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 for large multinational enterprise (MNE) groups, known as Pillar Two. This framework would only apply to certain MNE groups that have annual revenue of 750 million euros (EUR) or more in the Consolidated Financial Statements of the Ultimate Parent Entity (UPE) in at least two of the four fiscal years immediately preceding the tested fiscal year. The Pillar Two Model Rules provide two complementary measures, the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR), whereby jurisdictional profits taxed at less than an effective rate of tax of 15% would be targeted for additional taxation. These measures encourage low tax jurisdictions to implement a Domestic Minimum Tax (DMT) so that such top-up taxes are collected by the jurisdiction in which they arise, rather than different jurisdictions under the IIR or UTPR.

In May 2024, Jersey issued a statement reaffirming its commitment to implement Pillar Two by announcing its intention to implement an IIR and DMT from 2025, the latter being a new standalone multinational corporate income tax (MCIT) that will sit alongside Jersey’s existing corporate income tax (CIT) regime.

Jersey will not be enacting a UTPR at this time.

Draft legislation for both the IIR and MCIT is expected to be lodged towards the end of July 2024 and become effective from 2025.

RegTech Super-Deduction

In support of the Budget for Innovation, eligible companies, charged to Jersey income tax as financial services companies (i.e. at 10%) and registered with the Jersey Financial Services Commission under the Proceeds of Crime (Jersey) Law 1999, are now able to receive a 150% deduction on eligible expenditure. This includes computer hardware, software (including software subscriptions and licences), and training that is delivered by an external provider on such hardware or software. The eligible activities broadly include the prevention of financial crime, management of data, and other activities required by the Jersey Financial Services Commission.

There are anti-avoidance provisions for connected parties to prevent manipulation of this new relief.

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.