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Jersey’s draft substance law offers clues

Threat of substance: Bermuda has made commitments to stay off the EU’s list of noncooperative jurisdictions

Jersey has tabled a draft law to address EU “economic substance” concerns, offering clues as to what may be in the Bermuda Government’s upcoming legislation to tackle the same issue.

Legislators on the Channel Island, one of Britain’s Crown Dependencies, will debate the draft law next week, after months of consultation since the publication of initial proposals in August.

Jersey, like Bermuda, is one of the jurisdictions that has committed to enact new laws by the end of this year to help the EU combat tax avoidance by multinational corporations channelling profits to offshore subsidiaries that lack “economic substance”.

Those who fail to follow through risk being put on the EU’s noncooperative jurisdictions list.

The Draft Taxation (Companies — Economic Substance) Jersey Law 201 broadly follows guidelines in a scoping paper published by the European Council’s Code of Conduct Group.

It spells out requirements to be made of companies to meet the substance standard, how the requirements will be enforced and penalties that would apply to those who fail to meet the standard.

In a report accompanying the legislation, the EU scoping paper is quoted: “The jurisdiction should not facilitate offshore structures or arrangements aimed at attracting profits which do not reflect real economic activity in the jurisdiction.”

It adds: “The long-term effect is to regulate economic activity in Jersey and, through removal from the Companies register, prevent such activity by those who do not have economic substance.”

The types of business targeted mirror those mentioned in the scoping paper and include banking, insurance, fund management, finance and leasing, headquarters business, shipping, holding company business, intellectual property holding business, distribution and service centre business.

Businesses are required to be directed and managed on the island. This includes frequent board meetings taking place there with a quorum of directors physically present and strategic decisions made and recorded there. Company records must be kept in Jersey and directors should have the “necessary knowledge and expertise”.

Another requirement focuses on “core income-generating activities”. Companies are required to have “an adequate number of employees in relation to that activity who are physically present in Jersey” — whether or not those workers are directly employed by the company.

They must also have “adequate” expenditure and physical assets in Jersey.

The comptroller will be empowered to acquire information from companies and then to judge whether they meet the substance test.

Fines of up to £100,000 ($127,700) can be levied and companies will have the opportunity to appeal against such penalties.

If the situation persists, the new law will allow Jersey’s Minister for Treasury and Resources to apply to the court to make an order requiring an offending company to make the necessary changes to meet the substance test. It ultimately allows the minister to apply to the court to wind up the company.

The new legislation will be debated in Jersey’s States Assembly on December 4 and is designed to take effect from January 1 next year.

Whether Jersey’s proposed law will meet the EU’s demand that for “rigorous, effective and dissuasive” regulatory penalties remains to be seen.

In Bermuda, there are more than 12,000 international companies registered, according to the latest Quarterly Bulletin of Statistics published by the Government.

Many of them are subsidiaries of multinational companies whose main operations are onshore and who employ no one, and so would likely fall foul of new substance requirements. Indirectly they create work and revenue for local corporate services providers and law firms, and pay company fees to the Government.

David Burt, the Premier, arrived in Brussels yesterday for talks with European officials. Mr Burt told The Royal Gazette this week that the EU’s substance requirements, with their coming adoption by the OECD’s Forum on Harmful Tax Practices, would become a global standard.

He added that the Government had worked with industry participants on the upcoming legislation and added: “We, as the Bermuda Government, understand what is necessary to remain a blue-chip jurisdiction — and Bermuda will remain a blue-chip jurisdiction.”

To read Jersey’s draft legislation, see the PDF under the heading of “Related Media”