Draft legislation has been lodged for debate in the Jersey legislature which will have the effect of extending the economic substance requirements, introduced for companies tax resident in Jersey in 2019, to partnerships. The legislation is scheduled to be debated on 29 June 2021 and if approved will come in to force shortly thereafter.
What partnerships are in scope
The new rules will apply to all forms of partnership which are resident in Jersey and generating gross income from relevant activity. These include:
(a) an incorporated limited partnership established under the Incorporated Limited Partnerships (Jersey) Law 2011;
(b) a limited liability partnership registered under the Limited Liability Partnerships (Jersey) Law 2017;
(c) a limited partnership established under the Limited Partnerships (Jersey) Law 1994;
(d) a separate limited partnership established under the Separate Limited Partnerships (Jersey) Law 2011;
(e) a foreign limited partnership established under the laws of a jurisdiction outside Jersey and which consists of one or more persons who are general partners and one or more persons who are limited partners;
(f) any other arrangement that is subject to an assessment under Article 74 of the 1961 Law (ie a general partnership).
How is residence determined
Residence of a partnership for the purposes of the proposed law will be determined by its place of effective management. In a manner broadly similar to existing rules governing the residence of a Jersey incorporated company, a partnership formed under Jersey law is a resident partnership unless its place of effective management is outside of Jersey in a country or territory where (a) the highest rate at which a company or individual may be charged to tax on any part of its income is 10% or higher; or (b) the partnership is required to satisfy a test that is substantially the same as the economic substance test. A foreign limited partnership is to be considered Jersey resident if its place of effective management is in Jersey.
With regard to determining the place of effective management, a partnership's place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the partnership's business as a whole are in substance made; and a partnership will have one place of effective management at any one time (even if there is more than one place where management decisions are made). The Comptroller of Revenue in Jersey has power to issue guidance regarding the place of effective management and in determining the place of effective management, a person must have regard to any guidance so issued. The Comptroller has indicated that guidance will be issued following the passage of the law through the legislature.
What are relevant activities
Partnerships that are in scope for the new economic substance requirements will be resident partnerships that generate gross income from carrying on relevant activities. Relevant activities are as follows and are more specifically defined in the draft law:
(a) banking business;
(b) distribution and service centre business;
(c) finance and leasing business;
(d) fund management business
(e) headquarters business;
(f) holding partnership business;
(g) insurance business;
(h) intellectual property holding business;
(i) shipping business.
Are any partnerships out of scope?
The following partnerships are not required to comply with the economic substance requirements under the proposed law:
(a) a collective investment fund (as defined in the Collective Investment Funds (Jersey) Law 1988;
(b) a fund that would be a collective investment fund except that the offer of units in the fund is not an offer to the public (within the meaning given in Article 3 of the Collective Investment Funds (Jersey) Law 1988) (ie a private fund);
(c) a fund that (i) is not for the purpose of securitisation or repackaging of assets, and (ii) would be a collective investment fund except that the fund is prescribed not to constitute a collective investment fund in an Order made for the purposes of Article 3(7) of the Collective Investment Funds (Jersey) Law 1988;
(d) a partnership all of the partners of which are individuals who are subject to income tax in Jersey;
(e) a partnership that is not part of a multinational group which does not undertake business activities outside of Jersey. A partnership is a member of a multinational group if in accordance with international accounting standards its income and expenses would be a part of the consolidated results of a group of enterprises and one or more of the persons or partnerships in the group (i) is not a tax resident in Jersey or (ii) has one or more permanent establishments outside of Jersey.
The economic substance test
An in scope resident partnership must satisfy the economic substance test. In summary, (a) it must be managed in Jersey in relation to the relevant activity; (b) having regard to the level of relevant activity carried on in Jersey: (i) there are an adequate number of people performing work in relation to that activity who are physically present in Jersey; (ii) there is adequate expenditure incurred in Jersey; (iii) there are adequate physical assets in Jersey; (c) all of the partnership's core-income generating activities (which are defined by the proposed legislation relative to the relevant activity carried on) are carried out in Jersey; and (d) the partnership's governing body is able to monitor and control the carrying out of core income-generating activities carried out in Jersey for the partnership by another entity or partnership (if any).
A partnership is managed in Jersey in relation to an activity if (a) the partnership's governing body meets in Jersey at an adequate frequency having regard to the amount of decision-making required at that level; (b) the majority of the partnership's governing body are physically present at those meetings; (c) records are kept of the strategic decisions made at those meetings; (d) the members of the governing body, as a whole, have the necessary knowledge and expertise to discharge their duties; and (e) the records of the partnership, including the records referred to in sub-paragraph (c) are kept in Jersey.
In the absence of contrary guidance from the Comptroller of Revenues in Jersey, a partnership's governing body is the person or group of persons responsible for making the partnership's strategic and management decisions; but if that person or group is not able to be identified, all of the partners in the partnership. Further guidance from the Comptroller on the economic substance test is provided for in the draft legislation.
What are the penalties for non-compliance?
There are financial and other penalties for a partnership failing to meet the economic substance test. If the partnership fails to meet the test in a single financial period, the fine is up to GBP 10,000. If the partnership fails to meet the economic substance test in consecutive financial periods, the Comptroller may levy a fine of up to GBP 100,000 (in the second consecutive period) and rising by GBP 50,000 for each consecutive period thereafter. Other sanctions include an application to court for an order for winding up or de-registration for certain partnerships and otherwise a report to the Jersey Financial Services Commission . A requirement under the proposed law for the partnership to take an action is a requirement for the general partners in the partnership to take that action, and all general partners are jointly liable for any penalty resulting from a failure for the action to be taken.
The proposed law provides in specified circumstances for the exchange of information by the Comptroller with competent tax authorities of the countries or territories in which the following people or partnerships are tax residents (a) a controlling partner of the partnership; (b) the ultimate holding body of the controlling partner; (c) the ultimate beneficial owner of the partnership.
When will this apply?
It is intended that all new in scope resident partnerships established on or after 1 July 2021 will need to meet the economic substance test from establishment; existing partnerships must meet the test for any financial periods commencing on or after 1 January 2022.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.