A Substantial Undertaking
Originally published in Contact, November/December 2018 Issue
At the time of writing, one of the most significant matters facing the Channel Islands investment management sector (and in fact, offshore business as a whole) is the question of economic substance for companies that are tax resident in the Islands. The challenge facing this writer is that this is such a fast developing issue that circumstances and information available will have changed enormously by the time of publication. Proposals are due to be lodged for legislation in Jersey by 23 October 2018 and in both jurisdictions it is anticipated that changes to corporate tax residency rules will be in place with effect from 1 January 2019.
Some things however are already determined: in response to requests from the EU Code of Conduct Group (Business Taxation) (COCG) and with the threat of being placed on an EU blacklist as a non-co-operating jurisdiction, Guernsey and Jersey gave high level government commitments to make the necessary changes to ensure companies have sufficient economic substance where appropriate, to be reflected in their respective legal and regulatory frameworks and introduce additional accounting and tax reporting obligations where required. The commitments included addressing the COCG’s concerns by 31 December 2018.
The ambition reflected here should not be underestimated. An enormous amount of government resource is being committed, together with support from the private sector. It involves diplomatic engagement with the EU, accelerated legislative change and the development of reporting and assessment procedures all in an extraordinarily short time frame, which we suggest is unprecedented. It will also involve a considerable impact on both the conduct of business activities in the Island and how they are reported – businesses should be considering now the implementation requirements involved.
The Channel Islands have a thriving investment management sector, managing the wealth of individuals and operating pooled investment vehicles. The proposals identify a number of “relevant activities” in respect of which substance requirements will be imposed. In the investment management sector, the relevant activities of fund management, holding company activities and financing and leasing are likely to have the widest application. The proposals recognise that collective investment vehicle activities will be subject to reduced substance requirements as they differ from other companies with geographically mobile income.
The first requirement for substance relates to demonstrating that the company is directed and managed in the Island. This is something that all participants in the financial services sector in the Channel Islands will be familiar with. The proposals are likely to contain a bit more prescription as to what requirements must be met with regard to the proper direction and management: sufficiently frequent board meetings in the Island of directors who have the necessary knowledge and expertise , with a quorum physically present in the Island at which strategic decisions are set and minutes made reflecting those decisions. In addition all company records and minutes must be kept in the Island.
The second requirement is that the core income generating activities must be carried out in the Island. For fund management companies, core income generating activities may include taking decisions on holding and selling of investments, calculating risks and reserves, taking decisions on currency, interest fluctuations and/or hedging positions, preparing relevant regulatory and/or other reports for government authorities and investors. Finally such companies must also demonstrate that there is an adequate level of suitably qualified employees in the Island, an adequate level of expenditure incurred in the Island proportionate to the activities of the company and adequate physical offices and/or premises in the Island. It is anticipated that these three tests may be satisfied by an adequate level of expenditure on outsourcing to service companies in the Island where the service companies themselves satisfy the tests of suitably qualified employees, physical premises and local expenditure.