This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our PRIVACY POLICY for more information on the cookies we use and how to delete or block them.
  • Jersey Budget - Substance Requirements

Jersey Budget - Substance Requirements

27 November 2018

As anticipated, as part of the 2019 Jersey Budget, new ‘economic substance’ rules are being introduced which will apply to certain companies tax resident in Jersey effective   from January 2019.

These new rules were developed in close cooperation with the EU Code of Conduct Group (Business Taxation) and aim to address the EU’s concerns that profits made in Jersey may not be supported by the necessary economic substance.

The draft law sets out a series of tests to assist taxpayers determine whether the new rules will apply to them and if so, what the requirements are. Notably, where a company fails to meet the substance requirements the penalties arising may be significant.

STAGE ONE – Companies carrying on the following “relevant activities” will fall within the scope of the economic substance rules

  • banking
  • insurance
  • fund management
  • finance and leasing
  • headquarters’ activities
  • shipping
  • holding company activities
  • intellectual property and
  • distribution and service centre business.   

Collective investment vehicles, which were included within the consultation paper issued by States of Jersey in August 2018, are not specifically referred to in draft the draft law.

STAGE TWO – a company undertaking

“relevant activities” as above, will be required to demonstrate it has sufficient substance bysatisfying the tests below.

a) the company is directed and managed in Jersey in relation to that activity;

b) having regard to the level of relevant activity carried on in Jersey

i. there are an adequate number of employees in relation to that activity who are physically present in Jersey (whether or not employed by the resident company or by another entity and whether on temporary or long-term contracts),

ii. there is adequate expenditure incurred in Jersey, and

iii. there are adequate physical assets in Jersey;

c. the company conducts Jersey core-income generating activity (“CIGA”); and

d. in the case of Jersey CIGA carried out for the relevant company by another entity, the company is able to able to monitor and control the carrying out of that activity by the other entity.

The CIGA’s may include the following for each relevant activity:

Banking - raising funds, managing risk including credit, taking hedging positions, providing loans, credit or other financial services for customers, managing capital and preparing reports and returns to the Jersey Financial Services Commission or any body or entity with equivalent functions relating to the supervision or regulation of such business

Insurance - predicting and calculating risk, insuring or re-insuring against risk, providing client services

Fund Management - taking decisions on the holding and selling of investments, calculating risks and reserves, taking decisions on currency or interest fluctuations and hedging positions preparing reports and returns to the Jersey Financial Services Commission or any body or entity with equivalent functions relating to the supervision or regulation of such business.

Financing and leasing - agreeing funding terms, identifying or acquiring assets to be leased (in the case of leasing), setting the terms and duration of any financing or leasing, monitoring and revising agreements, managing any risk

Headquarters - taking relevant management decisions, incurring expenses on behalf of group entities, co-ordinating group activities

Shipping - managing the crew (including hiring, paying and overseeing crew members), overhauling and maintaining ships, overseeing and tracking deliveries, determining what goods to order and when to deliver them, organising and overseeing voyages

Holding company activities - all activities relating to that business.

IP holding companies - IP holding companies will have more rigorous requirements consequently if this is likely to impact you, please contact us.

Distribution and service centre business – transporting and storing goods, components and materials, managing stocks, taking orders, providing consulting or other administrative services.

STAGE THREE - enforce the substance requirements.


Where the Comptroller deems a company to have failed to meet the substance requirements he shall have the power to impose a penalty of up to £10,000 for the first failure. The penalty for any subsequent failure can increase to £100,000 per notice issued.

In addition to the financial penalties above the Comptroller also has the power to request that the court order the company to conduct its affairs such that it meets the economic substance tests. If necessary this power can extend to having the company wound up for failure to meet the substance tests.

Further provision has been included for the introduction of a penalty of up to £3,000 to be levied on any person who fails to provide information requested by the Comptroller.

Automatic Exchange of Information

Where a company fails to meet the new rules, the Comptroller will be obliged to furnish any relevant information pertaining to this failure to the relevant competent authorities in each of the jurisdictions (within the European Union) where the company has;

i. a holding body

ii. the ultimate holding body of the Jersey resident company, and

iii. an ultimate beneficial owner

Where the resident company is incorporated outside Jersey, relevant information will be provided to the competent authority of the country or territory in which the company is incorporated.

Our Comments

This draft law reaffirms Jersey’s commitment to be a good neighbour and highly regarded offshore finance centre. It does not include anything radically different from the proposals flagged in the summer consultation document and sets out the framework for how the new economic substance test will work. However, the supporting guidance will be key to understanding the exact scope and requirements of the new law. “Elements” of that guidance will be made available in the coming weeks.  

As this law is effective from 1 January 2019, it is to be hoped that the full guidance will follow as soon as possible such that company directors can act appropriately. This is especially important because the consequences of non-compliance are very significant; this law has sharp teeth.

The draft law helpfully leaves open the ability of Jersey companies to subcontract some core income generating activities to other parties provided the directors properly monitor and control the work done by others.

Until the guidance is made available, directors of Jersey resident companies should start reviewing the company’s activities now to determine whether they fall within one or more of the ‘relevant activities’ heads.  If so, they need to critically review their management structure and general modus operandi and start taking the necessary action to deal with any shortfalls.  This could include reviewing whether the directors have relevant experience, whether local directors need to be added to the board, whether board members join meetings by telephone and such like.  For most companies, meeting these requirements should be straightforward if they are following well-established UK ‘management and control’ principles.


For further information in this regard please find the full draft substance law here.

Or alternatively, if you have any further queries on the potential impact the new economic substance rules will have on your business or would like to discuss any aspect of these changes in more detail, please contact your usual BDO adviser.