Jersey: Certainty and Substance

The EU’s positive assessment came as a result of the Island’s collaborative dialogue with the COCG, which was tasked by the EU Council with assessing jurisdictions in the following three areas: tax transparency, fair taxation and compliance with anti–base erosion and profit shifting (BEPS) measures. While Jersey’s standards of tax transparency and anti-BEPS compliance were positively assessed, the lack of a legal substance requirement for entities doing business using the Island was highlighted as a concern.

In response the Government of Jersey introduced the Taxation (Companies – Economic Substance) (Jersey) Law 2019 (Law), which came into effect on 1 January, 2019. The Law makes provision for imposing an economic substance test on companies which are tax resident in Jersey. Tax resident companies must be able to demonstrate that they meet the relevant criteria, in order to pass the test.

The Law has been assessed by the EU finance ministers as meeting the requirements for demonstrating economic substance.

The Law was amended on 1 September 2022 to extend its application to Limited Liability Companies (LLCs). References to companies in this factsheet should accordingly be read as industry references to LLCs.

Separate legislation, the Taxation (Partnerships – Economic Substance) (Jersey) Law 2021, applying a similar economic substance test to partnerships resident in Jersey, came into force on 8 October 2021.

The Law applies to ‘resident companies’, defined as companies which are tax resident in Jersey. Where Jersey tax resident companies generate gross income during the relevant financial period in relation to a ‘relevant activity’, such companies must meet all criteria of the ‘economic substance test’ by:

• being directed and managed in the Island;
• conducting all Core Income Generating Activities (CIGA) in the Island; and
• having adequate people, physical assets and expenditure in the Island.

‘Relevant activities’ that would need to meet the criteria include: banking; finance and leasing; fund management; headquarters; holding company business; insurance; intellectual property holding; shipping; and distribution and service centres.

Directed and managed

The Law and accompanying guidance notes contain requirements of how a company can be ‘directed and managed’ in Jersey, including:

• board meetings being held in Jersey at an adequate frequency, determined by the level of decision making required but no less than one a year;
• meetings to include a quorum of directors being physically present in Jersey;
• board minutes to record strategic decisions of the company being taken at meetings;
• that directors have the necessary knowledge and expertise; and
• the minutes of all board meetings and records of the company being kept in Jersey.

CIGA

CIGA are the key essential and valuable activities that generate the income of the company.

Which activities constitute CIGA varies slightly depending on the type of business. For each sector, the law provides a list of the core activities which a company operating in such a sector could carry on.

The legislation permits companies to outsource some or all of its CIGA, however, where CIGA are outsourced, the company must be able to demonstrate that it has adequate supervision of the outsourced activities and that those activities are undertaken in Jersey.

Adequate employees, expenditure and physical assets

A company will also have to ensure it maintains and retains appropriate records to demonstrate the adequacy of the resources utilised and expenditure incurred. Guidance on what specifically constitutes ‘adequate’ may be issued in due course but currently it depends on the individual circumstances and level of business activity undertaken.

What is adequate for each company will depend on the particular tasks of the company and its business activity.

Fund management business

Funds are not themselves subject to the substance requirements, unless they fall within the definition of a ‘self-managed fund’, in which case the Law applies with specific modifications. However, a resident company carrying a ‘fund management business’ will be within the scope of the Law. For these purposes ‘fund management business’ is defined in detail and includes managers that are licensed under the Financial Services (Jersey) Law 1998 for certain categories of fund services business as a manager, investment manager, trustee (unless there is a separate manager), and general partner (unless there is a separate manager).

Also included within the scope of the Law is a general partner/trustee of an unregulated fund; and a general partner/manager/trustee of a private fund.

Therefore, even general partners/managers who are exempt from regulation under the Financial Services (Jersey) Law 1998 must have regard to the Law and where necessary ensure the economic substance test is met.

The CIGA for a fund management business could include:

• taking decisions on the holding and selling of investments;
• calculating risk and reserves;
• taking hedging decisions; and
• preparing reports and returns to investors and the JFSC or other regulators.