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The Jersey substance proposals, in substance

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The European Commission published an inaugural list of non-cooperative tax jurisdictions, known as the EU blacklist, in December 2017. The crown dependencies of Jersey, Guernsey and the Isle of Man were not on the blacklist. They were, however, included in a group of 13 jurisdictions that committed to addressing concerns relating to economic substance by 2018. Jersey and the other crown dependencies have consulted on the introduction of new substance requirements and, anticipating the enactment of those requirements later this year, it is time to examine their substance.

Jersey has a special relationship with the European Union. It is considered part of the EU for the purpose of trade in goods, but a third country for trade in services, including the financial and legal services that drive its economy. It is not part of the EU tax area, but pursues a cooperative ‘good neighbour’ policy and voluntarily adopts certain EU legislation under third country provision.

As the EU’s focus on harmful tax regimes and offshore structures without real economic activity increases, the latest step in the evolution of Jersey’s international tax policy is to address the Commission’s concerns relating to economic substance, and secure its cooperative status.

Jersey’s Minister for External Relations, Senator Ian Gorst, leads the crown dependencies’ joint consultation on new substance requirements. When I contacted him for comment, he underlined Jersey’s commitment to ensure that regulated financial institutions have real physical presence on the Island. According to Senator Gorst, the consultation on the proposals followed months of preparation, including engagement with industry representatives, Jersey Finance, and the Jersey Financial Services Commission. It also involved dialogue with the EU Code of Conduct Group, OECD officials and the EU Commission, to clarify the EU’s expectations.

What then is the substance of the proposals?

Outline of proposals

The Jersey substance requirements will apply to tax resident companies that carry on banking, insurance, fund management, financing and leasing, headquarters, shipping, and holding company or intellectual property activities. There are three layers to the proposed requirements, as set out below, noting that separate, more onerous requirements will apply to IP income generating companies.

First requirement: direction and management

The first requirement is for tax resident companies to be directed and managed on the Island.

Specifically this requires:

  • board meetings held on the Island at ‘adequate frequencies’;
  • a quorum of directors physically present at the meetings;
  • strategic decisions set at the meetings and recorded;
  • all company records kept on the Island; and
  • directors to have requisite expertise.

In substance, these requirements are similar to the factors considered for the purpose of the central management and control test of tax residency. Many Jersey tax resident companies would meet these requirements already, as a matter of good governance, to ensure that the company is not a tax resident of another country that applies a central management and control test, such as the UK.

The requirements are pertinent, however, if the other country does not have a central management and control test, such as the United States. This issue surfaced in November 2017, when US technology groups were accused of using offshore tax structures without economic substance in Jersey. The Government of Jersey vowed to introduce a legislative substance requirement and this proposal was reinforced by the EU blacklisting process. The requirements will, in effect, ensure that mere incorporation in Jersey is insufficient. The company must be directed and managed in Jersey.

Second requirement: core income generating activities

The next requirement is to have core income generating activities on the Island, carried on by the company itself or by a sub-contracted third party. This includes, for example:

  • banking – providing loans, managing risk and preparing regulatory reports and returns;
  • fund management – taking decisions on investments, calculating risks and preparing reports; and
  • holding companies – meeting filing requirements and conducting relevant activities on the island.

This requirement derives from the OECD BEPS Action 5, relating to work on harmful tax practices, which recommended substantial activity requirements for preferential regimes.

Many of the identified activities resemble strategic decisions made in Jersey to comply with central management and control or effective management tests of tax residency. Others, including the requirement for holding companies to meet filing requirements, do not look onerous. Certain activities, however, may require behavioural change, such as a fund manager that undertakes risk calculation and regulatory reporting in Jersey but delegates investment decisions to other jurisdictions.

The extent of the permission to outsource activities is unclear. Although the BEPS Action 5 report indicates that a significant proportion of the activity must be undertaken by the taxpayer itself, the Jersey consultation suggests that all activities may be undertaken by the company or outsourced.

Third requirement: employees, expenditure and premises

The final requirement is that in Jersey there must be an ‘adequate level’ of:

  • qualified employees;
  • annual expenditure; and
  • physical offices and/or premises.

(Any of which may be sub-contracted to a third party.)

The OECD supports this requirement because ‘core income generating activities presuppose having an adequate number of full-time employees with necessary qualifications and incurring an adequate amount of operating expenditures to undertake such activities’.

The main difficulty will be to decipher what is adequate. At the lower end of the spectrum is a holding company with filing requirements, which may have minimal substance to undertake those activities. At the higher end are fund management and leasing companies, where what is adequate will depend on the scale and complexity of their activities. There is likely to be disagreement between taxpayers, Jersey and the Commission on what is adequate, with little time for taxpayers to prepare and adjust.


Proper enforcement of the requirements is important to the Commission. The Jersey consultation proposed three levels of sanctions:

  • requests for information and filing penalties for incomplete disclosure;
  • financial penalties for failure to meet substance requirements; and
  • striking off from the register for persistent non-compliance.

The level of financial penalties and nature of persistent non-compliance were not discussed. Moreover, the sanctions do not appear to reach the OECD’s recommended standard of ‘rigorous, effective and dissuasive regulatory penalties’ and the denial of tax benefits of the regime where a taxpayer fails to meet the substantial activity requirements.


With implementation imminent, senator Gorst assures me that, through continued positive engagement and the contribution of the financial services industry to the consultation, he is confident that Jersey will meet the requirements of the EU Code of Conduct Group by the end of 2018.

As set out above, however, key details remain open for discussion and a tougher approach to enforcement may be necessary to satisfy the European Commission. Taxpayers, particularly UK multinational groups, may not consider the requirements to be particularly onerous as proposed. However, that could change following discussion with the EU, leaving little time to prepare for implementation. Guidance on the details is awaited eagerly. There is a lot to do in three months.