The law, once approved by the States of Jersey, will establish new tests for companies that are tax resident in Jersey and which perform ‘relevant activities’; essentially, to demonstrate that they are ‘directed and managed’ in, and undertake their ‘core income generating activities (CIGAs) in Jersey.
Sanctions for non-compliance include; financial penalties (which materially increase after the first year of non-compliance), strike-off from the register of Jersey companies and automatic exchange of information with relevant authorities in the EU.
The law sets out nine ‘relevant activities’ which include; banking, financing and leasing, insurance, fund management, shipping, headquarter activities, holding company activities, intellectual property holding activities and distribution and service centre business.
Companies that conduct a ‘relevant activity’ for which they receive gross income must be able to demonstrate that they meet the economic substance tests. The economic substance test requires that the company be (a) directed and managed in Jersey, (b) have Jersey based CIGAs and (c) have adequate staff, expenditure and physical assets in Jersey, each of which are summarised below.
Direction and Management
• The Board of Directors (all of whom must have the necessary knowledge and expertise to discharge their duties as a board) must meet in Jersey at adequate frequencies given the level of decision making required.
• There must be a quorum of the Board of Directors physically present in Jersey.
• The company’s strategic decisions must be set during meetings conducted by the Board of Directors and the minutes must reflect those decisions.
• All company records and minutes must be kept in Jersey.
Relevant Activities and CIGAs
(Note: this list does not cover all nine ‘relevant activities’)
• Fund management: 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 (note that fund vehicles themselves are not in scope of the law).
• Banking: Raising funds, managing risk, providing loans, credit or other financial services for customers, managing regulatory capital, preparing regulatory reports and/or returns.
• Financing and leasing: Agreeing funding terms, identifying or acquiring assets to be leased, setting the terms and duration of acquiring assets to be leased, monitoring and advising agreements and managing any risk.
• Headquarter activities: Taking relevant management decisions, incurring expenses on behalf of group entities and co-ordinating group activities.
• Holding company activities: All activities related to their business (Given the absence of prescribed requirements for this relevant activity, each holding company should to carry out an analysis as to what functions need to be carried out in Jersey, which is likely to vary depending on the function and purpose of the holding company).
Staff, Expenditure and Physical Assets: The Requirements
• An adequate level of (qualified) employees in Jersey, or adequate level of expenditure on outsourcing to service companies in Jersey proportionate to the activities of the company.
• An adequate level of annual expenditure incurred in Jersey, or adequate level of expenditure on outsourcing to service companies in Jersey, proportionate to the activities of the company.
• Adequate physical offices and/or premises in Jersey, or an adequate level of expenditure on outsourcing to service companies in Jersey, for the activities of the company.
The Ogier View
Companies and groups should review each company’s activities to see which (if any) relevant activity is being undertaken which results in gross income and, if this is the case, they should do the following:
• Carry out diligence to check compliance with economic substance tests: being directed and managed in Jersey, have Jersey based CIGAs and have adequate staff, expenditure and physical assets.
• Review outsourcing arrangements (where relevant, but likely to be particularly important to fund managers) to ascertain whether the third-party service provider agreements do not conflict with any of the three substance tests, particularly in relation to provision of office space and appropriate access to sufficiently senior employees.
• Where the relevant company is already compliant with the new requirements, consideration should still be given to whether amendments and updates are required to any of their policies and procedures as a result of the law.
• If carrying out IP income generating companies, analyse the impact of compliance with the enhanced requirements set out in the law for intellectualpropertyholdingcompanies.
Further to the publication of the draft law, detailed guidance has also subsequently been issued by Jersey’s government 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 economic substance test.
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