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Jersey issues key aspects document for economic substance law

Thursday, 8 November, 2018

Following the Jersey government's release of its Draft Economic Substance Law on 23 October, it has now issued a key aspects document providing high-level comments and clarification on a number of the principles set out in the draft law.

The law is being enacted to satisfy the European Union's Code of Conduct Group on Business Taxation (CCG) that Jersey's company law regime meets the CCG's requirements: namely, that relevant businesses on the island can demonstrate sufficient 'economic substance' in Jersey, rather than being 'brass plate' companies.

The new substance requirements will apply only to certain types of company, and will not need to be met if a company has no gross income in relation to a relevant activity carried on by it. Trusts and partnerships are out of scope, although trustees and general partners that are themselves companies may be within scope.

The key aspects document issued by Jersey attempts to clarify some of the grey areas, for example asserting that fund management is in scope but collective investment vehicles are out of scope.

The test for 'directed and managed' entities is also restated to emphasise that, although there will be overlap with the conventional 'management and control' test used to determine tax residence, there will also be specific expectations regarding meetings held in Jersey and the need to keep associated minutes and records.

The document clarifies that only some of the core income generating activities (CIGAs) listed in the law need to be carried out by a company with 'relevant activities'. Companies will thus have the option of seeking expert advice or engaging with specialists in other jurisdictions. There will also be a new expectation that the level of income subject to tax in Jersey must be commensurate to the CIGA undertaken, and that CIGAs can be outsourced if adequately supervised.

There will be a rebuttable presumption that high-risk companies holding only intellectual property will generally fail the substance requirement, unless certain functions (development, enhancement, maintenance, protection and exploitation) have been under its control. This includes the involvement of skilled staff who perform their activities in Jersey.

The original version of Jersey's draft law has now been reissued in a slightly amended form and will be discussed in the States Assembly on 4 December. Guernsey has also now published its corresponding substance legislation. Both are expected to take effect for financial periods starting on or after 1 January 2019.