Crown Dependencies issue further guidance on economic substance
The governments of Jersey, Guernsey and the Isle of Man issued jointly a second guidance to provide further assistance on the scope and application of the economic substance legislation for companies in the Crown Dependencies.
The legislation, which applies to all companies resident for tax purposes in the Crown Dependencies, was approved by the respective parliaments in December 2018 and is effective for accounting periods commencing on or after 1 January 2019.
The guidance confirms that Core Income Generating Activities (CIGA) are the key essential and valuable activities that generate the income of the company. It is not necessary for the company to perform all of the CIGA listed in the legislation for the particular sector, but it must perform the CIGA that generate the income it has.
In order to meet the economic substance requirement the CIGA that generate the income must be performed in the relevant Crown Dependency. Where the CIGA involves making relevant decisions, then the majority of those making the decisions must be present in Crown Dependency when the decision is made, otherwise the decision will not be considered to be made in the Crown Dependency.
If there is any indication that a company is seeking to manipulate or artificially suppress its income to avoid being subject to substance requirements the respective tax administrations will take the appropriate action.
The guidance contains examples of what constitutes CIGA for banking, holding companies, finance and leasing, fund management, distribution and service centres and headquartering. However it does not provide specific information in respect of insurance (including captive insurance), shipping and intellectual property, which are to be included in subsequent versions.
The guidance provides confirmation that pure equity-holding companies can passively hold investments and receive income or gains from them without being regarded as a commercial activity. To fall outside the definition of a pure equity-holding company, and be subject to more onerous requirements, a company would have to carry out real activities that are commercial in nature – activities directly linked to the sale/exchange of goods or assets, or services in pursuit of profit, such as renting land or property.
The guidance also confirms that intra-group financing is within scope of the economic substance law, although providing trade credit on terms that do not require the debtor to pay interest is not.
The definition of fund management encompasses companies that provide management services in relation to the investment and risk decisions for collective investment vehicles, but does not include the fund itself. Other types of services, such as administration, advisory or custodian services, are not within the defined activities.
It is possible that a company can receive relevant income from a number of relevant sectors. In such cases, the criteria for each sector should be considered. One of the examples included confirms that entering into a ‘one-off’ transaction will not necessarily mean that an entity is carrying on relevant activities in a particular sector. Whether or not this is the case will be a question of fact, with all relevant matters considered.
A definition of ‘employees’ is included, with acknowledgement that appropriately qualified staff will carry more weight when considering the adequacy of employees test. In order for a relevant activity of a company to be viewed as ‘directed and managed’, the company is expected to hold at least one board meeting per year. If more than one meeting is held, then it is expected that the majority of meetings should be in the relevant Crown Dependency.
This second guidance on economic substance is a work in progress there are still significant gaps, such as the guidance on relevant activities involving insurance, shipping and intellectual property. However, it does establish some useful principles that will assist affected companies to determine their compliance with the new requirements and the recent removal of the Crown Dependencies from the European Union’s ‘Grey List’, which may be seen as an effective endorsement of their policies.