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21 September 2017
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The principal Jersey tax statute is the Income Tax (Jersey) Law 1961, which determines the rate of Jersey income tax payable by Jersey companies.
For the purposes of the Income Tax Law, a company is Jersey tax resident if it is incorporated in Jersey or – if incorporated elsewhere – if its business is managed and controlled in Jersey. The general rate of tax is 0%, subject to some local exceptions.
Notwithstanding the general rule that Jersey-incorporated companies are treated as Jersey tax resident, the Income Tax Law states that a Jersey-incorporated company may be regarded as exclusively tax resident elsewhere if:
For Jersey and English purposes, tax residency is broadly determined by reference to where an entity's central management and control abides, as this is where the high-level strategic decisions of the company are made. The principles of management and control in Jersey are the same as those in the United Kingdom, so English case law is relevant. However, as outlined below, there are other factors which influence where management and control is deemed to be located.
The English case Wood v Holden ( EWCA Civ 26) confirmed that all board meetings should be held, and all decisions and resolutions should be made, in Jersey to ensure that a Jersey entity's tax residency remains there as a matter of English tax law.
In the English case Laerstate BV v HMRC ( UKFTT 209) the First Tier Tribunal held that company residency cannot be established merely on the basis of the location of board meetings. The tribunal found that a company should be resident in the place where it had been doing all of its real business, including contract negotiations and obtaining advice. In Laerstate the tribunal found that this was within the United Kingdom, which made the company tax resident there. The following guidelines were raised:
The recent case of Development Securities (No 9) Ltd v HMRC ( UKFTT 0565 (TC)) – a first-instance decision of the First Tier Tribunal which may be appealed – sounds a further note of caution with regard to interaction between offshore subsidiaries and UK parent companies and the role of directors.
Development Securities (No 9) Ltd (DSL) set up three Jersey subsidiaries to participate in a tax planning arrangement on the recommendation of a 'big four' accounting firm.
The Jersey companies were to acquire assets at more than their market value via the use of call options which could be exercised once certain conditions were met. This structure was intended to increase the capital losses that were available to the DSL group while protecting against allegations that the transactions were preordained.
At face value the acquisitions did not make commercial sense for the Jersey subsidiaries. However, they did make commercial sense for DSL on the basis that any capital loss – when set off against any capital gain – could be deducted from the group's tax liabilities, reducing the amount that DSL would have to pay in corporation tax.
Shortly after the acquisitions were completed, each Jersey subsidiary would become a UK tax resident company by a resolution of its directors. In theory, each such tax migration would avoid the accrual of stamp duty or corporation tax and reduce the overall level of tax that each company would have to pay as a result of the capital losses.
Correspondence and manuscript notes on the Jersey subsidiaries' board minutes referred to an instruction from DSL rather than advice or a recommendation from DSL or another adviser. The tribunal found that the Jersey subsidiaries were following DSL's orders and were held to be managed and controlled from the United Kingdom and not from Jersey.
The tribunal made reference to Wood v Holden, but this case was distinguished by the following:
The Development Securities case again highlights the importance of the safeguards that Jersey service providers and advisers are used to ensuring are in place, including:
However, although it is an extreme case, it highlights several other considerations:
As a result, companies should:
The case also serves as a timely reminder that Jersey resident directors cannot provide a purely 'administrative' service for the benefit of the parent owner; directors carry all of the duties and responsibilities of a director generally and, as such, they must ensure that they have sufficient knowledge and understanding of the company's business.
For further information on this topic please contact Raulin Amy or Simon Felton at Ogier by telephone (+44 1534 514 000) or email (firstname.lastname@example.org or email@example.com). The Ogier website can be accessed at www.ogier.com.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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