The government of Jersey has now published draft legislation introducing the changes sought and intended to apply for companies with accounting periods beginning on or after 1 January 2019.
The draft provides that a tax resident company carrying on any relevant activity must satisfy a new economic substance test.
The definitions of these activities largely use existing regulatory definitions. Finance and leasing means the business of providing credit facilities of any kind for consideration, but does not include leases granting exclusive rights to occupy land. This recognises real estate income is not the target of these provisions given the prevalence of local withholding taxes. Holding companies are defined as holders of subsidiaries as defined in Jersey company law.
A company is not required to meet the economic substance test if it has no gross income in relation to a relevant activity carried on by it.
In the case of a high-risk IP company, defined as any company carrying on an intellectual property holding business (a) which did not create the intellectual property which it holds, acquired it from a connected person or in consideration for funding R&D elsewhere, and which licences to connected persons or (b) that does not carry on research and development, branding or distribution as part of its Jersey core-income generating activities, there is a rebuttable presumption that the economic substance test is failed.
In other cases, the Comptroller may conclude that the economic substance test has not been met. Where such a determination is made, and in the case of high risk IP companies, whether or not a determination is made, the Comptroller must exchange the information provided by the company, either on its tax return or as a result of enquiries, with the competent authority of the European Union member state in which resides a holding body, the ultimate holding body, and an ultimate beneficial owner (owning 25% or more of the share capital) of the resident company. If the resident company is incorporated outside Jersey, the provision of information is to the competent authority of the member state in which the resident company is incorporated.
There are also financial penalties if the Comptroller determines a failure to meet the economic substance test. In the first financial period up to £10,000, in the second period up to £100,000. After the first penalty, the Comptroller may provide the Minister for Treasury and Resources with a report on the company and the Minister may apply to the court for an order of winding up. There is provision for appeal against penalty determinations.
Guernsey is expected to produce similar draft legislation shortly.
Companies tax resident in Jersey and Guernsey will need to consider the draft legislation and how it will apply in their circumstances, bearing in mind the intended application of the new rules from 1 January 2019. Guidance notes, given some statutory force by the draft legislation, are expected shortly.
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