Taxation (Companies – Economic Substance) (Jersey) Law (the “EU Substance Law”)
The EU Substance Law has been introduced to meet the requirements of the EU Code of Conduct Group (Business Taxation) in respect of tax transparency, fair taxation and anti-BEPS measures.
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What is the EU Substance Law?
In a nutshell, the EU Substance Law has been designed to address concerns that companies could be used to artificially attract profits that are not commensurate with economic activities and substantial economic presence in Jersey.
Who does it apply to?
The law applies to resident companies.
A resident company is a company that is tax resident in Jersey and that generates gross income which relates to a "relevant activity".
The EU Substance Law defines relevant activities as: banking business, finance and leasing business, fund management business, headquarters business, holding company business, insurance business, intellectual property holding business, shipping business and distribution and service centre business.
What is the Economic Substance Test?
A Jersey tax resident company must pass an economic substance test in relation to any relevant activity carried on by that company.
In order to pass the economic substance test:
the company must be directed and managed in Jersey;
there are an adequate number of employees physically resident in Jersey; there must be adequate expenditure incurred in Jersey; and there must be adequate physical assets in Jersey;
the company must conduct Jersey core-income generating activity (“Income Activities”); and
in the case of an Income Activity carried out for the relevant company by another entity, it is able to monitor and control the carrying out of that activity by the other entity.
States of Jersey Guidance in connection with concept of “Directed & Managed”
The requirement to be directed and managed in the Island is a separate test to the case law “management and control” test used in determining the tax residence of a company.
The directed and managed test is designed to ensure that there are an adequate number of board meetings held and attended in the Island (although it is not necessary for all of those meetings to be held in the Island).
What constitutes an adequate number of meetings in the Island will be dependent on the relevant activities of the company. However, it is generally expected that the majority of board meetings will be held in the Island.
It is also expected that even for companies with a minimal level of activity there will be at least one meeting of its board of directors.
The test also looks to ensure that the associated minutes and records are kept in the Island and that the board is a decision-taking body with the necessary knowledge and experience. In the case where there are corporate directors, the requirements will apply to the individual(s) (officers of the corporate director) actually performing the duties.
States of Jersey Guidance in Connection with Income Activities
Income Activities are the key essential and valuable activities that generate the income of the company.
For each sector the EU Substance Law provides a list of the core activities a company operating in such a sector could carry on. It is not necessary for the company to perform all of the Income Activities listed in order to demonstrate substance.
Consideration must however be given as to whether the appropriate Income Activities are being undertaken in the Island. Some companies may undertake or outsource all or part of an activity outside of the Island. If that activity is not part of the Income Activities of the company this will not affect the company’s ability to meet the substance requirement (for example, back office functions, such as IT support).
In addition, the substance requirement does not preclude companies seeking expert professional advice or engaging the services of specialists in other jurisdictions.
States of Jersey Guidance in connection with Outsourcing
The EU Substance Law does not prohibit a company from outsourcing some or all of its activity. Outsourcing, includes contracting or delegating to third parties or group companies.
If some or all of the Income Activities are outsourced, the company must be able to demonstrate that it has adequate supervision of the outsourced activities and, to meet the substance requirements, that those activities are undertaken in the Island.
Where Income Activities are outsourced, the resources of the service provider in the Island will be taken into consideration when determining whether the people and premises test is met. However, there must be no double counting if the services are provided to more than one company.
The company remains responsible for ensuring accurate information is reported on its return and this will include precise details of the resources employed by its service providers, for example based on the use of timesheets.
States of Jersey Guidance in connection with the concept of “Adequacy”
The EU Substance Law refers to the term “adequate”. However, this term is not defined and therefore has its ordinary meaning. The dictionary definition of “adequate” is: “Enough or satisfactory for a particular purpose”.
What is adequate for each company will be dependent on the particular facts of the company and its business activity. A company will have to ensure it maintains and retains appropriate records to demonstrate the adequacy of the resources utilised and expenditure incurred. Given the stringent regulatory requirements in the Island, which result in a significant overlap with the substance requirements, it is expected that companies carrying on banking, insurance or fund management will already be operating with adequate resources and expenditure.
States of Jersey Guidance in connection with Domestic Reporting
As part of its income tax filing process all companies are require to provide the following details:
business/income types; and
amount and type of gross income.
In addition, companies carrying on relevant activities will also be required to provide:
amount of operating expenditure;
details of premises;
number of (qualified) employees;
confirmation of the Income Activities conducted for each relevant activity;
the financial statements; and
confirmation of whether any Income Activities have been outsourced and if so relevant details
States of Jersey Guidance in connection with Sanctions
The EU Substance Law includes robust and dissuasive sanctions for failure to meet the substance requirements. The sanctions are progressive and include financial penalties, with the ultimate sanction leading to the striking off of the company from the Companies Register.