There is no doubt that ‘substance’ is flavour of the month in the offshore jurisdictions. But what is it and how will it impact your offshore company?
To start with it is important to understand that the recent focus on substance was driven by the EU list of non-co-operative jurisdictions for tax purposes published in December 2017*. This identified areas of concern over tax practice and transparency and ‘invited’ relevant jurisdictions to address those deficiencies by 31 December 2018 (or be blacklisted). For the Channel Islands, where transparency and reporting are well established, the area of concern was the “existence of tax regimes that facilitate offshore structures that attract profits without real economic activity” or, in very simple terms, lack of ‘substance’ within the jurisdiction.
In line with the other UK Crown Dependencies, Jersey responded by passing the Draft Taxation (Companies – Economic Substance) (Jersey) Law which came into force on January 1st 2019. This legislation applies to all companies resident in Jersey for tax purposes and seeks to ensure that companies performing various prescribed activities generate an appropriate level of economic activity and can also demonstrate effective governance and oversight in the island. The activities are defined by the OECD’s Forum on Harmful Tax Practices** and include banking, insurance, shipping, fund management, holding companies, headquarters and intellectual property.
The most immediate impact is likely to be on ‘restricted service’ entities – companies which have a registered office address on the island but non-resident Directors and little or no local infrastructure. Where their activities are ‘relevant’ these entities will need to change, close or move onshore (relocation to another offshore location is unlikely to be an option because most have already committed to implement an equivalent substance regime). So one of the first questions to ask is - Do the company’s activities fall within the OECD definitions and if so does it still serve a valuable purpose to you?
There is no need to panic though. If this all seems complicated and potentially expensive, there is help at hand. At VG, we have worked with restricted service entities for many years and we are committed to supporting current and new clients. We understand the importance of protecting your legitimate confidentiality while meeting all relevant laws and regulations. You will, almost certainly, need specific advice if the company falls within the scope of the new law but we do offer a preliminary analysis to help make that determination and if necessary we can help you to build a revised structure that meets substance requirements.
In practice this could mean providing local directors to help demonstrate strategic and management decision-making, organising board meetings, producing accounts, performing administrative functions and retaining records, or a combination of these functions. However, whatever is needed to demonstrate that the economic substance of the company on the island is commensurate with its activities, our commitment is to offer a competitive, fixed fee for those services so that you have certainty and clarity.
Demonstrating substance is particularly problematical for companies holding, or deriving income from intangible assets, such as intellectual property. If you own or control such a company, then you need to take advice without delay. Whilst restructuring may be possible, the timeframe in which this can be implemented is limited.
In conclusion, substance is an important issue if you have an offshore company and you do need to take appropriate advice as soon as practicable.
- The challenge from the EU Code of Conduct Group to all the jurisdictions was to have legislation which was effective from the 1st January 2019.
- Under the new legislation, all companies resident in Jersey for tax purposes are required to prove substance or they could be forced to close or move onshore.
- Demonstrating substance is particularly problematical for companies holding, or deriving income from intangible assets, such as intellectual property.