In 2017, the EU Code of Conduct Group (Business Taxation) (COCG) investigated the tax policies of over 90 countries, which included Jersey. Jersey was identified as a cooperative tax jurisdiction, however, as part of the dialogue with the COCG, the Government of Jersey committed to address concerns raised in relation to a need for businesses to better demonstrate economic substance in the Island.
As a result of the COCG review and subsequent follow up, Jersey implemented new substance requirements under the Taxation (Companies - Economic Substance) (Jersey) Law 2019 (the "Economic Substance Law"). This law applies to all companies which are tax resident in Jersey, with financial periods commencing on or after 1 January 2019.
Jersey tax resident companies which conduct ‘relevant activities’, and which receive a gross income from those activities, are now required to demonstrate that they have sufficient economic substance in the Island.
The first step in complying with the legislation is for Jersey tax resident companies to complete a Relevant Activity Test (RAT), which determines whether or not the company is within the scope of the legislation for any given financial period. The results of the RAT should be documented and presented to the Board of Directors for review and approval.
It should be noted that a RAT is required to be completed annually: activities can change over time and the receipt of a gross income from relevant activities can also vary. For example, a company carrying out holding company activities within the definition of the law may receive a dividend in one financial period, meaning that the company is caught by substance requirements, but receive no dividend, or other income from its activities as a holding company, in the following financial period, therefore falling outside of the scope of the legislation.
All Jersey tax resident companies must now confirm within their annual Jersey Tax Return whether relevant activities have been conducted in the financial period and if so, which relevant activities have been conducted.
In addition to the RAT, companies which are concluded to fall into the scope of the legislation, or indeed companies which are likely to fall into scope in future periods, should complete a Substance Test. The Substance Test should address the key requirements of the Economic Substance Law and its purpose is essentially two fold – firstly to identify any deficiencies or areas of weakness which can then be promptly addressed and secondly to compile the information which will later be required for completion of the Jersey Tax Return.
Once again, the considerations and conclusions of the Substance Test, as well as any action points, should be reviewed and agreed by the Board of Directors.
As previously noted, those companies which are conducting relevant activities and receiving gross income from those activities must now confirm this in the Jersey Tax Return. Those companies which fall within scope must then answer a series of questions and make a number of affirmations in respect of economic substance. These include, but are certainly not limited to, the number of board meetings held in Jersey during the year, the number of full time equivalent people which have worked for the company in Jersey during the period (including time spent by outsourced providers) and the amount of expenditure in the Island.
Compliance with the Economic Substance Law is monitored and enforced by the Jersey Comptroller of Taxes. Failure to comply will result in fines which increase over consecutive periods of non-compliance and which could lead potentially to a non-compliant company being struck off. The details of non-compliant companies will also be disclosed to relevant foreign tax authorities.
The Economic Substance Law applies to financial periods beginning on or after 1 January 2019. Therefore companies which fall within the scope of the legislation, may need to address substance in their tax returns for the tax year ended 31 December 2019.
The 2019 tax returns would normally be required to be submitted by 31 December 2020, however, due to the difficulties some businesses have faced this year as a result of Covid-19, the Jersey Tax Office has extended the deadline for submission to 31 January 2021.
Sanne remains engaged with the relevant authorities, our tax advisors and industry to ensure that we have an effective solution to ensure compliance with the Economic Substance Law.
Our staff have been trained to diligently complete the Relevant Activity Tests and explain the results of these tests to our company boards as well as any follow up actions required. Our team of tax experts have developed an in-house Substance Tool which is designed to assess the key substance requirements, identify any deficiencies and collate the information required for the tax return.
Our Substance Tool compiles the results into a user-friendly report which can be tabled to the Board of Directors and which provides evidence of the work performed. Our teams are already working on the completion of the 2019 returns, with many already having been completed far in advance of deadlines. Should you have any further questions please feel free to contact your normal Sanne contact. We attached for standard fee card for substance services for your information.