Tax legislation needed to avoid the island being blacklisted by Brussels was approved in Tynwald this week.

In December last year, the Isle of Man avoided being blacklisted when the EU published a list of jurisdictions considered to be non-co-operative for tax purposes.

Instead, we were placed on a greylist after the Manx government gave a high-level commitment to address the EU’s concerns regarding our taxation system.

That commitment included introducing legislation by December 3 this year to show the companies that operate here have real ’substance’.

The Income Tax (Substance Requirements) Order 2018 is targeted at those companies in the island which do not have any real economic activity and substantial economic presence.

Its focus will be on business sectors identified by the EU including banking, insurance, shipping, fund management, finance and leasing, headquartering, holding companies, distribution and service centres and intangible property.

The legislation will require companies that are tax resident in the Isle of Man and which operate in these business sectors to demonstrate a minimum level of substance here.

Substance requirements are set out in the legislation and some of the requirements vary according to the business sector.

If a company fails to meet the requirements, progressive sanctions will be applied for non-compliance.

The Assessor may impose a civil penalty of up to £50,000 and may also disclose any relevant information about that company to a foreign tax official of the EU member state where the ultimate parent company or beneficial owner is based.

If the non-compliance continues, additional civil penalties of up to £100,000 may be imposed.

Ultimately, the Assessor will ask the Department for Enterprise or the Registrar to strike the company off the register if it is incorporated here.

If the company is not incorporated here, the Assessor will notify the tax administration in the company’s jurisdiction of incorporation.

The Isle of Man has worked closely with colleagues in Jersey and Guernsey and has also held a series of industry meetings to discuss the draft legislation which is in the form of a Temporary Taxation Order.

No significant concerns have been raised, the explanatory memorandum to Tynwald members states.

Temporary Taxation Orders are used where legislation is required quickly, to meet international tax standards.

But they have to be confirmed by a Bill which must have its second reading in the House of Keys within 12 months of the order’s approval by Tynwald.