Jersey puts forth economic substance legislation
Jersey has tabled new laws to address the EU’s concerns over ‘economic substance’, the degree of real business activity carried out by companies registered in the Island.
The new proposed requirements for an economic substance test for Jersey tax-resident entities have been published and are set to come into force on 1 January, subject to States approval.
The reforms include 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.
Last year the Island avoided being placed on a new ‘blacklist’ of non-cooperative jurisdictions drawn up by the EU Code of Conduct Group on business taxation, but was among more than 40 regimes asked to reform their tax structures to ensure compliance with standards, which was dubbed a ‘grey-list’ by some commentators.
The EU wants Jersey to show it has economic substance by ensuring the taxes it collects within the financial services sector were generated through real economic activity in the territory.
In other words, proof that an offshore company is paying taxes in Jersey because it largely does its work and earns its profits in/from Jersey.
External Relations Minister Ian Gorst has said Jersey is not a ‘brass-plate jurisdiction’, an area where companies exist in name only.
The EU list, first published in December 2017, was divided into three sections: cooperative jurisdictions, non-cooperative jurisdictions and jurisdictions that had undertaken to modify their tax regimes to comply with the rules set by the Code of Conduct Group (CCG).
Many of these ‘grey-listed’ jurisdictions operate tax transparency regimes that are at least as good as the white-listed ‘cooperative’ jurisdictions, but fell foul of the CCG’s additional criterion that businesses should only be granted tax residence in a jurisdiction once they demonstrate they have adequate economic substance there.
The blacklist is to be revised at the end of this year, and grey-listed jurisdictions such as Jersey are at risk of being moved onto it if they do not act soon.
Jurisdictions which are blacklisted could face sanctions and risk reputational damage.
Prior to lodging the law, the government worked with industry, as well as the Jersey Financial Services Commission, and in August issued a consultation, which summarised its proposals and requested feedback, prompting 35 responses.
The other Crown Dependencies, Guernsey and the Isle of Man, were also consulted and are due to table similar draft laws soon.
“Affected companies 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,” law firm Ogier said in a briefing.
Jersey and MP clash over beneficial ownership
Dame Margaret Hodge MP has publicly criticised Jersey’s government and finance industry for failing to make its beneficial ownership register public.
In an interview with local news outlet Jersey Evening Post the long-serving UK politician aired concerns that “dirty money” from Russian criminals was being funnelled through Jersey.
Jersey Finance’s deputy chief executive officer Amy Bryant defended the Island’s position, and issued a warning that complete openness came with fresh risks.
“To be clear, Jersey is absolutely committed to the global transparency agenda and stands side by side with the UK in terms of our shared ambitions to fight financial crime and tackle corruption. At the moment, UK law enforcement have access to that information within one hour for urgent requests and 24 hours for all other requests. Suggestions that the general public are in a better position than law enforcement authorities to scrutinise beneficial ownership information are flawed,” she said.
“There are serious concerns that public registers may lead to increased instances of crimes such as identity theft, kidnap and ransom. The UK has itself acknowledged these risks, for instance through the recent introduction of regulations which limit the disclosure of residential addresses of company directors on the Companies House register. Company directors are twice as likely to be victims of fraud.”
But, despite those risks, Bryant said Jersey would review its stance if international expectations changed.
“Should public registers become a global standard, we will revisit our approach. But this is not the case now and is unlikely to be for some time.”