Introduction

Family office structures which include Jersey tax-resident companies must consider whether those companies fall within the scope of the Taxation (Companies – Economic Substance) (Jersey) Law 2019 (the Economic Substance Law).

The Economic Substance Law came into effect on 1 January 2019 and applies to certain Jersey tax-resident companies which conduct one or more relevant activities. The law was introduced in order to comply with the requirements of the EU Code of Conduct Group on Business Taxation for the purpose of demonstrating that the income generated by Jersey companies which carry on relevant activities are commensurate with their economic activities and substantial economic presence in Jersey. Accordingly, companies which generate no gross income from their activities or which are not tax-resident in Jersey fall outside the scope of the legislation.

Activities of relevance for family offices

While nine separate activities are identified in the Economic Substance Law, the most relevant of these in the context of family offices are:

  • holding company business – where a company has as its primary function the acquisition of, or holding of controlling interests in, other companies and does not otherwise conduct a commercial activity. This will typically mean that companies holding investment portfolios should not be caught by the law;
  • finance and leasing business – the business of providing credit facilities of any kind for consideration. In this regard, particular consideration should also be given to whether there is any intra-group lending by the company;
  • fund management business – where a company acts as the manager, investment manager, managing trustee or general partner of an investment fund (even if the company is exempt from requiring a regulatory licence in order to conduct such business under Jersey's financial services legislation);
  • distribution and service centre business – where a company provides services to foreign connected persons in connection with the business. The company may be caught if, for example, it provides centralised administrative, accounting or other support to group companies; and
  • headquarters business – where a company provides services such as providing senior management, assuming or controlling risk for activities carried out by connected persons or providing substantive advice in connection with such risks.

Three-stage test

The Economic Substance Law sets out a three-stage test which must be satisfied by companies which are within the scope of the law:

  • the company must be directed and managed in Jersey in relation to the relevant activity;
  • having regard to the level of relevant activity carried on in Jersey, the company must have:
    • an adequate number of employees physically present in Jersey;
    • adequate expenditure in Jersey; and
    • adequate physical assets in Jersey; and
  • all of the company's core income-generating activities must be carried out in Jersey.

Penalties for non-compliance

Family offices should focus their attention on compliance with the three-stage test because a number of progressively punitive penalties are available should the Comptroller of Taxes determine that a company does not satisfy the test. These include:

  • financial penalties;
  • strike-off from the register of Jersey companies; and
  • the exchange of information with any relevant tax or regulatory authorities.

Authorised persons may also request, examine and make copies of any business document for the purpose of investigating compliance with the Economic Substance Law.

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