The Draft Taxation (Companies – Economic Substance) (Jersey) Law 201- (the “Law”) will be debated by the States Assembly on 4 December 2018.
The Law is intended to address concerns raised by the EU Code of Conduct Group on Business Taxation (the “COCG”) with regards to the need for relevant businesses to demonstrate sufficient economic substance in Jersey. The Law will not affect trusts, partnerships and companies (however general partners and trustees that are themselves companies may be caught) that have no gross income with regards to a relevant activity carried on by it.
The COCG produced a scoping paper (the “Paper”) in relation to requests from the Government of Jersey and other jurisdictions who required clarity as to how to comply with the requirement for companies to have economic substance. With reference to the Paper, outline proposals (the “Proposals”) were developed in order to address the concerns of the COCG.
The Proposals to address the concerns consist of three stages:
1. Stage 1 - identify companies carrying on relevant activities;
2. Stage 2 - impose economic substance requirements on companies undertaking relevant activities; and
3. Stage 3 - enforce the economic substance requirements.
In August 2018, the Government of Jersey released a consultation document entitled “consultation on the introduction of economic substance requirements for companies tax resident in Jersey” (the “Consultation”) which summarised the Proposals above and also sought feedback from interested parties on the Island. The Consultation implied that due to the high standards set by Jersey companies, it is likely that many of them will be able to demonstrate that they meet the economic substance requirements.
What are the important points to know?
Following on from this feedback, further discussions with the COCG and the Proposals, the Law has been prepared.
The key elements of the Law are:
1. Article 5 - outlines the scope and the component elements of the economic substance test (the “Test”);
a. the Test must be met by a resident company and is met if there takes place in Jersey an adequate level of certain activities relating to direction and management;
b. if there are an adequate number of people working in Jersey;
c. if there is adequate expenditure incurred in Jersey; and
d. if there are adequate physical assets in Jersey and if the resident company conducts Jersey core-income generating activity.
2. Article 8 - outlines the circumstances in which the Comptroller will exchange information obtained in economic substance with other jurisdictions.
3. Article 9 - outlines the sanctions that will be applied where a company is determined to have failed the Test (including, by virtue of Article 19, the ability for the Minister for Treasury and Resources ultimately to request the Royal Court to strike-off a company).
In preparation of the debate on 4 December 2018, the Comptroller will release guidance notes to explain how the Law will operate in practice.
Pinel Advocates’ Comment
Jersey is regarded as fully compliant with the principles of fair taxation by the EU. The Law if implemented will further demonstrate Jersey’s tax transparency.