Jersey, Channel Islands

Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Pillar Two

The OECD has designed a framework to introduce a global minimum tax of 15% for very large multinational enterprise (MNE) groups, known as Pillar Two, that have annual consolidated revenue of 750 million euros (EUR) in at least two of the four fiscal years immediately preceding the tested fiscal year. Consequently, most Jersey businesses remain unaffected by Pillar Two and remain subject to the existing parallel corporate income tax regime (better known as 0/10).

The Pillar Two Model Rules provide two complementary measures known as the Income Inclusion Rule (IIR), Undertaxed Profits Rule (UTPR). The IIR and UTPR permit other jurisdictions to apply a top-up tax where the minimum rate is not achieved domestically. These measures, therefore, encourage low tax jurisdictions to implement a Domestic Minimum Tax (DMT) to protect their tax base and avoid Ithe IIR or UTPR from being applied. There is third rule, the Subject to Tax Rule (STTR), that is intended to ensure that double taxation agreements entered into by developing countries do not prevent certain cross-border transactions from being taxed at a rate of less than 9%.

Jersey’s response to Pillar Two is the introduction of a DMT known as the Multinational Corporate Income Tax (MCIT), which is aligned with the OECD’s Model Rules, together with the IIR.

The MCIT is effective for fiscal years, being the accounting periods of the ultimate parent entity of the MNE group, starting on or after 1 January 2025. In-scope Jersey constituent entities of the MNE group will pay MCIT at 15%.

Whilst Jersey has implemented that the IIR, it has not implement the UTPR or STTR at this time. Jersey only has one double taxation agreement with a developing country at this time that could be affected by the STTR, and the island has committed to implement this rule if asked by that developing country to do so.

Economic substance

Companies

Jersey introduced economic substance legislation for accounting periods beginning on or after 1 January 2019. Jersey tax resident companies carrying on relevant activities will be required to meet an economic substance test.

Relevant activities are defined as any of the following businesses:

• Banking
• Insurance
• Fund management
• Finance and leasing
• Headquarters
• Shipping
• Holding company
• Intellectual property holding
• Distribution and service centre

Self-managed funds are required to demonstrate they have substance in Jersey for any financial period that commences on or after 1 January 2021. Self-managed funds are always treated as having received income from the relevant activity of fund management, so the gross income test does not apply.

There are financial penalties in the case of failure to meet the economic substance test. In the first financial period up to 10,000 British pounds sterling (GBP), in the second period up to GBP 100,000. After the first penalty, the Comptroller may provide the Minister for Treasury and Resources with a report on the company, and the Minister may apply to the court for an order of winding up. There is provision for appeal against penalty determinations.

The requirements for companies with regards to the economic substance test dictate that they must be directed and managed in Jersey, undertake their core income generating activities (CIGA) in Jersey, and have adequate employees, expenditure, and physical assets in Jersey.

Partnerships

On 29 June 2021, a law extending Jersey's economic substance regime to partnerships was passed. The economic substance requirements will apply to a Jersey 'resident partnership' undertaking a 'relevant activity' unless it is exempt.

The exemptions are detailed as follows:

• 'Domestic exemption': These are partnerships with activities only within Jersey that are also not part of a multinational group
• 'Individual exemption': These are partnerships with only Jersey tax resident partners already subject to tax in Jersey
• 'Collective investment funds'
• 'Place of effective management (POEM) outside of Jersey': Those partnerships with a POEM in a qualifying jurisdiction (i.e. with a tax rate higher than 10% for a company or individual) or if the partnership is required to comply with a similar economic substance test in that jurisdiction.

Partnerships in existence before 1 July 2021 are in scope of the law for accounting periods commencing on or after 1 January 2022. Partnerships formed on or after 1 July 2021 are in scope from the date of formation.

The law is broadly aligned with the company economic substance regime, summarised above, although there are points of divergence particularly relating to exemptions and sanctions for failing the economic substance test.