Companies resident for tax purposes in Guernsey, the Isle of Man or Jersey are subject to economic substance requirements if they have income from a relevant business sector in any accounting period commencing on or after 1 January 2019.
Legislation was implemented to meet concerns raised by the EU Code of Conduct Group on Business Taxation that the corporate tax systems of these Islands could be used to attract profits which are not commensurate with real economic substance. The EU has recently confirmed that the Crown Dependencies are no longer on the "grey list" of non-cooperative jurisdictions.
The economic substance requirements affect businesses such as banking, insurance, shipping, distribution and service centres and fund management, as well as pure holding companies. Companies are required to have adequate physical presence in the Island, as well as to conduct their core income-generating activity (CIGA) (which varies by business sector) in the Island. Pure holding companies have lower substance requirements to meet than companies in other business sectors whereas IP companies have enhanced substance requirements.
Where the CIGA involves making relevant decisions, then the majority of those making the decisions must be present in the Island when the decision is made otherwise the decision will not be considered to be made in the Island.
Guidance on the key aspects of the substance requirements was published in 2018. The three islands have now published further joint guidance explaining the sector specific requirements. For example, for fund management the examples on pages 14 and 15 show the importance of an Island-based fund manager continuing to make overarching strategic decisions and overseeing any sub-manager’s activities. It is not enough for a fund manager to hold board meetings on the Island - the company must be able to assess and react on behalf of the fund to risks and opportunities as they arise.
The guidance is described as "work in progress" and, in particular, further guidance will follow for some sectors (such as insurance and IP companies) and on the reduced substance requirements for pure holding companies.
If a company in a relevant sector cannot demonstrate that it has adequate substance in the Island, it will be subject to sanctions such as financial penalties and, ultimately, to striking off the companies register. Affected companies will need to assess the impact of the legislation and the guidance, and make changes as required, to ensure compliance and avoid sanctions.
Where the CIGA involves making relevant decisions, then the majority of those making the decisions must be present in the island when the decision is made, otherwise the decision will not be considered to be made in the Island.