What is a local CSP?
Contrary to what is usually assumed, Corporate Service Providers in the Isle of Man don’t always require a financial services licence.
When the Government decided to regulate the corporate services sector, they decided (quite sensibly) to regulate the ‘offshore’ fiduciary sector which traditionally comprises of beneficial owners who are non residents of the Island and whose businesses principally undertake ‘non Isle of Man’ business activities.
As a result, our legislation does not require corporate service providers who provide services to companies whose activities meet the criteria of ‘domestic services’ to hold a Class 4 licence.
The relevant legislation in relation to ‘domestic services’ is contained within Financial Services (Exemptions) Regulations 2011 (most recently updated in 2019).
The domestic services test is a 3 part test – comprising of parts (a) (b) and (c) and all 3 parts must be passed for the business to fall within the definition of “Domestic Services.”
The relevant part which defines ‘domestic services’ and exempts CSPs who provide such services from licencing starts on page 17 but it is set out in full below for reference.
4.7 (1) Subject to paragraph 4.2, in relation to an activity falling within paragraphs (1) to (4) and (6) to (15) of Class 4, section 4 does not apply to a person who is resident in the Island and where the company or partnership which is the subject of the activity—
(a) is resident in the Island;
(b) has a permanent establishment in the Island; and
(c) carries on as its sole or principal trade or business—
(i) the holding of assets which are beneficially owned by persons who are resident in the Island; or
(ii) the supply made within the Island of any goods or services; or
(iii) the manufacture in the Island of any goods; or
(iv) the holding of real property where the majority of that property is in the Isle of Man.
What does this mean in practice ?
(a) is resident in the Island; – All Isle of Man Companies are resident in the Island, unless application is made to the Income tax department who have the power to make exceptions under Isle of Man Income Tax Act 1970; so, an Isle of Man Company being resident on the Island is, more or less, a given.
(b) has a permanent establishment in the Island;. It’s hard to imagine a domestic company without a permanent establishment on the Island so that leaves us to consider Condition (c).
Condition (c) is more complex and defines 4 eligible types of ‘domestic service’ based on the nature of the sole or principal trade or business undertaken by the Company in question.
Examining these 4 types of domestic services in turn:-.
Type (i) Companies holding assets ultimately beneficially held by local residents: The definitions clarify the meaning of beneficial owner and from this it is clear that this category includes any company that is beneficially owned by Island residents which holds investment assets. It does not matter where the assets are located so this category would include all holding and investment companies which are beneficially owned by persons resident in the Isle of Man for tax purposes.
Type (ii) Any Company whose principal business is the supply of goods or services within the Island. This would include all local shops, hotels, restaurants, hospitality businesses, farms, as well as local tradespeople, and other locally based service businesses. It is important to note that this applies regardless of whether or not the beneficial owners are Island residents.
Type (iii) Any Company whose principal business is Manufacturing in the Isle of Man. ie Any company with its principal factory or other production facility physically located in the Isle of Man. Again, note that this applies regardless of whether or not the beneficial owners are Island residents.
Type (iv) a Company in the business of holding of real property where the majority of that property is in the Isle of Man. ie a local property investment Company which holds (a majority of) Isle of Man based property. Again, note that this applies regardless of whether or not the beneficial owners are Island residents.
Limits on the Exemption:
The Exemption applies only to the regulated activities detailed in the Regulated Activities Order 2011 under Class 4 (1)-(4) and Class 4 (6)-(15). It does not apply to Class 4 (5) services – which is acting as a Registered Agent for a 2006 Act Company, a Foundation or an Isle of Man LLC.
Section 4.2 of the Exemptions Order – disapplies the exemption in relation to the number of professional directorships that can be held so this remains (subject to the rather complex rules) at 10
Money Laundering Requirements.
Regulated for Financial Services and Regulated for Money Laundering purposes are not the same thing in the Isle of Man. The Proceeds of Crime Act (Business in the Regulated Sectors) Order 2019 details which business activities are within the Regulated Sector for Money Laundering purposes.
According to that legislation,
(1) A business is in the regulated sector to the extent it – (a) is a business or carries on an activity to which sub-paragraph (6) applies, which is conducted – (i) by way of business; and (ii) in or from the Island;
(6) This sub-paragraph applies to – (a) subject to sub-paragraph (13), engaging in any regulated activity within the meaning of the Financial Services Act 2008, whether or not an exemption specified in the Financial Services (Exemptions) Regulations 2011 applies to that activity.
Acting as a local CSP involves the provision of services detailed under Class 4 of the regulated Activities Order 2011 (albeit the local CSP is exempted from licensing under the Financial Services (Exemptions) Regulations 2011) therefore, such activity would fall within the definition of “engaging in any regulated activity within the meaning of the Financial Services Act 2008, whether or not an exemption specified in the Financial Services (Exemptions) Regulations 2011.” and therefore The activities of a local CSP are within the regulated sector for money laundering purposes – therefore Client CDD, MLRO appointment, Risk assessments, procedures manual etc are all required under the law.
Businesses licenced under the Financial Services Act 2008 and businesses required to register under the Designated Businesses (Registration and Oversight) Act 2015 (updated 2019) are subject to regulatory oversight by the Financial Services Authority in the Isle of Man.
As we have already seen, a ‘local CSP’ that provides ‘domestic services’ is not required to hold a licence under the Financial Services Act. However, we need to examine whether such a business would fall within the definition of a designated business.
Schedule 1 (on page 29) of the Designated Businesses (Registration and Oversight) Act 2015 (updated 2019) lists the businesses that are required to register as designated businesses, and are subject to regulatory oversight of the Isle of Man Financial Services Authority.
The provision of corporate services (domestic or otherwise) is not within the list of designated businesses and therefore local CSPs that provide such services are not subject to regulatory oversight by the Financial Services Authority.
However, as an exempted regulated activity the local CSP falls within the definition of a permitted person under the Financial Services Act 2008. Most of the Financial Services Authority’s powers, including those of inspection can be exercised in respect of a permitted person. Thus, whilst the Financial Services Authority does not have the power to exercise regulatory oversight it does have the power to ensure the local CSP is not in breach of the general prohibition and that it complies with its obligations under the AML/CFT legislation as it applies in the Isle of Man.
DISCLAIMER; THIS ARTICLE IS A GENERAL EDITORIAL COMMENTARY ONLY. IT IS NOT INTENDED TO BE AND DOES NOT CONSTITUTE LEGAL ADVICE.