European Union: Jersey Substance Proposals – The Banking And Finance Perspective

Last Updated: 25 October 2018
Article by Simon Felton
Most Read Contributor in Jersey, September 2019

New proposed requirements for an economic substance test for Jersey tax-resident entities have been published to meet the requirements of the EU Code of Conduct Group.

The reforms published today – and set to come into force on 1 January, subject to States approval – establish new tests for certain tax resident companies carrying on "relevant activities" in respect of demonstrating that they are "directed and managed" in Jersey, and that their "core income generating activities" are undertaken here.

"Relevant activities" for the purposes of this briefing includes:

  • Companies holding a license to carry on deposit taking business under the Banking Business (Jersey) Law 1991 (Banks);
  • Financing and leasing vehicles; and
  • Companies holding a license to carry out insurance business under the Insurance Business (Jersey) Law 1996 (Insurance Businesses).

Please see here for Ogier's briefing applicable to fund managers and here for Ogier's briefing in respect of holding companies.

Our view, set out below, is that specific consideration should be given to outsourcing arrangements, to each company within a relevant structure, and to updating Policies and Procedures. Further consideration also needs to be given in respect of the detailed guidance on the definition of "adequacy" that we anticipate soon, and in respect of companies generating income from intellectual property, which will be subject to more stringent tests.

The "Direction and Management Test"

  • There must be meetings of the Board of Directors in Jersey at adequate frequencies given the level of decision making required;
  • During these meetings, there must be a quorum of the Board of Directors physically present in Jersey;
  • Strategic decisions of the company must be set at meetings of the Board of Directors and the minutes must reflect those decisions;
  • All company records and minutes must be kept in Jersey; and
  • The Board of Directors, as a whole, must have the necessary knowledge and expertise to discharge their duties as a board.

Core Income Generating Activities

Jersey tax resident entities which carry on relevant activities will need to demonstrate that they carry out core income generating activities (CIGA) in Jersey. The nature of the CIGA varies by industry sector and are summarised below.

CIGA for Banks

Companies holding banking business licences will need to demonstrate that the following CIGA are carried out in Jersey:

  • Raising funds;
  • Managing risk;
  • Providing loans, credit or other financial services for customers;
  • Managing regulatory capital; and
  • Preparing regulatory reports and/or returns.

CIGA for Finance and Leasing vehicles

Financing and leasing vehicles will need to demonstrate that the following CIGA take place in Jersey:

  • Agreeing funding terms;
  • Identifying or acquiring assets to be leased (in the case of leasing);
  • Setting the terms and duration of acquiring assets to be leased (in the case of leasing);
  • Monitoring and revising agreements; and
  • Managing any risk.

CIGAs for Insurance Businesses

Companies holding an insurance business licence will need to demonstrate the following CIGA are carried out in Jersey:

  • Predicting and calculating risk;
  • Providing client services.

What is the impact of carrying on a "relevant activity"?

Companies carrying on a "relevant activity" must be able to demonstrate:

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

The new law proposes sanctions for non-compliance to include financial penalties, strike-off from the register of Jersey companies, and reporting to any relevant tax or regulatory authorities.

The Ogier view

  • Affected entities should review outsourcing arrangements (where relevant) in respect of Jersey tax-resident companies that fall within the scope of the new law and whether the third-party service provider agreements in place meet the tests set out therein.
  • It is anticipated that many structures will be compliant with the new requirements already – consideration should still be given to whether amendments and updates are required to any Policies and Procedures as a result of the new law.
  • IP income generating companies (ie tax resident companies with income from intellectual property) will be subject to enhanced requirements, which will be the subject of a separate briefing in due course.
  • We anticipate further detailed guidance on the precise definition of activities to fall within the scope of the law, and the definition of adequacy in respect of employees, expenditure and premises under the "Core Income Generating Activities" test.

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