15 June 2021
Jersey is a popular place to establish an asset holding company because its corporate law is modern, flexible and modelled on English companies legislation.
Jersey introduced the Substance Law to require Jersey companies which carry on particular activities (called relevant activities) to have economic substance in Jersey.
This guide looks at the key things you need to know about enforcement and sanctions regime under the Substance Law in Jersey.
For a high-level overview of the economic substance requirements in each of our offshore jurisdictions (BVI, Cayman, Guernsey and Jersey), please view our fact sheet which is accessible from this page.
Words in bold text are defined at the end of this guide.
Why was the Substance Law introduced?
As a part of its base erosion and profit sharing (or BEPS) initiative, the European Union required OFCs like Jersey to introduce legislation which seeks to ensure that an OFC does not facilitate structures that generate profits which do not reflect real economic activity in that OFC.
To avoid being placed on the European Union blacklist of non-compliant jurisdictions, Jersey introduced the Substance Law which came into force on 1 January 2019.
The Substance Law is supported by the Guidance published by the Comptroller which is periodically revised.
When does the Substance Law apply?
As explained in our other guides in this series, the Substance Law applies where:
- a tax resident company;
- carries on a relevant activity in a financial period; and
- earns gross income from that relevant activity.
Comptroller's enforcement powers
The Substance Law equips the Comptroller with the following enforcement powers.
Produce documents or information
The Comptroller may serve notice on any person requiring the person to provide, within the time period and at the place, specified in the notice, any documents or information the Comptroller reasonably requires to facilitate the exercise of the Comptroller's powers under the Substance Law.
For the purpose of investigating any issue relating to compliance with the Substance Law, the Comptroller may:
- examine and take a copy of any document that is located on business premises;
- enter business premises at any reasonable time; and
- give notice to any person requiring the person to produce any document at the business premises where the business document is located.
If the Comptroller has determined that a tax resident company has failed to satisfy:
- the substance requirements for any relevant activity in a financial period; and
- those substance requirements in any subsequent financial period,
the Comptroller may send a report to the Minister which (among other things):
- notifies the Minister of those failures; and
- recommends that the Minister applies the Court for an order to be made against the company under the Companies Law.
Under the Companies Law, if the Minister receives a report from the Comptroller, the Minister may apply to the Court for (among others) any order the Court thinks fit requiring the company to take any action specified in the order for the purpose of satisfying the substance requirements.
It is likely that the Comptroller would only recommend that the Minister apply for an order against a company if the company repeatedly or persistently fails to satisfy the substance requirements.
Anti avoidance measures
The Guidance states that, if there is any indication that a company is seeking to manipulate or artificially suppress its income to avoid being subject to the substance requirements, the Comptroller will apply the anti avoidance provisions of the Tax Law.
The Comptroller may impose a range of sanctions under Substance Law. The Guidance states that the sanctions that would be imposed under the Substance Law are progressive.
If a tax resident company fails to satisfy the substance requirements for any relevant activity carried on by it in a financial period, the Comptroller may impose a penalty of up to:
- £10,000 for the first financial period; and
- £100,000 for any subsequent financial period,
in which the company fails to satisfy those substance requirements.
A person is liable to a penalty of up to £3,000 if the person fails to provide any information required by the Comptroller.
A person is liable to a penalty of up to £3,000 if the person provides the Comptroller with inaccurate information and the person:
- knows about the inaccuracy at the time the person provides the information but fails to tell the Comptroller about the inaccuracy; or
- discovers the inaccuracy after the person provides the information and fails to take reasonable steps to inform the Comptroller about the inaccuracy.
Providing information to competent authorities
If the Comptroller determines that a tax resident company has not satisfied the substance requirements for a relevant activity for a financial period, the Comptroller must provide the information given to the Comptroller for that financial period to the competent authority in:
- the jurisdiction in which each holding body, ultimate holding body and ultimate beneficial owner of the company resides; and
- (where the company is a foreign company) the jurisdiction in which the company is incorporated.
The Comptroller is only required to provide the information to a competent authority if it is permitted to do so under:
- a bilateral agreement between Jersey and that jurisdiction; or
- the Convention on Mutual Administrative Assistance in Tax Matters.
In the circumstances explained under the heading Court orders above, the Comptroller may send a report to the Minister which (among other things) recommends that the Minister applies to the Court for an order against the company under the Companies Law.
Under the Companies Law, if the Minister receives a report from the Comptroller, the Minister may apply to the Court for an order that the company be wound up on just and equitable grounds or in the public interest.
The Comptroller would only recommend that the Minister apply to the Court for an order seeking the winding up of a company if the company repeatedly or persistently failed to satisfy the substance requirements.
The Guidance states that the ultimate sanction for non-compliance would be for a company's name to be struck off (or removed from) the register of companies kept by the Jersey registrar of companies.
Enforcement of penalties
A penalty imposed under the Substance Law:
- must be paid within 30 days of the payment date stated in the penalty notice or the date on which an appeal is dismissed or withdrawn; and
- may be enforced by the Comptroller as if it were income tax that is due and payable under the Tax Law.
A company may appeal against a penalty being imposed on it or the amount of the penalty imposed. Notice of appeal must:
- be given to the Comptroller before the payment date stated in the penalty notice; and
- state the grounds for the appeal.
A Commission of Appeal will be established for the purposes of hearing the appeal and the appeal will be carried out in accordance with the Tax Law.
The Commission of Appeal may confirm or cancel the penalty or alter the amount of the penalty.
A person commits an offence if, without reasonable excuse, the person:
- obstructs the Comptroller; or
- fails to provide any reasonable assistance required by the Comptroller,
in connection with an inspection of business premises or the requirement to produce a document.
A person who is convicted of this offence is liable to imprisonment for up to six months and a fine.
Altering, suppressing or destroying documents
A person commits an offence if the person intentionally alters, supresses or destroys any document which the Comptroller has required the person to be produced in a written notice given under the Substance Law.
A person who is convicted of this offence is liable to imprisonment for up to two years and a fine.
CIGA means a core income generating activity.
Companies Law means the Companies (Jersey) Law 1991.
Comptroller means the Jersey Comptroller of Revenue.
Court means the Royal Court of Jersey.
financial period means a period of up to 18 months for which a company's financial statements are prepared.
Guidance means the documents entitled:
- Key aspects in relation to the economic substance requirements, as issued by Guernsey, Isle of Man and Jersey, version 2 dated 21 December 2018; and
- Guidance on aspects in relation to the economic substance requirements issued by Guernsey, Isle of Man and Jersey, version 2 dated 22 November 2019.
Minister means the Minister for Treasury and Resources.
OFC means an offshore financial centre.
relevant activity means banking business, distribution and service centre business, fund management business, finance and leasing business, headquarters business, holding company business, intellectual property holding business, insurance business or shipping business.
Substance Law means the Taxation (Companies – Economic Substance) (Jersey) Law 2019.
substance requirements means the requirements that a company to which the Substance Law applies must:
- be directed and managed from Jersey;
- (having regard to the level activity carried on by it):
- have an adequate number of employees physically present in Jersey (whether employed by it or by another person);
- incur adequate expenditure in Jersey; and
- have adequate physical assets in Jersey;
- carry on all of its CIGAs in Jersey; and
- (to the extent any of its CIGAs is carried out for it in Jersey by another person (like a corporate services provider)) be able to monitor and control in Jersey the carrying out of those CIGAs.
Tax Law means the Income Tax (Jersey) Law 1961.
tax resident company means company that is regarded as tax resident in Jersey under the Tax Law. A Jersey company is regarded as tax resident in Jersey under the Tax Law unless:
- its business is centrally managed and controlled outside Jersey in a jurisdiction where the highest rate at which any company may be charged to tax on any part of its income is 10% or higher; and
- the company is resident for tax purposes in that jurisdiction.
About this guide
This guide gives a general overview of this topic. It is not legal advice and you may not rely on it. If you would like legal advice on this topic, please get in touch with one of the authors or your usual Collas Crill contacts.
About this series
This guide is part of our series Let's talk about Jersey economic substance which looks at aspects of Jersey's economic substance regime. The other guides in this series can be found in the Latest thinking section of our website.
About Collas Crill
We are a leading offshore law firm. We are easy to do business with and give practical advice to overcome tough challenges. Through our network of offices, we practise British Virgin Islands, Cayman Islands, Guernsey and Jersey law.