Crown Dependencies issue joint guidance on economic substance rules for partnerships
All three Crown Dependencies, as well as most British Overseas Territories, implemented legislation during 2021 to bring resident partnerships into the scope of the economic substance requirements. Originally, the substance requirements applied only to companies and similar entities; however, the EU Code of Conduct Group (Business Taxation) later decided that partnerships must also be subject to its economic substance rules in order to discourage the setting up of shell entities, such as holding companies with passive income, in offshore jurisdictions.
Jersey and Guernsey's legislation introduces this rule for accounting periods starting on or after 1 January 2022. Partnerships formed on or after 1 July 2021 are in scope immediately on formation, if they conduct activities that trigger the economic substance requirements. The corresponding Isle of Man legislation applies to accounting periods from July 2021.
The new guidance clarifies points such as exemptions, place of effective management, and the identity of the governing body. The most complex is the issue of place of effective management, which determines the partnership's jurisdiction of residence. A Guernsey or Jersey law partnership is deemed to be resident in Guernsey or Jersey for substance purposes unless its place of effective management is located in a 'qualifying jurisdiction', meaning one where either the partnership is already subject to equivalent economic substance requirements or where the top rate of income tax is at least 10 per cent. This includes Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, Jersey and the United Arab Emirates. Similarly, a foreign-law partnership is deemed resident in Guernsey or Jersey for substance purposes if its place of effective management is located in Guernsey or Jersey.
The guidance defines place of effective management as 'the place where key management and commercial decisions that are necessary for the conduct of the entity’s business as a whole are in substance made'. A partnership may have only one place of effective management at any one time, even if there are multiple places of management. For limited partnerships, this will typically be where the board of the general partner makes its decisions.
The guidance also provides further details on the 'governing body' that directs and manages the activities of the resident partnership. It confirms that this body is the person or group of persons responsible for making the partnership's strategic and management decisions, although its constitution will be different for each type of partnership, especially where general partnerships are concerned.
The guidance also sets out detailed examples of the three exemptions applicable to resident partnerships. These are the collective investment vehicle exemption for regulated funds; the individual exemption for partnerships where all the partners or members are individuals subject to income tax on their share of the partnership profits and the domestic exemption for partnerships that are not part of a multinational group and carry out their activities only in the relevant jurisdiction.
'Businesses should be taking steps now to check whether or not they are in-scope of the economic substance requirements, and if so, to ensure that they can readily comply', says law firm Walkers.
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