Crown Dependencies issue guidance on economic substance regulations
Jersey, Guernsey and the Isle of Man collaborated on drafting the legislation in 2018, under threat of being blacklisted by the European Union as 'uncooperative tax jurisdictions'. As a result, all three CDs produced very similar statutes at the end of last year, thus enabling them to issue the new guidance on a joint basis.
The guidance provides welcome confirmation that pure equity-holding companies can passively hold investments and receive income or gains from them without being regarded as a commercial activity.
To fall outside the definition of a pure equity-holding company, and thus be bound by more onerous requirements, the company would have to carry out real activities that are commercial in nature; for example, activities directly linked to the sale/exchange of goods or assets, or services in pursuit of profit.
The guidance also confirms that intra-group financing is within scope of the economic substance law, although providing trade credit on terms that do not require the debtor to pay interest is not.
CD-resident corporate managers to funds (which will include corporate general partners to fund partnerships) will be in scope of the regime. This will apply whether or not the fund is regulated and whether or not the fund is established in the relevant CD or elsewhere, says law firm Mourant.
According to law firm Appleby, the explanation of the 'core income-generating activity' (CIGA) is the guidance note's most important statement. CIGAs that generate a relevant company’s core income in any relevant sector must be performed by the company in the relevant CD. It is not necessary for a company to perform all of the CIGAs in the CD itself, but it must perform the CIGAs that generate the income that it has. Jersey recently re-drafted its substance legislation to make this point clear.
However, the guidance fails to clarify the meaning of the term 'adequate' used in some key requirements in their economic substance legislation. Nor does it clarify the process that will be used by local tax officials to determine whether a company meets the substance requirements, says Appleby, although it provides a little more detail on the requirement for relevant companies to be directed and managed in the relevant CD.
Further development of the guidance is expected soon, in particular information on intellectual property-holding companies, and the reduced substance requirements for pure equity-holding companies.
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