EU substance requirements for Crown Dependencies 9 October 2018

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Lisa Aune

Lead Director, Corporate Services

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Introduction of substance requirements for the Crown Dependencies, prepared by Lisa Aune, Lead Director, Corporate Services. 


On 1 December 1997, the Council of the European Union (EU) adopted a resolution on a Code of Conduct for business taxation with the aim of reducing harmful tax competition practices. In 1998 the EU Code of Conduct Group (Business Taxation) (‘COCG’) was set up to assess tax measures and regimes that fall within the scope of the Code of Conduct for business taxation.

In 2017, the COCG investigated the tax policies of over 90 countries, both within and outside the EU. An in-depth screening process took place as part of the investigation, and jurisdictions were assessed against the following tax good governance criteria:

  1. Tax transparency
  2. Fair taxation
  3. Implementation of anti–BEPS measures

Jersey and Guernsey were both identified as cooperative tax jurisdictions. As part of the dialogue with the COCG, the Governments of Jersey and Guernsey made a number of commitments to address concerns raised in relation to a need for businesses to better demonstrate economic substance in the jurisdictions.

Jersey and Guernsey, along with the other Crown Dependencies, has committed to address these concerns by 31 December 2018. Proposals have been drafted in conjunction with the COCG and a public consultation has now been completed on legislation which will require entities undertaking specific income generating activities, to demonstrate that they have sufficient economic substance. 

Jersey, Guernsey and the Isle of Man are working closely together to introduce consistent proposals.

The key features of the Jersey/Guernsey proposals

The proposals set out in the consultation document, state that all Jersey and Guernsey companies conducting ‘relevant activities’ will be required to demonstrate that there is:

  • An adequate level of (qualified) employees in Jersey/Guernsey, or adequate level of expenditure on outsourcing to service provider companies in Jersey/Guernsey, proportionate to the activities of the company;
  • An adequate level of annual expenditure incurred in Jersey/Guernsey, or adequate level of expenditure on outsourcing to service provider companies in Jersey/Guernsey, proportionate to the activities of the company; and
  • Adequate physical offices and/or premises in Jersey/Guernsey, or adequate level of expenditure on outsourcing to service provider companies in Jersey/Guernsey, for the activities of the company.

In addition the proposals state that:

  • Meetings of the Board of Directors will need to be held in Jersey/Guernsey at adequate frequencies which will be dependent on the level of decision making required;
  • A quorum of the Board of Directors will need to be physically present in Jersey/Guernsey;
  • Strategic decisions of the company must be set at meetings of the Board of Directors and the minutes must adequately reflect those decisions and the rationale behind them;
  • All company records and minutes must be kept in Jersey/Guernsey; and
  • The Board of Directors, as a whole, must have the necessary knowledge and expertise to discharge their duties as a board.

Relevant activities have been identified as the following:

  • Banking
  • Insurance
  • Fund Management
  • Financing & Leasing
  • Headquarters
  • Shipping
  • Holding Company Activities
  • Intellectual Property

The ways in which companies demonstrate their economic substance in the Island will vary depending on the type of relevant activities they conduct.  For example a Fund Manager in Jersey/Guernsey may be required to evidence that the following activities are undertaken in Jersey/Guernsey:

  • Decisions with regards to the holding and selling of investments
  • Calculating risks and reserves
  • Taking decisions on currency, interest fluctuations and/or hedging positions
  • Preparing relevant regulatory and/or other reports for Government authorities and investors

By contrast, companies which purely hold equity investments will need to confirm they meet all applicable corporate law and tax filing requirements and where holding companies also conduct other ‘relevant activities’ they will additionally be subject to the requirements associated with that activity.

Substance requirements for Collective Investment Vehicles (CIVs) / Funds structured as companies in the Island are expected to be reduced as CIVs differ from other companies with geographically mobile income. The reduced substance requirements will be aligned with the regulatory framework in Jersey/Guernsey. Further information is expected to be released in due course.

The consultation document also sets out Jersey and Guernsey’s plan to work with the EU to ensure that legal and beneficial ownership information in relation to companies can be appropriately shared in a real-time or close to real time manner with tax and law enforcement authorities on a reciprocal basis.

In addition, Jersey and Guernsey plan to introduce legislation for mandatory disclosure of certain cross border transactions by 31 December 2019.

Implementation of the proposals

It is anticipated that the outlined proposals will apply for the 2019 tax year of assessment. It is further anticipated that the new requirements will primarily be introduced through the Income Tax Law, with the Comptroller overseeing compliance.

The 2019 corporate income tax return process will be enhanced to enable companies to report relevant information electronically and facilitate the Comptroller’s ability to oversee compliance. Companies carrying on relevant activities will be required to disclose the following in their tax returns:

  • Business activity;
  • Amount and type of gross income;
  • Amount and type of expenses and assets;
  • Premises; and
  • Number of employees, specifying the number of full time (equivalent) employees.


It is expected that the Comptroller will enforce the new substance requirements via a formal hierarchy of sanctions for non-compliant companies with increasing severity of sanctions imposed for persistent non-compliance.

SANNE comments

Whilst the proposals outlined above are significant, we believe that the majority of administered companies’ currently undertake practices in line with the proposals and it will be a matter of better evidencing the economic substance which already exists as opposed to overhauling the way in which companies conduct business in the Channel Islands. 

That said, there are some critical details which are still unclear such as what will constitute ‘adequate levels of staffing and expenditure’ and how we evidence that the Board has ‘sufficient knowledge and expertise’. The Consultation Period closed on 31 August 2018 and we expect further clarity on these points to be released in the near future.

SANNE will be staying close to this matter and will work with our tax advisors over the coming weeks to ensure that an effective solution is offered to clients to ensure compliance with these new requirements in advance of the year-end deadline. A further communication will be made once the final legislation and accompanying guidance has been released.

Should you have any further questions please feel free to contact your SANNE contact. Click here to view the team