Jersey is introducing changes to the way that companies are taxed in order to ensure that the island meets international standards while maintaining its competitive edge in the offshore financial services sector.
The introduction of the "Zero/Ten tax regime", which is enshrined in the Income Tax (Amendment No. 28) Jersey Law 2007, means that the standard rate of corporate income tax will be zero per cent. A special rate of 10 per cent will apply to financial service companies, including banking, trust advisory services and entities providing fund functionary services.
The changes take effect for existing companies from 1 January 2009 and will apply to all new companies that have been established since 3 June 2008. This legislation replaces the previous system whereby companies incorporated in Jersey as "exempt" companies paid a fixed £600 per annum exempt fee and were then not liable for corporation tax.
Two principal factors lie behind these changes to the law. Firstly, there has been growing international pressure in recent years for Jersey to move away from a system of taxation that discriminates between resident and non-resident companies. The European Union (EU) has been particularly active in pushing for the abolition of these types of provisions, which it considers to be harmful tax practices, and has introduced a code of conduct in respect of its own taxation of businesses.
Jersey remains outside of the EU, but Dawn Primarolo, the United Kingdom's Paymaster General, has praised Jersey for updating its business taxation system in accordance with EU and Organisation for Economic Co-operation and Development standards.
Secondly, an important part of the financial package that an offshore jurisdiction offers is its tax system, and Jersey has faced growing international competition from other offshore jurisdictions offering a zero per cent tax rate or a tax exemption for non-resident companies.
Annual Exempt Fee to be Abolished
As a result of the new legislation, the current exempt company legislation will be abolished so that companies incorporated as Jersey exempt companies will no longer be liable to pay a £600 per annum exempt fee. Generally these companies, together with all other corporate vehicles, will now fall within the zero tax rate.
In broad terms the 10 percent rate will apply to specified entities providing financial services including banks, most investment and licensed trust companies and most functionaries, as well as to investment funds or entities holding a funds services business licence. There is no intention to tax investment funds themselves or to bring in the 10 percent rate for structures that may meet the regulatory test but do not trade through an established place of business in the island.
The reasoning behind the change is that zero tax is necessary to safeguard Jersey's position as a leading financial centre, while ensuring that sufficient revenue is raised by entities operating within the finance sector to fund Jersey's public spending requirements.
Local utilities companies, such as the providers of gas, electricity and telecommunications, will continue to be taxed at 20 per cent, as will Jersey rental income and Jersey property development profits.
Shareholder Tax to be Introduced
Shareholder taxation measures are to be introduced, which will be designed to prevent trading profits from being rolled up and extracted tax-free by individuals resident in Jersey. Amongst other things, these will include:
- The definition of "distribution" being extended to catch any withdrawal of trading profits (whether by way of capital distribution, sale of shares or liquidation);
- A deferred distribution charge being introduced that will effectively charge interest on the deferral of distributions;
- A deemed distribution charge being introduced where trading profits have not been distributed within three years to avoid indefinite roll up; and
- Anti-avoidance measures being revised to cover circumstances where companies are owned by offshore trusts and/or companies.
In addition, shareholder loans will be charged tax on the amount of the loan made in the year of assessment. Account will be taken of any amounts repaid and credit given for amounts repaid in subsequent years of assessment. While the shareholder loan provisions do not apply to holders of shares in utility companies and companies subject to full attribution, they do extend to members of the family or household of a shareholder.
Personal Tax Rate
The tax changes have been introduced alongside a "20 means 20" policy for Jersey tax residents whereby the rate of personal tax will be 20 per cent with a phasing out of tax allowances over a number of years to 2011 other than in restricted areas such as approved pension contributions.
The States of Jersey also introduced, as part of the new fiscal strategy, the Goods and Services (Tax) Law 2007. This came into effect in May 2008 and the provision of financial services is now taxable at three per cent when customers based in Jersey are invoiced. To further protect the competitiveness of the finance industry, GST is not charged on services provided to International Service Entities (ISE).
As the ISE category will include most special purpose vehicles including companies, trusts and partnerships, it is not anticipated that there will be any adverse tax effect on the international client base. An annual fee of £50 will be payable for ISE status and it will be possible for administrators to make bulk applications without disclosure of individual customer details.
Business As Usual
The broad intention of the reforms is to keep Jersey competitive from a tax perspective and for persons using Jersey to embrace zero tax as a positive advantage. The overall message for businesses and investors is that the Zero/Ten tax regime should have a minimal effect on international business and structures using Jersey. It is very much business as usual under a new tax structure, anticipated to provide a simple, efficient and sustainable framework for business taxation.
This article first appeared in the JEP Finance Industry Review supplement, on 10 September 2008.
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