The governments of Jersey, Guernsey and the Isle of Man are asking businesses for their views on proposed new legislation that will require certain tax-resident companies to demonstrate they have sufficient substance.

The legislation is aimed at avoiding a blacklisting by the European Union as uncooperative in tax matters.

Like the Cayman Islands, all three jurisdictions have been accused of violating the EU’s fair tax criterion, which stipulates that jurisdictions should not facilitate offshore structures that attract profits without real economic activity.

And like the Crown Dependencies, Cayman committed in November 2017 to address the perceived lack of tax fairness before the end of this year. To this end, the ministry of financial services said it had formed several working groups to review the EU’s guidance paper and provide input into legislative proposals to address the economic substance requirements.

In July, the ministry announced that it also plans to consult the general public on the matter in due course.

Meanwhile, the Crown Dependencies are one step ahead. Public consultations closed at the end of August, with results due to be published three months later.

The three jurisdictions have collaborated in developing proposals that will require companies that are tax resident, and engaged in key activities identified by the EU, to demonstrate that they meet minimum substance requirements as part of their annual tax return.

The key activities identified by the European Commission’s 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.

“This area of work is important to demonstrating our continued commitment to maintaining Guernsey’s reputation as a well-regulated, transparent and cooperative jurisdiction,” said Lyndon Trott, vice president of Guernsey’s Policy and Resources Committee.

He said the committee had worked very closely with counterparts in Jersey and the Isle of Man to develop the proposals to ensure they meet both the needs of local industry and the commitment to the European Union.

The substance requirements vary for each key activity to reflect the different needs of the companies involved.

“When we talk about substance, we are referring to real people, making real decisions in real time. These proposals establish that point unequivocally. They are a reasonable and proportionate response to the concerns raised by the Code of Conduct Group for Business Taxation,” Trott said.

Under the proposed legislation, companies generally have to demonstrate that the board of directors meets at certain intervals in the respective dependencies with a quorum of directors being physically present. The board of directors as a whole must have the necessary knowledge and expertise to discharge their duties as a board.

Strategic decisions must be made at the board meetings and reflected in the minutes of the meeting. Minutes and other company records must be kept in the jurisdiction.

In addition, companies have to ensure that core revenue-generating activities are carried out locally.

The core revenue-generating activities will be defined for each sector in the respective legislation, but the consultation documents noted already certain elements.

For fund management, the activities include taking decisions on the holding and selling of investments; calculating risks and reserves; taking decisions on currency, interest fluctuations and/or hedging positions; and preparing relevant regulatory and other reports for government authorities and investors.

If a business functions as the headquarter of a group, all relevant management decisions must be taken there, and group activities must be coordinated or expenses incurred on behalf of group entities to demonstrate core activities.

Holding companies, which purely hold equities, will need to confirm they meet all applicable corporate law and tax-filing requirements.

In addition, all companies that carry out relevant activities must be able to show that they have an adequate level of qualified employees in the relevant jurisdiction, as well as adequate physical office space and expenditures or corresponding outsourced activities in the jurisdiction.

Collective investment vehicles, however, should have reduced substance requirements in line with the local regulatory framework.

Tax resident companies that generate income from intellectual property will be required to show that they are managed in the jurisdiction and undertake income-generating activities like research and development, marketing, branding, distribution, risk management or other underlying trading activities to demonstrate sufficient substance.

How onerous these requirements are remains to be seen. It is also not certain how flexible the rules are for companies that outsource certain core activities to service providers outside of the relevant jurisdiction.​

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