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Crown Dependencies confirm collective investment vehicles are out of scope of economic substance tests

Thursday, 28 November, 2019

Regulated public and private fund companies in the Crown Dependencies are confirmed to be out of scope of the economic substance legislation, under new guidance issued by Guernsey, the Isle of Man and Jersey last week.

The substance legislation came into force in the three jurisdictions on 1 January 2019, to comply with the EU Code of Conduct Group (Business Taxation)'s demand that a company that carries on certain specified geographically mobile activities in a jurisdiction must have economic activities and presence there that is commensurate with the profits it generates. The Crown Dependencies issued the first draft guidance on the substance requirements in April, and it has now been updated with some important clarifications.

The principle clarification is the position of fund management businesses, including collective investment vehicles (CIVs). Fund vehicles themselves will generally not be required to prove economic substance, although their subsidiaries may be in scope if they are carrying on 'relevant activities' as specified by the regulations, such as intra-group lending and holding company activities. The definition of a CIV is expected to include both public and private fund companies that are regulated in the jurisdiction.

Fund managers themselves will be in scope where they have income in relation to their fund management activities. Corporate self-managed funds are also expected to be covered when the law is amended in 2020.

The substance requirements currently do not apply to any limited partnerships, regardless of whether or not they are CIVs. However, it is possible that the position may change in future.

The need for board meetings in the jurisdiction is also clearer. It is not necessary for all of the company's meetings to be held in the jurisdiction, but most will have to be held there with a quorum of directors physically present. Certain meetings may be held elsewhere, and isolated decisions can be taken elsewhere, provided this does not outweigh decisions taken in the jurisdiction. However, a fund management company is unlikely to meet the substance requirements if strategic decisions have been delegated to entities outside the jurisdiction without real oversight by the board.

The revisions to the joint guidance also provide additional guidance covering insurance, intellectual property, high-risk intellectual property and shipping.

Sources