1. Are there any “sandbox” or other regulatory neutral zones?
Yes, the Isle of Man Financial Services Authority (IOMFSA) can offer a regulatory sandbox to allow a business to build its product in a live test environment where the risks to more vulnerable consumers and the financial system are contained.
The IOMFSA may issue a business still at beta testing stage with a restricted licence subject to conditions and waive or modify requirements of the Financial Services Rule Book 2016 until testing has been completed and the business is fully compliant and ready to launch.
Currently, the sandbox is limited to activities regulated under the Financial Services Act 2008 and is not available for insurance business.
2. Is there a Digital “incubator” or hub?
Yes, Digital Isle of Man, part of the Department for Enterprise, who may be able to provide assistance and financial support.
The IOMFSA also has a dedicated “Innovation” section on its website offering guidance to businesses seeking authorisation under the Financial Services Act 2008 and/or the Insurance Act 2008 using innovative technology in delivering regulated activities.
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 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.
Foundations, limited liability company (LLCs), protected cell companies (PCCs) and limited partnerships are also available.
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).
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.
The IOMFSA is currently exploring whether to extend regulation of crypto-assets beyond AML and CFT 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.
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.
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.
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:
(d) fund management;
(e) financing and leasing;
(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.
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.
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.
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.
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.