Jersey is a popular place to start an asset holding because its corporate law is modern, flexible and modeled on English company law.
Jersey introduced the Taxation (Companies – Economic Substance) (Jersey) Law 2019 (the Substance law) to require that Jersey companies that carry out certain activities (so-called relevant activities) have economic substance in Jersey.
This guide contains some frequently asked questions or FAQs about using the application Substance law.
For a general overview of the economic substance requirements in each of our offshore jurisdictions (BVI, Cayman, Guernsey and Jersey) please read our factsheet available on this page.
Why was the substance law introduced?
As part of its Erosion and Profit Sharing (or BEPS) initiative, the European Union called for an offshore financial center (OFCs) like Jersey to introduce legislation to ensure that an OFC does not allow structures that generate profits that do not correspond to real economic activity in that OFC.
To avoid being blacklisted by the European Union of non-compliant jurisdictions, Jersey has the
Substance law which came into force on January 1, 2019.
The Substance law is supported by guidance (the
Orientation aid) published by the Jersey Comptroller of Revenue (the Auditor), which is revised regularly.
Where can I find the substance law and the guidelines?
You will find a copy of:
When does the substance law apply?
As explained in our other guides in this series, the
Substance law applies where:
- a tax resident company;
- carries out a relevant activity in a financial year; and
- earns a gross income from this corresponding activity.
What is a taxable company?
A tax resident company is a company incorporated under the Income Tax (Jersey) Law 1961 (the
Tax law).
Under the Tax law:
- a Jersey company is deemed to be taxable in Jersey unless:
- its business is centrally administered and controlled outside of Jersey in a jurisdiction where the maximum rate that a company can be taxed on any portion of its income is 10% or more; and
- the company is resident for tax purposes in this legal system; and
- a foreign corporation will be considered resident for tax in Jersey if its business is conducted and controlled in Jersey.
Which activities are relevant?
The related activities included in the Substance law are:
- Banking business;
- Sales and Service Center business (our guide to this relevant activity can be found here);
- Fund management business (our guide to this relevant activity can be found here);
- Finance and leasing business (our guide to this relevant activity can be found here);
- Headquarters business (our guide to this relevant activity can be found here);
- Holding company (our guide to this relevant activity can be found here);
- Ownership of intellectual property;
- Insurance business; and
- Shipping business.
What is a financial period?
For the purpose of Substance law, a financial year is a period of up to 18 months for which the annual financial statements of a company are prepared.
What are the economic substance requirements?
In which the Substance law applies to a company, the company must meet the following requirements for economic substance:
- directed and administered from Jersey;
- (taking into account the level of activity she performs):
- have a reasonable number of employees physically present in Jersey (whether employed there or by someone else);
- spend reasonable expenses in Jersey; and
- have sufficient physical assets in Jersey;
- continue all of its core income generation activities (CIGAs) on Jersey; and
- (if one of its CIGAs is carried out for you in Jersey by another person (such as a corporate service provider)) be able to monitor and control the implementation of these CIGAs in Jersey.
What is a Core Income Generating Activity or CIGA?
The essence of a CIGA is that it is an important essential and valuable activity that generates a company’s income.
The Substance law sets CIGAs for each relevant activity. A company does not have to carry out all of the CIGAs that are in Substance law for a corresponding activity.
Further information on the CIGA for:
- You can find sales and service center business here;
- Fund management business can be found here;
- You can find financing and leasing business here;
- You can find the headquarters business here; and
- You can find the holding business here.
What does appropriate mean?
Although the Substance law does not define what is meant by appropriate, Orientation aid states that it should be given its ordinary meaning of sufficient or satisfactory for a particular purpose.
The Orientation aid adds:
- what is appropriate for a company depends on the particular circumstances of the company and its business operations; and
- a company should keep appropriate records to demonstrate adequacy.
Are there exceptions to the substance law?
The Substance law does not apply to a company if, in a company’s financial year:
- does not carry out any relevant activity;
- carries out a corresponding activity, but does not generate any gross income from it; or
- is not a taxable company.
In addition, currently the Substance law does not apply to trusts, foundations or partnerships, but the European Union requires that Substance law apply for partnerships by July 1, 2021.
Does the Substance Act apply to non-Jersey companies?
The Substance law applies to any business that is resident in Jersey for tax purposes, regardless of where the business is incorporated. As mentioned above, under Tax law, a foreign corporation is considered resident for tax purposes in Jersey if it conducts and controls its business in Jersey.
Does the Substance Act apply to a company that is being liquidated?
The Orientation aid states that if a company in liquidation continues to carry out a relevant activity from which it generates gross income, it must meet the economic substance requirements for that relevant activity.
The Orientation aid adds that upon the appointment of a liquidator, the powers of the directors lapse:
- the company’s liquidator must provide evidence that the company is managed and administered in Jersey; and
- for the purposes of directed and managed needs, the liquidator is the board of directors.
What happens if a company carries out more than one relevant activity?
If a company carries out more than one relevant activity in a accounting period from which it generates gross income, it must meet the economic substance requirements for each relevant activity during this accounting period.
Does the Substance Act apply if a company only carries out a relevant activity for part of a financial year?
If a company only carries out a relevant activity during part of a accounting period from which it generates gross income, it must nevertheless meet the economic substance requirements for this relevant activity during this accounting period.
How is compliance with the economic material requirements assessed?
In order for the comptroller to determine whether a company has met the economic substance requirements for a relevant activity during a financial year, the company must submit an annual tax return online.
Some of the information a company must submit on its tax return includes:
- any relevant activity carried out by her;
- his gross income from any relevant activity;
- the operating expenses incurred for each relevant activity;
- its CIGAs for each relevant activity;
- Details of its Jersey premises;
- the number of board meetings held that were quorate in Jersey; and
- the number of its skilled workers in Jersey.
A copy of the company’s annual financial statements for the financial year concerned must be attached to a tax return.
What happens if a company does not meet the economic substance requirements?
If a company does not meet the economic substance requirements for a relevant activity it carries out in a financial year, the comptroller may be fined up to:
- £ 10,000 for the first financial period; and
- £ 100,000 for each subsequent financial period,
in which the company does not meet these economic substance requirements.
If a company continues to fail to meet economic substance requirements, it could result in the company’s name being removed (or removed) from the Commercial Register in Jersey.
The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.