Jersey is first jurisdiction to publish ‘economic substance’ legislation

Jersey’s government has tabled legislation designed to satisfy the EU Code of Conduct Group (Business Taxation)’s ‘economic substance’ test, a vital part of the European Union’s criteria for placing third countries on its blacklist of jurisdictions that do not practice ‘fair taxation’.

The EU list, first published in December 2017, was divided into three sections: cooperative jurisdictions, non-cooperative jurisdictions and jurisdictions that had undertaken to modify their tax regimes to comply with the rules set by the Code of Conduct Group (CCG).

Many of these ‘grey-listed’ jurisdictions operate tax transparency regimes that are at least as good as the white-listed ‘cooperative’ jurisdictions, but fell foul of the CCG’s additional criterion that businesses should only be granted tax residence in a jurisdiction once they demonstrate they have adequate economic substance there.

The blacklist is to be revised at the end of this year, and grey-listed jurisdictions such as Jersey are at risk of being moved onto it if they do not act soon.

The Jersey government conducted a consultation in August 2018 summarising some outline proposals and seeking feedback from interested parties. It received 35 responses. The outcome is the draft Taxation Companies Economic Substance Law, now placed before Jersey’s legislature, the States Assembly.

The law establishes new tests for certain tax-resident companies carrying on ‘relevant activities’ to demonstrate that they are ‘directed and managed’ in Jersey, and that their ‘core income generating activities’ are undertaken in Jersey, said law firm Ogier. Enactment is expected to take place before the end of this year, and the law will come into force on 1 January.

The draft has been developed in close consultation with the governments of the other Crown Dependencies, which will be tabling similar proposals, said Jersey’s Minister for External Relations, Ian Gorst.

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