EU finance ministers have formally approved Jersey's economic substance legislation by removing the jurisdiction from the "grey list" on 12 March 2019 and the Privy Council granted formal approval to the Taxation (Companies - Economic Substance) (Jersey) Law 2019 (the Law) on 13 March 2019. The Law takes effect from 1 January 2019.
The legislation – similar to laws passed in other offshore jurisdictions in response to pressure from the EU Code of Conduct Group - requires certain entities to demonstrate economic substance in the jurisdictions in which they are tax resident.
With the EU's endorsement, Guidance Notes about the practical implications of the legislation are expected shortly.
Our view, in anticipation of those Guidance Notes, is that:
- Fund managers should review outsourcing arrangements in respect of Jersey tax-resident companies that fall within the scope of the new law and consider whether the third-party service provider agreements in place meet the tests set out, particularly in relation to provision of office space and appropriate access to sufficiently senior employees.
- As the legislation also includes "finance and leasing business", consideration should be given to any intra-group financing and any holding company within the group structure with a view to determining whether any entities in addition to the fund manager fall within scope.
- It is anticipated that many structures will be compliant with the new requirements already – consideration should still be given to whether amendments and updates are required to Policies and Procedures as a result of the new law.
- We anticipate further detailed guidance 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 tests.
A quick summary of the legislation is that it includes three key tests.
Fund managers must be directed and managed in Jersey, which requires:
- meetings of the board of directors (all of whom must have the necessary knowledge and expertise to discharge their duties as a board) in Jersey at adequate frequencies, given the level of decision making required;
- a quorum of the Board of Directors to be physically present in Jersey at these meetings;
- minutes recording the strategic decisions of the company made at these meetings; and
- retention of all company records and minutes in Jersey.
Having regard to the level of fund management carried on in Jersey, fund managers must demonstrate adequate activity here:
- have an adequate number of employees;
- demonstrate adequate expenditure in Jersey; and
- have access to adequate "physical assets", or premises, in Jersey.
They must also conduct Core Income Generating Activities, or CIGAs, in Jersey, which includes:
- taking decisions on the holding and selling of investments;
- calculating risks and reserves;
- interest fluctuations and/or hedging positions, and
- preparing relevant regulatory and/or other reports for government authorities and investors.
Consideration will need to be given to ensuring sufficient CIGAs are carried on in Jersey to avoid a letter-box entity characterisation.
Ogier has worked closely with the Jersey government and Taxes Office and is well placed to help Jersey fund managers meet their obligations under the legislation. Please get in touch with us to discuss what you need to do to ensure and demonstrate compliance.