY

Access to local government and regulators?

Ability to establish a local presence and hire staff?

Direct flights to onshore hubs

TOKENISED FUNDS BDA BVI KY GUE IOM JER MAU SEY

Can a tokenised fund be established?

Tokenised funds subject to the local AML regime?

Can service providers outside the jurisdiction be used?

depends on

nature of service

depends on

nature of service

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A.VIRTUAL ASSETS

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A sandbox now exists in the Isle of Man. This is headed by Digital Isle of Man, part of the Department for Enterprise.

This gives businesses:

• a live test environment; • the ability to run pilots; • a restricted licence prior to production; • early feedback; and alignment with modern software development.

ARE THERE ANY “SANDBOX” OR OTHER REGULATORY NEUTRAL ZONES?

This initiative coincided with the launch of Isle of Man Blockchain Office, which acts as intermediary between businesses and regulators, to provide guidance to businesses and allow for collaboration between businesses.

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3.2.

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The Isle of Man offers two principal legal entities that are potentially suitable for FinTech companies:

1931 Act Companies: the ‘traditional’ Manx company based on the 1929 equivalent United Kingdom (UK) legislation. This entity is available in a number of forms including share capital companies, guarantee companies as well as hybrid companies. This type of company does not require a licensed fiduciary to act as registered agent.

2006 Act Companies: a flexible and modern corporate entity that follows the international business company model. The forms of company available are the same as the 1931 Act companies.

Yes.

ARE THERE ANY BARRIERS TO ENTRY FOR FOREIGN COMPANIES?

Each foreign company must register as a foreign company under the Foreign Companies Act 2014, if that company carries on, or is held to carry on, business from an established place of business in the Isle of Man.

HAVE TRADITIONAL INSTITUTIONS EMBRACED NEW TECHNOLOGIES?

New technologies have not yet displaced traditional financial service providers in the Isle of Man. However, the new technologies market is expanding in the Island, with the most notable areas including e-gaming, software development, payment services and crypto-currencies.

WHAT FORMS OF LEGAL ENTITY ARE AVAILABLE FOR TECHNOLOGY COMPANIES?

IS THERE A DIGITAL “INCUBATOR” OR HUB?

4.WHAT AML REQUIREMENTS APPLY TO BUSINESSES IN THE ISLE OF MAN?

There is no specific legislation for FinTech businesses. However, as noted above, they will be subject to the Island’s AML and CFT legislation. This includes: the Proceeds of Crime Act 2008; the Anti-Money Laundering and Countering the Financing of Terrorism Code 2019 and associated AML Handbook. The foregoing essentially integrate the main principles of international standards of AML/CFT.

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The Isle of Man’s Electronic Transactions Act 2000 (ETA2000) provides for the use of electronic signatures in certain circumstances. Section 1 of the ETA2000 provides that a transaction will not be invalid merely because it takes place wholly or partly by means of one or more electronic communications. The requirement for a written signature of a person is taken to have been met under the ETA2000 in relation to an electronic communication if: (i) a method is used to identify him and indicate his approval of that which is communicated; (ii) having regard to all the relevant circumstances at the time, the method is as reliable as is appropriate for the purpose of the information communicated, and; (iii) the receiver consents to that method.

The AML Handbook also allows client due diligence (CDD) documentation to be obtained electronically. The AML Handbook provides that where CDD is obtained electronically, the authenticity of the electronic document must be verified by appropriate measures.

5.ARE ELECTRONIC SIGNATURES VALID?

Greater protections and rights have been provided to those whose personal data is being processed with the implementation of the European Union (EU) General Data Protection Regulation (GDPR). Although the Isle of Man is not in the EU, it has an adequacy finding from the European Commission that aids the transfer of personal data into and outside of the Island. Accordingly, the Island decided to implement the GDPR into domestic law.

The Data Protection Act 2018, allowed the Council of Ministers to make certain orders which implemented the GDPR into Isle of Man law. The relevant orders are the Data Protection (Application of GDPR) Order 2018 (as amended) and the Data Protection (Application of the LED) Order 2018. There are also implementing regulations setting out more detail, namely the GDPR and Law Enforcement Directive (LED) Implementing Regulations 2018 (as amended).

6.HOW IS PERSONAL DATA PROTECTED?

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B.VIRTUAL ASSETS

The Financial Services Act 2008 (FSA08) sets out a general prohibition against any person carrying on, or holding themselves out as carrying on, by way of business, in or from the Isle of Man, a financial services activity without a licence or in breach of licence conditions unless there is a relevant exclusion or an exemption as set out in the Financial Services (Exemptions) Regulations 2011 (as amended). Licences are granted by the Isle of Man Financial Services Authority (IOMFSA). When granting licences, the IOMFSA must be satisfied that the activities will be managed and controlled in the Isle of Man and that there will be a genuine presence in the Island.

The Proceeds of Crime Act 2008 (POCA08) lists all businesses considered to be conducting “business in the regulated sector.” Activities concerning crypto-currencies have been included in the list of activities deemed to be conducting “business in the regulated sector” since 2015. The relevant definition in POCA08 is as follows:

“convertible virtual currency activity” means issuing, transmitting, transferring, providing safe custody or storage of, administering, managing, lending, buying, selling, exchanging or otherwise trading or intermediating convertible virtual currencies, including crypto-currencies, virtual assets or similar concepts where the concept is accepted by persons as a means of payment of goods or services, a unit of account, a store of value or a commodity; “

1.HOW ARE VIRTUAL ASSETS REGULATED?

Consequently, carrying out such business will be subject to the requirements of the Island’s AML and CFT legislation and such businesses will be required to employ rigorous know-your-customer procedures, just like other businesses in the regulated sector operating in the Isle of Man.

Under the terms of the Designated Businesses (Registration and Oversight) Act 2015 (DBA15), digital currency businesses (in accordance with the definition above) need to register with the IOMFSA and it publishes and maintains a register of “designated businesses.” Such businesses must submit annual returns, confirming compliance with AML and CFT requirements and detailing any instances of non-compliance.

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4.CAN A CRYPTO EXCHANGE BE ESTABLISHED?

The DBA15 captures any exchange of virtual currencies, including crypto currencies - both crypto-to-crypto and crypto-to-fiat. Consideration should also be given as to whether a money services licence is also required.

3.IS A PHYSICAL PRESENCE REQUIRED IN THE ISLE OF MAN TO CONDUCT A VIRTUAL ASSET SALE?

The IOMFSA’s policy entitled the “Designated Businesses Registration Policy” issued on 5 October 2018, sets out the requirements for crypto businesses in the Isle of Man. Businesses that fall under the definition of crypto businesses as set out in question 1 above, must have two Manx resident directors and the management and control must be in the Island as per paragraph 4.1 of the said policy. The IOMFSA have also indicated that the DBA15 will be amended to include a requirement for all designated businesses to be managed and controlled on the Isle of Man.

2.ARE VIRTUAL ASSETS SUBJECT TO THE LOCAL AML REGIME?

Yes.

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7.ARE ANY LEGAL OR REGULATORY CHANGES EXPECTED?

The IOMFSA have indicated that the DBA15 will be amended to include a requirement for all designated businesses to be managed and controlled on the Isle of Man.

6.ARE GAMBLING PLATFORMS PERMITTED?

Yes. The Isle of Man was one of the first jurisdictions in the world to introduce legislation specifically created to regulate online gambling and e-gaming businesses as well as offering protection to customers. Gambling services are highly successful on the Island and are regulated (both land-based and online services) by the Isle of Man Gambling Supervision Commission (GSC). In January 2017, the terms of the Online Gambling (Amendments) Regulations 2016, allowed GSC licence holders to accept virtual currencies from players, subject to certain regulatory safeguards.

5.CAN A VIRTUAL ASSET PROJECT ESTABLISH A LOCAL BANK ACCOUNT?

This is a matter between the bank and the relevant business and will be subject to the relevant bank’s normal take-on and due diligence procedures.

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2.IS THERE A MINIMUM INVESTMENT AMOUNT?

If an ICO falls into the designated business regime noted above, there are no requirements regarding investment amounts. However, for tokenised funds which are collective investment schemes, certain classes of fund are subject to minimum investment criteria under the regulations made under the CISA08.

1.ARE TOKENISED FUNDS REGULATED IN THE ISLE OF MAN?

In a tokenised fund, an investor’s interest is represented by a cryptographic token, as opposed to shares or other interests or units offered to investors in a more traditional fund structure.

If an issuer of tokens falls within the definition of a collective investment scheme it will need to be established in accordance with the provisions of the Collective Investment Schemes Act 2008 (CISA08) and comply with the AML and CFT regime.

C.TOKENISED FUNDS

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D.ECONOMIC SUBSTANCE

1.DOES THE ISLE OF MAN IMPOSE ECONOMIC SUBSTANCE REQUIREMENTS?

Yes. These requirements (the ES Law) came into force on 1 January 2019.

Under the ES Law, the economic substance test (ES Test) requires a company that is tax resident in the Isle of Man that derives income from a relevant sector to ensure that:

(a) it is directed and managed in the Isle of Man; (b) there is an adequate number of qualified employees in the Isle of Man; (c) it has adequate operating expenditure proportionate to the level of activity carried on in the Isle of Man; (d) has an adequate physical presence in the Isle of Man; and (e) it conducts core income-generating activity (often referred to by the acronym “CIGA”) in the Isle of Man.

The “relevant sectors” under the ES Law include each of the following:

(a) banking; (b) insurance; (c) shipping; (d) fund management; (e) financing and leasing; (f) headquartering; (g) operation of a holding company; (h) holding intangible property; and (i) distribution and service centre business.

2.ARE THERE ANY REPORTING REQUIREMENTS IN CONNECTION WITH ECONOMIC SUBSTANCE?

Yes. Information is required to be included in a company’s income tax return to allow the Assessor of Income Tax to determine if the company has complied with the ES Test.

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D. Economic Subtance

The Assessor of Income tax has the power under the ES Law to impose civil penalties on any company that is required to satisfy the ES Test but fails to do so. The company may be subject to an initial penalty of up to £10,000, rising to up to £50,000 in the second year of non-compliance and up to £100,000 in the third year of non-compliance. If the company is a “high risk IP company”, the penalties increase to up to £50,000 and up to £100,000, respectively.

There are also information sharing sanctions, and in serious cases the Assessor may cause the company to be struck off the register.

It is an offence for a person to make or deliver an untrue tax return. This extends to the information that a corporate taxpayer is required to include in its tax return relating to the ES Test. Such an offence is punishable on summary conviction by a penalty not exceeding £10,000.

WHAT PENALTY PROVISIONS APPLY IN THE CASE OF NON-COMPLIANCE?

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1.COPYRIGHT

Copyright law in the Isle of Man is governed by the Isle of Man Copyright Act 1991 (as amended) which provides the author and/or rights owner control over the copying, rental, publication, public performance/viewing and modification of the work. This legislation is meaningful for those in the FinTech business as computer programs are included in the definition of “literary works” that are able to be covered by copyright protection. Databases are also protected under the database right.

E.INTELLECTUAL PROPERTY

A few years ago, the Isle of Man undertook a review of its intellectual property (IP) legislation to ensure that it was up to date and fit for purpose. The Isle of Man does not have its own register for registered rights but has its own legislation for unregistered IP rights. The terms of the UK’s Trade Marks Act 1994 and Patents Act 1977 apply to the Island by way of Order in Council. In addition, UK and EU registered trade marks automatically extend to the Island.

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3.PATENTS

Again, the Island does not have its own register and the UK’s legislation has been extended to the Isle of Man by way of Order in Council.

2.TRADE MARKS

The Island does not have its own register of trade marks as the UK’s Trade Marks Act 1994 extends to the Island. This is beneficial, as any trade marks registered in the UK automatically extend to the Island.

Where a trade mark is protected by registration in the EU as an “EU trade mark,” this protection also extends to the Isle of Man. This is useful for international FinTech businesses as it means that no re-registration of such trade marks is required in the Isle of Man.

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2.TRANSPORTATION LINKS

The Island can be accessed from either ferry or by air. Ferries are available from Belfast, Dublin, Liverpool and Heysham. There is a large array of airports that are available for direct flights such as Belfast International, Birmingham, Bristol, Dublin, Edinburgh, Liverpool, London City, London Gatwick and Manchester.

VISAS AND WORK PERMITS

Generally, any person who is not an Isle of Man worker requires a work permit before beginning employment of any kind. Those born on the Island or having lived on the Island for a continuous period of five years are entitled to work without the need for a permit. There are several exceptions such as those relating to spouses and civil partners. FinTech companies may be able to utilise newly created exemptions relating to information and technology and e-business (including e-gaming). Among minor conditions, if the employment is to last at least a year and the salary is at least £25,000, the exemption could apply.

The applications can be made by the potential worker themselves or by a number of other connected persons including the potential employer. There is an application fee of £60 and where an application is successful, the permit will be granted for a set period. Where necessary, an application for renewal of a permit can subsequently be made.

F.DOING BUSINESS IN ISLE OF MAN

1.

The Island benefits from a separate tax system to the UK. There are no capital gains or inheritance taxes and no stamp duty. Personal income tax has a maximum of 20% rate subject to a tax cap on total income tax payable of £150,000 per person (£300,000 for a joint assessed couple).

There is a standard zero rate of corporation tax. However, banking business income and retail businesses with profits above £500,000 are taxed at 10% and land and property income from Isle of Man sources is taxed at 20%.

3.TAX MATTERS

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© Appleby Global Group Services Ltd 2020.Published in the Isle of Man. All Rights Reserved.

Production credits:Report design by Infinite Global. Photo by JC Gellidon on Unsplash. Icons from Flaticon by Freepik and monkik.

+44 (0)1624 647 971kjohnson@applebyglobal.com

Senior Associate | CorporatePartner | Corporate+44 (0)1624 647 698cmilne@applebyglobal.com

Katherine JohnsonClaire Milne

IOMTechnological innovation is transforming businesses, markets and our everyday life. Appleby’s multi-disciplinary global technology and innovation group comprises experts from each of our 10 offices to help businesses meet the new challenges and support clients across a broad range of emerging technologies, including:

— Blockchain

— Virtual Currencies, Token Sales and Initial Coin Offerings

— Financial Technologies

— Digital Technology and E-Commerce

— Intellectual Property

— Unmanned Aircraft Systems

— IT and Communications

— Data Protection and Information Management