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20 December 2018
New proposed requirements for an economic substance test for Jersey tax-resident entities have been published to meet the requirements of the EU Code of Conduct Group.
The reforms are set to come into force on 1 January 2019, subject to approval by the States of Jersey, and establish new tests for certain tax-resident companies carrying on relevant activities in respect of demonstrating that they are directed and managed in Jersey, and that their core income generating activities are undertaken here.
'Relevant activities' for the purposes of this article include:
Specific consideration should be given to outsourcing arrangements, to each company within a relevant structure and to updating policies and procedures. Further consideration also needs to be given in respect of the detailed guidance on the definition of 'adequacy' that is anticipated soon, and in respect of companies generating income from intellectual property, which will be subject to more stringent tests.
Jersey tax-resident entities must be directed and managed in Jersey, as follows:
Jersey tax-resident entities which carry on relevant activities will need to demonstrate that they carry out core income generating activities (CIGAs) in Jersey. The nature of the CIGA varies by industry sector, as summarised below.
CIGAs for banks
Companies holding banking business licences will need to demonstrate that the following CIGAs are carried out in Jersey:
CIGAs for finance and leasing vehicles
Financing and leasing vehicles will need to demonstrate that the following CIGAs take place in Jersey:
CIGAs for insurance businesses
Companies holding an insurance business licence will need to demonstrate the following CIGAs are carried out in Jersey:
Companies carrying on a relevant activity must be able to demonstrate:
The new law proposes sanctions for non-compliance to include financial penalties, strike-off from the register of Jersey companies and reporting to any relevant tax or regulatory authorities.
Affected entities should review outsourcing arrangements (where relevant) in respect of Jersey tax-resident companies that fall within the scope of the new law and whether the third-party service provider agreements in place meet the tests set out therein.
It is anticipated that many structures will be compliant with the new requirements already – consideration should still be given to whether any policies and procedures must be amended or updated as a result of the new law.
IP income generating companies (ie, tax-resident companies with income from intellectual property) will be subject to enhanced requirements.
Although initial high-level guidance has been jointly published by the governments of Jersey, Guernsey and the Isle of Man, it is expected that further detailed guidance notes on the precise definition of activities to fall within the scope of the law and the definition of adequacy in respect of employees, expenditure and premises under the CIGA test will be published in due course.
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