The Crown dependencies (Guernsey, Jersey and the Isle of Man) have published an expanded version of their joint guidance on legislation introduced with effect from 1 January 2019 requiring resident companies to demonstrate ‘economic substance’ sufficient to comply with EU rules on non-cooperative jurisdictions for tax purposes.
The legislation introduced in each of the jurisdictions addresses concerns identified by the EU’s Code of conduct group on business taxation in 2017 about the Crown dependencies’ lack of legal requirements to ensure entities doing business there could not be used artificially to attract profits that do not meet international standards on ‘economic activities’ and ‘substantial economic presence’.
This updated version supplements initial guidance on ‘key aspects’ issued in November alongside draft legislation in the three territories. It will be further updated to incorporate technical developments arising from continuing discussions with the EU Code of conduct group and the OECD Forum on harmful tax practices, and additional island-specific guidance will follow in due course. The islands’ authorities will also take account of feedback on the guidance from interested parties.
The economic substance requirements apply to all companies tax-resident in the Crown dependencies which have income in accounting periods commencing on or after 1 January 2019 derived from any of the following sectors:
banking;
insurance;
shipping;
fund management (not including collective investment vehicles);
financing and leasing;
headquartering;
distribution and service centres;
operation of holding companies; and
holding intellectual property.
Demonstration of ‘adequate substance’ will generally require companies to:
be directed and managed in the territory;
have an adequate number of qualified employees proportionate to the level of activity carried on in the territory;
have adequate expenditure proportionate to the level of activity carried on in the territory;
have an adequate physical presence in the territory; and
conduct ‘core income-generating activity’ in the territory.
If companies in a relevant sector cannot demonstrate adequate substance in an accounting period, they will be subject to sanctions. These sanctions include exchange of information with competent authorities in other jurisdictions, financial penalties and, ultimately, striking off the companies register.
The Crown dependencies (Guernsey, Jersey and the Isle of Man) have published an expanded version of their joint guidance on legislation introduced with effect from 1 January 2019 requiring resident companies to demonstrate ‘economic substance’ sufficient to comply with EU rules on non-cooperative jurisdictions for tax purposes.
The legislation introduced in each of the jurisdictions addresses concerns identified by the EU’s Code of conduct group on business taxation in 2017 about the Crown dependencies’ lack of legal requirements to ensure entities doing business there could not be used artificially to attract profits that do not meet international standards on ‘economic activities’ and ‘substantial economic presence’.
This updated version supplements initial guidance on ‘key aspects’ issued in November alongside draft legislation in the three territories. It will be further updated to incorporate technical developments arising from continuing discussions with the EU Code of conduct group and the OECD Forum on harmful tax practices, and additional island-specific guidance will follow in due course. The islands’ authorities will also take account of feedback on the guidance from interested parties.
The economic substance requirements apply to all companies tax-resident in the Crown dependencies which have income in accounting periods commencing on or after 1 January 2019 derived from any of the following sectors:
banking;
insurance;
shipping;
fund management (not including collective investment vehicles);
financing and leasing;
headquartering;
distribution and service centres;
operation of holding companies; and
holding intellectual property.
Demonstration of ‘adequate substance’ will generally require companies to:
be directed and managed in the territory;
have an adequate number of qualified employees proportionate to the level of activity carried on in the territory;
have adequate expenditure proportionate to the level of activity carried on in the territory;
have an adequate physical presence in the territory; and
conduct ‘core income-generating activity’ in the territory.
If companies in a relevant sector cannot demonstrate adequate substance in an accounting period, they will be subject to sanctions. These sanctions include exchange of information with competent authorities in other jurisdictions, financial penalties and, ultimately, striking off the companies register.
