Look to windward
The winds of change continue to blow through the offshore world. The latest transparency measure affecting offshore trust company businesses (TCBs) addresses concerns raised by the EU Code of Conduct Group (Business Taxation) regarding the economic substance of companies that are tax resident in Jersey and other offshore jurisdictions.
The Taxation (Companies – Economic Substance) (Jersey) Law 2018 (the Law) was adopted with effect from 1 January 2019.1 The Law, like similar legislation in 12 other comparable jurisdictions, including the Cayman Islands, Guernsey and the Isle of Man, introduces substance requirements for certain companies.
The Law applies to Jersey-tax-resident companies with gross income during any financial period starting on or after 1 January 2019 deriving from a ‘relevant activity’. Relevant activities include banking, insurance, fund management, holding companies and intellectual property.2
Companies with scope must satisfy the new substance test by:
- being directed and managed in Jersey;
- conducting core income-generating activities (CIGAs) in Jersey; and
- having adequate people, premises and expenditure in Jersey.
Further to the recent guidance issued by the Crown Dependency governments,3 there remain a number of practical uncertainties, which may become clearer as the guidance is updated periodically. For now, however, the following points are clear:
- All TCBs should already have identified those companies under administration that are within, or potentially within, the scope of the Law and started to review their existing activities with regard to the economic substance test.
- Two of the relevant activities of companies in the private client space most likely to be affected are holding companies and finance and leasing businesses. A company is deemed a holding company if its principal purpose is the holding of controlling interests in other companies and it does not carry out any commercial activity. A company can satisfy the finance and leasing definition by simply providing loan finance to a connected company or beneficiary of a trustee-shareholder for consideration.
- To comply with the direction and management test, there is a need for a majority of board meetings to take place in Jersey with a quorum present at an adequate frequency. The word ‘adequate’ is not defined in the Law. The articles of some companies may need to be amended to ensure that a quorum can be established in Jersey.
- Outsourcing arrangements may need to be reviewed, as any CIGA that generates income in relation to relevant activities must be outsourced to a Jersey party and properly overseen.
- The need for ‘adequate’ people, business premises and expenditure in Jersey is, prima facie, onerous, but in practice there is a recognition that what constitutes ‘adequate’ will depend on the purpose and activities of a company. The requirements of a holding company, for example, may be modest.
- The compliance and reporting obligations of companies within scope to evidence satisfaction of the test are extensive and time-consuming, with a self-assessment exercise and detailed annual declarations in the income tax return. This will require TCBs to amend procedures and update software to comply with these requirements in good time for the early 2019 income tax return filings.
- For any companies within or potentially within scope, external legal or tax advice is likely to be important.
For larger TCBs, the new requirements will likely be consistent with existing practice. By contrast, smaller or less forward-thinking companies may struggle to demonstrate compliance, especially in view of the raft of other tax and regulatory pressures experienced in recent times. Whatever shape the business takes, the need for directors to have requisite knowledge of the requirements is vital, not least as the penalties for non-compliance are up to GBP100,000, and could even include the company being struck off.
In addition, directors will need to make thorough substance reviews (and consequential changes to procedure) an annual process going forward, as companies risk inadvertently falling in and out of scope of the Law by taking seemingly simple steps, such as granting interest-bearing loans or ceasing to carry on commercial activity, thereby satisfying the holding company definition.
In reviewing the effects of the substance legislation and other changes blowing through offshore jurisdictions, our advice is for offshore trustees to invest in a good set of waterproofs, as we all know that, when it rains, it generally pours.
1 For more on Jersey’s economic substance requirements, see Josephine Howe, ‘Structures in the Spotlight’, STEP Journal (Vol27 Iss3), p.37
2 As identified by the OECD Forum on Harmful Tax Practices.
3 The Jersey guidance notes can be found at bit.ly/2DVuoX1.
The same guidance has been issued by the Jersey, Guernsey and Isle of Man governments.
Michael Giraud and Simon Hart, 'Look to windward', STEP Journal (Vol27, Iss5),p.25, June 2019