Why was the law adopted?
Following a screening exercise in 2017, the EU's Code of Conduct Group raised a concern relating to Jersey's lack of statutory substance requirements. This was considered to increase the risk that the profits of Jersey tax resident companies might not be reflective of their actual activities in Jersey. As a result, Jersey (like many other offshore jurisdictions) put in place a law requiring certain companies which are tax resident in Jersey to demonstrate that they have sufficient 'economic substance' in Jersey; this is known as the Taxation (Companies - Economic Substance) (Jersey) Law 2019 (the "ES Law"), and applies to financial periods commencing on or after 1 January 2019.
Which entities are subject to the ES Law?
Any company (which could be a company incorporated in Jersey or elsewhere) which is tax resident in Jersey, receives income and carries on any of the following "Relevant Activities":
- banking business;
- insurance business;
- fund management business;
- finance and leasing business (which, among other activities, includes the provision of finance to third parties or affiliates);
- headquarters business;
- shipping business;
- holding company business (covering, broadly, companies which hold controlling equity stakes in other companies but undertake no other commercial activities);
- intellectual property holding business; or
- distribution and service centre business (which, among other activities, includes the provision of services to affiliates).
Definitions of each Relevant Activity are provided in the ES Law.
What do these companies need to show?
Companies within the scope of the ES Law must, in respect of their Relevant Activities:
- be directed and managed in Jersey;
- conduct Core Income Generating Activities in Jersey; and
- have adequate employees, expenditure and physical assets in Jersey.
When is a company 'directed and managed' in Jersey?
A company is directed and managed in Jersey for the purposes of the ES Law if:
- it meets in Jersey with adequate frequency, having regard to the amount of decision making required (and it is expected that a majority of board meetings will be held in Jersey);
- a quorum is physically present at each board meeting in Jersey;
- strategic decisions of the company are made in those meetings with minutes recorded;
- the board of directors as a whole has the knowledge and expertise required to discharge the duties of the board; and
- minutes and other records of the company are kept at the office in Jersey.
What are 'Core Income Generating Activities'?
Examples of Core Income Generating Activities ("CIGA") are provided in the ES Law for each of the Relevant Activities. The CIGA are considered to be the key essential and valuable activities that generate the income of the company and these activities must be carried out in Jersey; however, expert professional advice or specialist services can be obtained elsewhere if necessary. A company can outsource its CIGA so long as it continues to supervise the outsourced activities.
How can I tell if a company has adequate employees, expenditure and physical assets?
This needs to be assessed on a case by case basis depending on the activities of the company. These elements can be outsourced by a company so, for example, the company can use the employees of an affiliate or third party provider.
Are there any exceptions?
Companies which carry on the following activities are subject to a slightly different regime:
- holding company business: companies carrying out this Relevant Activity need to be directed and managed in Jersey and have adequate employees, expenditure and physical assets, but are subject to reduced CIGA requirements;
- intellectual property holding business: entities which hold intellectual property in a manner defined as "high risk" are automatically deemed to be non-compliant with the substance requirements unless they provide additional evidence of compliance. The details of these companies are automatically exchanged with relevant foreign tax authorities.
How is compliance with the ES Law monitored?
Compliance with the ES Law is monitored and enforced by the Jersey Comptroller of Taxes. Affected companies need to set out details of their compliance in their annual tax return. Failure to comply with the ES Law will result in fines and, potentially, in a non-compliant company being struck off. The details of non-compliant companies will also be disclosed to relevant foreign tax authorities.
Where can I find out more?
Please refer to Bedell Cristin's detailed economic substance briefings and 'top tips', available on our website, and contact any of our specialists if you would like more information or advice. Jersey's ES Law and guidance can be accessed by clicking here.
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