EU proposal of substance requirements for zero tax territories

Proposed introduction of substance requirements for certain companies in the crown dependencies

In response to pressure from the EU, Jersey, Guernsey and the Isle of Man have published consultations on the introduction of substance requirements for certain companies that are tax resident in those jurisdictions. Recently issued guidelines extend the scope of the EU’s Code of Conduct for Business Taxation with respect to companies located in zero tax territories. The proposals broadly provide that a company resident in one of Jersey, Guernsey or Isle of Man, which carries on “relevant activities”, will be expected to meet substance requirements that are commensurate with the activities carried on, and income generated, in that jurisdiction.

It is proposed that there will be reporting requirements imposed, via the company’s tax returns. Insufficient substance could result in penalties, ranging from fines to the striking off of the company.

The companies to which undertake “relevant activities” include those in the following sectors: banking, insurance, fund management, finance and leasing, headquarters activities, shipping, holding company activities and intellectual property.

In order to meet the substance requirements, it is proposed that companies would need to show how they carry on the “core income-generating activities” in the territory, i.e. they will have to demonstrate that there is:

  • An adequate level of (qualified) employees in the jurisdiction proportionate to the activities of the company
  • An adequate level of annual expenditure incurred in the jurisdiction proportionate to the activities of the company, and
  • Adequate physical offices and/or premises in the jurisdiction for the activities of the company.

In addition, companies would need to demonstrate that the company is “directed and managed” in the jurisdiction, as follows:

  • There must be meetings of the Board of directors in the jurisdictions, at adequate frequencies given the level of decision making required;
  • For these meetings, a quorum of directors must be present in the jurisdiction;
  • Strategic decisions of the company must be set at meetings of the Board and the minutes should reflect those decisions;
  • All company records and minutes should be retained in the jurisdiction;
  • The members of the Board should have the necessary knowledge and expertise to discharge their duties as a board.

These tests can be met through outsourcing to other companies, but only where that other company is conducting its activity in the same territory. However, companies that outsource activities to providers in other jurisdictions may come under enquiry.

It is proposed that the new measures, as they relate to Jersey, Gurney and Isle of Man will be finalised by 31 December 2018 and will apply for 2019 and subsequent years.

However, it is important to note that this process applies to other jurisdictions as well, including the Cayman Islands, British Virgin Islands and the UAE, and is something to consider when using any offshore jurisdiction.

For more information on this and other services Osiris can provide to help ensure that your company meets the necessary substance requirements, please contact Miles Walton or your usual Osiris contact.