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UK Crown Dependencies Introducing Economic Substance Rules

Friday, December 28, 2018

Each of the Crown Dependencies – Jersey, Guernsey, and the Isle of Man – have tabled legislation that will introduce new substance requirements for tax-resident firms engaged in certain industries from January 1, 2019.

These proposals will require companies that are tax resident in Jersey, Guernsey, or the Isle of Man, and are engaged in key activities identified by the EU, to demonstrate that they meet minimum substance requirements as part of their annual tax return to access the territories' tax regimes.

The key activities identified by the European Commission Code of Conduct Group are: banking, insurance, fund management, financing and leasing, shipping, intellectual property, collective investment vehicles, and holding companies that generate income from any of these key activities.

Each Crown Dependency will be redesigning its tax return to ensure that all tax resident companies will be required to provide additional information concerning their activities and income.

In the Isle of Man, there will be a consultation on the rules in the first of 2019, regulations will be issued in the second half of 2019, and tax returns including the new information should be filed from January 2020.

The Isle of Man has issued guidance concerning the implications of the new rules for taxpayers in the three territories, in "Key aspects in relation to economic substance requirements, as issued by Guernsey, Isle of Man and Jersey," released on December 20, 2018.

The substance requirements vary for each key activity to reflect the different needs of the companies involved and are designed to be fair and proportionate while ensuring that there are sufficient activities undertaken in the relevant jurisdiction to reflect the amount of profits accounted there. The substance requirements will include being able to demonstrate that the company is directed and managed from the relevant Crown Dependency, that the company has adequate levels of employees as well as annual expenditure and physical offices.

The relevant laws are Guernsey's Income Tax (Substance Requirements) (Implementation) Regulations 2018, Jersey's Taxation (Companies – Economic Substance) (Jersey) Law 201-, and the draft Taxation Companies Economic Substance Law in the Isle of Man.