Technology And Innovation Guide – Isle Of Man – Finance and Banking – Isle of Man – Mondaq News Alerts

Technology and Innovation

1. Are there any “sandbox” or other regulatory neutral
zones?

The Isle of Man Financial Services Authority may, in some
instances, grant a restricted licence to carry out a financial
services activity subject to stringent conditions.  Persons
interesting in establishing a technology business in the Isle of
Man should contact Digital Isle of Man, part of the Department for
Enterprise, who may be able to provide assistance and financial
support.

2. Is there a Digital “incubator” or hub?

Yes, Digital Isle of Man, part of the Department for
Enterprise.

3. Are there any barriers to entry for foreign technology
companies?

A 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.

4. Have traditional institutions embraced new technologies?

The Isle of Man Department for Enterprise is welcoming of
technology businesses, with Digital Isle of Man focussing on key
sectors of blockchain, e-gaming, e-sports, internet of things,
digital media and innovative technology

Some financial service providers in the Isle of Man have
embraced new technology in how they operate and onboard
clients.  The AML Handbook issued by the Isle of Man Financial
Services Authority (IOMFSA) provides that
video-conferencing and ‘selfie’ documents may be used for
the purposes of meeting due diligence verification requirements
under the Anti-Money Laundering and Countering the Financing of
Terrorism Code 2019 (AML/CFT Code).

5. What forms of legal entity are available for technology
companies?

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

1931 Act Companies: the ‘traditional’ Manx company 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.

6. What AML requirements apply to businesses in the Isle of
Man?

There is no specific legislation for technology businesses .
However, a business operating in the regulated sector, as defined
in  the Proceeds of Crime Act 2008 (POCA08),
must comply with the AML/CFT Code and associated AML/CFT Handbook.
The Isle of Man’s AML/CFT legislation essentially integrates
the main principles of international standards of AML/CFT. The AML
Handbook allows client due diligence (CDD)
documentation to be obtained electronically.

7. Are electronic signatures valid?

The Isle of Man’s Electronic Transactions Act 2000
(ETA2000) provides for the use of electronic
signatures. 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.  There are some
notable excluded transactions, including powers of attorney,
charges over land and charges granted by companies which must be
executed under hand.

8. How is personal data protected? 

Although the Isle of Man is not in the European Union
(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 EU
General Data Protection Regulation (GDPR) into
domestic law in 2018 through the Data Protection Act 2018, the Data
Protection (Application of GDPR) Order 2018 (as amended). There are
also implementing regulations setting out more detail, namely the
GDPR and Law Enforcement Directive (LED) Implementing Regulations
2018 (as amended).

Virtual Assets

1.  How are virtual assets regulated?

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 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.

Where a virtual asset is a security token it will be an “investment” for the purposes of the FSA08.  Those
participating in transactions concerning security tokens may
consequently require licensing by the IOMFSA under the FSA08, such
as those arranging deals in the security tokens.

Issuers may find themselves falling within the definition of a
collective investment scheme, in which case the issuer itself will
need to consider its regulatory status and those providing services
to it may need to be licensed by the IOMFSA under the FSA08.

Issuing electronic money is regulated activity under the
FSA08.  A token will be electronic money if it: (i) holds
electronically stored fiat monetary value; (ii) is represented by a
claim on the claim on the electronic money issuer to convert it
back to fiat currency; (ii) is issued on receipt of funds; (iv) is
used for the intended purpose of making payments; and (v) is
accepted as a means of payment by a person other than the person
issuing or selling the token.

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”

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), convertible virtual
currency businesses which are not otherwise regulated need to
register with the IOMFSA which 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.

2.  Are virtual assets subject to the local AML regime?

Yes, businesses carrying out virtual currency activities
(defined above) and registered under the DBA15 or licensed under
the FSA08 must comply with the AML/CFT Code.  Those licensed
by the Gambling Supervision Commission must comply with the
Gambling (Anti-Money Laundering and Countering the Financing of
Terrorism) Code 2019.

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 includes
additional requirements for convertible virtual currency businesses
to register in the Isle of Man. These businesses must have at least
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.

4. 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 decentralised-finance (DeFi) products be launched from
the Isle of Man?

Yes, subject to any licensing, authorisation or registration
required for that product.

Virtual Asset Service Providers (VASPs)

1. Can a crypto-to-crypto exchange be established?

Yes, provided the exchange would not be handling tokenised
securities it would not require a licence under the FSA08. 
However, the exchange would need to be registered with the IOMFSA
under the DBA15 and comply with the AML/CFT Code.

2. Can a crypto-to-fiat exchange be established?

The DBA15 captures any exchange of virtual currencies –
both crypto-to-crypto and crypto-to-fiat.

3. Is a money services licence required for crypto-to-fiat
conversion through an OTC desk?

This will depend upon whether the technology business is
carrying out “payment services” as defined in the
Regulated Activities Order 2011 (as amended), which requires a
licence from the IOMFSA under the FSA08.

4. 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

5. Can you register as a virtual asset custodian in the Isle of
Man?

Yes, a virtual asset custodian would need to be registered under
the DBA15 and comply with the AML/CFT Code.

6.  Are VASPs subject to the local AML regime?

Yes, as discussed above.

Tokenised funds

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.  There is no separate framework for the regulation of
tokenised funds in the Isle of Man.

2. What service providers are required for a tokenised fund?

This would depend upon the type of established under the CISA08
and vary greatly based on the regulatory treatment of the fund and
the nature of the permitted investors

Usually a fund will appoint a manager or administrator licensed
by the IOMFSA to carry out day-to-day administration, and this is
essential for most fund types.  Some fund types require an
asset manager or investment advisor/manager to be appointed, for
the fund to have a custodian and for the fund to have its accounts
audited.

3. What AML/KYC is required for token holders?

The fund must obtain CDD for all token holders in accordance
with the AML/CFT Code.  There is no de minimis holding.

4. 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.

5. Can token holders redeem their tokens or transfer the tokens
they hold?  

Subject to ensuring compliance with AML/CFT requirements, the
commercial terms of the token will dictate whether a participant
can redeem tokens.

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 through amendment to the Income Tax Act
1970.

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.

3. What penalty provisions apply in the case of
non-compliance?

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.

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.

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 technology 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.

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 technology businesses as
it means that no re-registration of such trade marks is required in
the Isle of Man.

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.

4. Trade Secrets

Trade secrets are protected in the Isle of Man through a
combination of common law and rules of equity. A range of remedies
are available where trade secrets have been improperly acquired,
disclosed or used. In practice, non-disclosure agreements and/or
contractual mechanisms are typically used to provide
protection.  Confidential information is similarly protected
principally through contractual agreements or non-disclosure
agreements, or through a common law obligation to keep information
confidential.

Doing Business in the Isle of Man

1. Trade Licences

The Isle of Man does not have or apply any trade licence
requirements other than as mentioned elsewhere in this Guide, such
as with regard to work permits for non-Isle of Man workers and
licensing or registration with the IOMFSA to carry out a particular
business.

2. Tax Matters

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 £200,000 per person
(£400,000 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. 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. Technology businesses may be able to utilise
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.

4. 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
throughout the British Isles.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.